The Tullow Oil (LSE: TLW) share price has risen by 69% from the lows of 130p seen in early 2016. Today's half-year results have nudged the share price slightly higher, but it's still a long way from the 500p level last seen when oil prices were crashing in late 2014.
I think this could be an opportunity for smart investors. Let me explain why.
The trend is your friend
When Tullow's 2014 results were published in February 2015, the shares were worth around 340p. That's about 25% more than they're worth today, after adjusting for the new shares created in last year's rights issue.
To understand the potential opportunity here, I think we need to compare some figures from the firm's 2014 results with the equivalent numbers from today's 2018 half-year results:
Full year 2014
Working interest production (barrels of oil equivalent per day)
Cash operating costs
Although net debt is roughly the same today as it was in 2014, it's moving in opposite directions.
Tullow has now largely finished the big projects it was working on when the oil price crashed in 2015. Free cash flow is rising strongly, and the firm has reduced net debt by nearly $800m over the last 12 months.
The figures in this table tell me that conditions in the oil market are now favouring companies such as Tullow, which have cut costs and boosted production with new long-life oil fields.
Now could be the right time
Today's half-year results show that Tullow sold oil at an average price of $67.50 per barrel during the first half of the year, up from $57.30 per barrel during the same period last year. Revenue rose by 15% to $905m and free cash flow doubled from $205m to $401m.
Although I think a price target of 500p may be slightly ambitious, as debt continues to fall, the firm's equity value should increase. I expect to see the shares trading between 350p and 400p over the medium term.
At around 220p, the shares currently trade on just 9 times 2018 forecast earnings. I believe this could be a low-risk buy with the potential for decent gains.
Are you looking for excitement?
Tullow's operations in Africa aren't without political risk. But Genel Energy (LSE: GENL)operates in much riskier Kurdistan, the autonomous region to the north of Iraq. Despite the conflict that's spread through much of this region over the last few years, Genel has kept the oil flowing and continued to receive payment for it.
As a result, this seemingly risky stock has become an unlikely cash cow. The firm's 2017 results showed that its net debt fell from $241m to $135m last year. Free cash flow rose to $100m, thanks to cash operating costs which I estimate at less than $2.50 per barrel.
Although Genel shares have risen by 140% this year, low costs and a strong cash performance means they still look affordable to me. Trading on 9.3 times forecast earnings, this stock isn't without risk. But if the oil market remains stable, I think shareholders could see further gains.
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Roland Head 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.