Oil stocks: 1 I'd buy and 1 I'd sell

Few companies represent the boom and bust nature of the oil & gas industry as well as Tullow Oil (LSE: TLW) over the past half-decade. From 2012 to today the company's share price has collapsed 85%, after the firm dramatically over-extended itself during the boom years of $100/bbl oil.

///>

Although I was long confident that the company could right the ship and bring down its staggering $4.8bn net debt load, I've now come to believe the time is right for shareholders to cut their losses. The catalyst was the announcement last week that the company intends to tap investors for $750m in a deeply-discounted 25-for-49 rights issue that will significantly dilute current shareholders.

Not a company I'd want to own

Management's decision is driven by its need to cut into the pile of debt that represented a whopping 5.1 times full-year 2016 EBITDA. While bringing down this dangerously high level of leverage is wise, I don't believe that current shareholders should be on the hook for this rights issue, which will see the company's share count increase by a full 51% and won't even completely wipe out the company's debts.

Rather, the company should have focused its efforts on reducing net debt through cash flow from its relatively low-cost-of-production assets. Management made a big deal about operations turning free-cash-flow positive in Q4 2016, but increased production levels in 2017 will evidently not be enough to bring debt down as rapidly as desired.

Also worrying was the outgoing CEO's comment that this rights issue would enable management to "grow our business even if oil prices remain low." This leaves little doubt in my mind that the company, instead of responsibly cutting debt and concentrating on building shareholder value, is intent on expanding at a time when oil prices show little sign of returning to previous highs.

A heavily indebted oil producer that is diluting shareholdings to fund expansion in the midst of a turbulent market is not a company I'd want to own.

A much safer option

One oil & gas stock I'd actually buy is Middle Eastern services provider Petrofac (LSE: PFC). Services firms provide much of the upside of owning producers but come with very much less downside risk.

This is clear in Petrofac's performance in 2016. Despite oil prices that were the lowest in a generation, the company's revenue actually increased 15% to $7.8bn and EBITDA more than doubled to $704m. This performance is largely down to the company's high exposure to downstream projects, which are much less cyclical than upstream projects, and a client base that is made up of Middle Eastern national oil companies that continue to produce oil & gas at very high rates.

The company's resilience throughout the business cycle is also clear in the fact that its dividend, which yielded a whopping 5.8%, was safely covered 1.43 times by earnings last year, thanks to impressive free cash flow generation. High cash flow also helped push net debt down to $617m, or less than 1x full year EBITDA.

With consistent revenue and profit generation no matter whether oil is $50/bbl or $100/bbl, a well-covered dividend, and an attractive valuation of 9.8 times forward earnings Petrofac is the one oil & gas share I'd own for the long term.

If you're looking for the stellar growth that the oil & gas industry can provide but want more reliability out of your investments then look no further than the Motley Fool's Top Growth Share of 2017. This company has time and again proven its non-cyclical nature by increasing sales every single year since going public way back in 1997.

And even though its share price has rocketed 250% in the past five years alone the Fool's Head of Investing believes its shares could triple again in the coming decade. To discover this under-the-radar growth champion for yourself, simply follow this link for your free, no obligation copy of the report.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. 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.