The Tullow Oil share price may keep rising, but I'd buy this stock first

Former FTSE 100 member Tullow Oil (LSE: TLW) is getting closer to regaining its spot in the blue-chip index. The group's £3.25bn market cap is still a little short of the £4.5bn+ level I estimate might be necessary, but if net debt of $3.4bn continues to fall in 2018, I believe shareholders could see steady gains.

However, Tullow's focus on debt reduction means that shareholders have had to take a back seat over the last few years. The group hasn't paid a dividend since 2013, and the shares have lost more than 75% of their value over the last five years.

The Africa-focused firm is expected to return to profit this year, with analysts forecasting earnings of $0.20 per share. That puts the stock on a forecast P/E of 15.6. This seems about right to me, so I'd rate Tullow as a hold rather than a buy.

I believe there's better value elsewhere in the oil market, including my next stock.

This stock could rise by 226%

Shares of FTSE 250 oil and gas group Ophir Energy (LSE: OPHR) rose by 6% this morning, after the company announced a $205m deal to acquire producing oil and gas assets in South-East Asia.

The planned acquisition will see Ophir buy a portfolio of producing assets in Vietnam and Indonesia from Australian firm Santos Limited. A number of exploration and appraisal assets in the region will also be included.

These new fields should fit together well with the production assets the firm acquired when it bought Salamander Energy in 2015. Chief executive Nick Cooper expects the new assets to add about 13,500 barrels of oil equivalent per day (boepd) to the group's pro forma production in 2018, taking total production to 25,000 boepd.

The deal will increase Ophir's proven and probably ('2P') reserves by 43% to 70.6 million barrels of oil equivalent. And it's also expected to bring the group closer to its objective of generating free cash flow from production.

This is significant, because it should protect the long-term value that's hidden on the firm's balance sheet. Ophir's accounts showed a net asset value of 206p per share at the end of 2017, 226% above the last-seen share price of 63p.

Why I'm excited

Ophir is a business of two halves. The group's production assets provide useful cash to keep the company going.

But before it started buying these mid-sized production fields, Ophir discovered a number of large gas deposits off the coast of Africa. Finding commercial partners to develop these is taking time. But I'm confident it will happen eventually.

Based on its track record to date, Mr Cooper's plan is to find larger partners to fund these projects in return for a slice of the asset. Ophir itself has steered clear of borrowing to fund development and this has paid off. The group came through the oil market crash with a strong balance sheet and ended last year with net cash of $117m.

I believe that Ophir's growing production means that the worst-case scenario for shareholders is that the shares remain flat for the next few years. The best-case scenario is that the stock could double or more.

Although this has been a disappointing investment so far, I believe the shares now deserve a buy rating. Buying Ophir stock today and tucking it away for a few years could be very profitable, in my view.

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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.