2014 has been a hugely different experience for investors in Leni Gas & Oil (LSE: LENI) than it has been for their counterparts in Tullow Oil (LSE: TLW). Indeed, while Tullow Oil’s share price has slumped by 38% since the turn of the year, Leni’s has risen by a whopping 540% year-to-date.
The key reason for their markedly different performance has been updates concerning their exploration activities. While Tullow Oil’s news flow has been very mixed, Leni’s has generally been positive and has caused investor sentiment to strengthen heavily.
Looking ahead, can Leni continue to outperform Tullow? Or will it be a case of ‘role-reversal’ moving forward?
Exploration Activities
Clearly, both companies are heavily reliant upon the success or failure of their respective exploration activities. Indeed, it seems as though their share prices are almost wholly dependent upon whether prospects yield as much, more, or less oil/gas as they were expecting to find. As such, it is very challenging to accurately predict their short term price movements, since exploration is an inherently uncertain activity.
So, on the face of it, there seems to be little difference between Tullow Oil and Leni. Certainly, the driver of the two share prices seems to be the same: news flow regarding a highly uncertain activity.
The Bottom Line
However, where the two companies do differ is with regard to their bottom lines. While Leni remains unprofitable, Tullow Oil has been in the black in every one of the last five years and, perhaps more importantly, has had years of outstanding growth during the period. For example, in 2011 net profit jumped by an incredible 795%.
Therefore, while both companies’ share price are hugely volatile and are dependent upon the outcome of what is essentially a ‘known unknown’, Tullow Oil seems to be doing the better job of turning its operations into a profitable return for shareholders.
Looking Ahead
On the face of it, then, Tullow Oil seems to be the obvious choice. Not only is it profitable, but its shares also trade on a very enticing valuation. For example, Tullow Oil currently has a price to earnings growth (PEG) ratio of just 0.3, which shows that the stock offers growth at a very reasonable price.
However, with Leni having considerable potential to increase its top line through having an increased sales tank at its Goudron field in Trinidad (the first sales from which occurred last week), it could prove to be a strong performer, too.
Certainly, it remains a higher risk proposition than Tullow Oil, simply because of its relative lack of diversification and less resilient financial standing. However, with both companies having considerable potential at their various prospects, a mix of the two could work out as a profitable, albeit risky and volatile, combination.