Why Tullow Oil plc could be a millionaire-maker stock

There was a time when Tullow Oil(LSE: TLW) shares were trading at over 1,500p and rumours of a bid by one of the oil majors were rife. While the oil price was around $100 a barrel back then, compared with around $50 today, the company still owns valuable and covetable assets and its shares are currently trading at 288p.

I believe Tullow's improving prospects as a standalone business, as well as the potential for renewed takeover interest, could mean that the shares are primed for take-off from their depressed level.

Significant positive

News at the weekend, which has pushed the shares up about 5% today, represents a further brightening of the outlook for investors. On Saturday, the Special Chamber of the International Tribunal of the Law of the Sea in Hamburg delivered its judgment on a dispute over the maritime boundary between Ghana and Côte d'Ivoire.

The dispute had seen a drilling moratorium at Tullow's TEN fields but the company said that after Saturday's determination it "expects to resume drilling around the end of the year, which will allow production from the TEN fields to start to increase towards the FPSO design capacity of 80,000 bopd [barrels of oil per day]."

To put this into context, the TEN fields averaged 48,000 (22,500 net to Tullow) bopd in the first half of this year, while full-year guidance across all the group's assets is 78,000 to 85,000 bopd. As such, Tullow's ability to progress the TEN fields' plan of development towards their full potential is a significant positive for the future.

Increasingly attractive for investors

Its first-half free cash flow and a rights issue in April allowed it to reduce net debt to $3.8bn from $4.8bn. With a new chief executive focused on financial discipline and efficient use of capital, and a balance sheet that should further strengthen from rising free cash flow, I believe Tullow is looking an increasingly attractive proposition for investors.

Before the weekend's news, the City consensus earnings forecast for 2018 was 9p a share, giving a price-to-earnings (P/E) ratio of near to 21. While the consensus isn't going to move up as far as the most bullish forecast of over 19p a share (P/E of less than 10), I'm expecting to see plenty of upgrades. In view of this and Tullow's longer-term potential, I rate the stock a 'buy'.

Scope for shares to rise

Also benefitting from improved clarity from a recent resolution to a dispute is Genel Energy(LSE: GENL). The company announced last month that it had reached an agreement with the Kurdistan Regional Government relating to unpaid entitlements for past oil sales from its Taq Taq and Tawke fields.

In return for cancelling and waiving its rights to outstanding receivables, Genel will enjoy a range of benefits. The company said the net effect would be that "cash flow is expected to be materially enhanced over the course of the agreement, delivering significant value creation for all stakeholders."

The shares have advanced over 10% since the announcement to 147p today. With earnings forecast to increase 70% from 6.9p a share this year to 11.7p next year, the price-to-earnings growth (PEG) ratio of 0.2 -- well below the fair-value marker of one -- suggests there's scope for the shares to rise a good deal higher yet. As such, they look very buyable to me at their current level.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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