One small-cap turnaround stock I'd buy instead of Tullow Oil plc

I'm not afraid to invest in oil companies with debt at times in the hope that increased production coupled with a possible oil price rise might gear up my profits -- though admittedly my investment in Premier Oil is yet to come good.

But going for Tullow Oil(LSE: TLW) would be a step too far for me, with net debt standing at $3.8bn (which is more than the company's market cap). And that's even after a rights issued in April this year raised £600m and contributed to a $1bn debt reduction -- at least that's something Premier Oil hasn't had to do as it's managed to keep its creditors reasonably sweet.

What Tullow desperately needs is an oil price rise or some significant new discovery, and it doesn't look like getting either of those any time soon.

On the latter, Friday's Araku-1 exploration well update was disappointing, as after reaching a depth of 2,685 metres and penetrating the objectives of the Araku prospect, "no significant reservoir quality rocks were encountered" and the well is to be plugged and abandoned.

What next?

The drilling has apparently led to new geological insights which should de-risk some deeper plays, but the market is not too pleased with the overall outcome, and has lopped 5% off the share price to 173p.

As for the price of a barrel of oil, that's been stubbornly stuck around the $50 level for the last three years, currently creeping just above that to $52.50.

Many observers, including me, were expecting to see prices clawing back at least towards the $75 level by now, but with OPEC reductions not having any great effect and the extensive oil shale industry adding to supplies, that's looking increasingly unlikely.

Family business

As a result of the slump in demand from oil and gas producers, business at Goodwin(LSE: GDWN) has been suffering. The firm makes valves, pumps, and other engineering things, which are used heavily in the oil and gas business and also in mining, and the last three years have seen earnings per share fall from 207p to 84.5p -- though the modest dividend has been retained at a little over 42p.

Since a peak in spring 2014, the shares have lost more than 50% of their value to today's 1,960p, but we really need to examine the wider picture. At the peak I reckon we were looking at a slightly over-enthusiastic growth valuation after a couple of years of stunning EPS rises.

The longer-term price movement is nothing short of spectacular, with Goodwin shares having multiplied 39-fold since 1988 -- I don't know many investments that can turn £1,000 into £39,000 in a bit under 30 years, with dividends added as an extra.

Recovering

And the shares are already picking up, having put on 23% in the past month, so the recovery could well be on the cards.

Goodwin's business is not short term, tying in with cycles of capital expenditure in big industrial markets, and the company has the management it needs to recognise and deal with that. The founding family still has a major stake in the firm, and that should keep it largely immune from pressures to look good over any short-term periods.

I see Goodwin as a seriously good long-term investment, and one which could actually do very well over the next couple of years too.

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Alan Oscroft owns shares in Premier Oil. The Motley Fool UK has recommended Goodwin. 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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