Here’s why I’d shun the 88E share price and go for Tullow Oil instead

If you look at the 88 Energy(LSE: 88E) share price over the past 12 months, you might think a 7% rise isn’t too shabby, even if it’s nothing to get excited about.

But that hides the boom and bust that has had investors on the edges of their seats, and the share price has actually shed a scary 64% since a peak in June.

The problem is, though the company’s Icewine project in Alaska could potentially harbour game-changing volumes of hydrocarbons. And this summer’s drilling programme has fallen disappointingly short on getting much of it flowing.

Familiar tale

That reminds me of similar problems for UK Oil & Gas and its Horse Hill prospect, where early anticipations of vast quantities of oil and gas led to a soaring share price — only to see a big reversal when flow test results were unimpressive. There’s a big difference between hydrocarbons deep in the earth and those flowing strongly at the surface.

88 Energy’s latest portfolio update tells us its Icewine 3D seismic inversion is substantially complete, and suggests a gross mean prospective resource of 2,896 mmbo.

But some of that is deep, and the company reminds us that “reservoir quality had been deemed a key risk factor… due to depth of burial and compaction.”

With cash burn continuing, and a rights issue aimed at raising approximately £7.96m currently in progress (with results expected this week), 88 Energy is still targeting a farm-out deal which it hopes to be in place before the 2018 year-end.

I reckon 88E could easily go either way at this stage, and it’s far too risky for me.

Past the worst

I don’t mind a bit of risk, though, and when oil prices were low, I saw Premier Oil and Tullow Oil(LSE: TLW) as possibly the best balance between financial risk and recovery potential, due to their proven reserves.

I went for Premier Oil myself, as I saw its debt mountain and financing difficulties as a bit less onerous than those at Tullow. I’m slightly up on Premier, but these days I’m starting to see Tullow is being an attractive investment again.

Tullow has moved on from fighting a rearguard action simply to remain afloat. And in a key measure of progress, fellow Fool writer Harvey Jones has pointed out that it’s once again back to active exploration and searching for new fields in Africa and South America.

Cash flow

That would not have been possible without the first half of this year seeing the company turn its previous big loss into a $150m pre-tax profit.

Free cash flow of $401m helped make a significant dent it its previously overbearing debt, knocking it back from more than $3.8bn at the end of June 2017, to just under $3.1bn a year later. That’s significantly faster progress than I’d been expecting at this stage.

The share price has responded positively, with a 15% gain over the past 12 months, but I still see the shares as undervalued compared to Tullow’s long-term potential. Sentiment still seems to be jittery, and I can’t help feeling that’s holding the price back in the short term.

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Alan Oscroft owns shares of Premier Oil. 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.