Suffice to say, the last year has been incredibly tough for investors in Ophir Energy (LSE: OPHR) and Tullow Oil (LSE: TLW). That’s because the share prices of the two mid-cap energy companies have fallen by 45% and 54% respectively, which is clearly hugely disappointing. Certainly, they have stabilised during the course of 2015, with a spike in the price of oil to over $60 per barrel helping to lift investor sentiment in both stocks, but they remain stocks with highly uncertain futures.
Growth Potential
Despite this uncertainty, Tullow Oil appears to be well-worth buying at the present time. That’s at least partly because it is a potential bid target for a larger, well-financed company and this could push its share price higher. In addition, Tullow seems to be adopting the right strategy in response to the oil price decline, with it focusing to a much greater extent on production rather than exploration moving forward. And, with it recently announcing that the TEN project will be allowed to continue, it could boost the company’s oil production over the next few years.
Looking ahead, Tullow is forecast to increase its bottom line by as much as 69% next year and, while this figure has come down in recent months, it would still represent a super rate of growth given the challenges posed by a lower oil price environment. And, even if there are further downgrades to Tullow’s growth prospects, it appears as though the market has adequately accommodated them in the company’s valuation, with Tullow currently trading on a price to earnings growth (PEG) ratio of just 0.3. As such, it appears to be a strong buy at the present time which looks set to deliver excellent growth over the medium to long term.
A Potential Partner?
Meanwhile, mid cap peer, Ophir Energy, appears to be facing a number of additional challenges beyond a low oil price. For starters, it lost the backing of key shareholder, Kulczyk Entities, when it sold its entire 8% stake in the business for around £80m. This not only hurt investor sentiment in the company, but also means that Ophir has lost a key financial backer which could have proved useful should the company be required to seek refinancing over the medium term in order to finance its considerable capital expenditure plans.
Additionally, Ophir continues to be a loss-making entity, with it being forecast to post pretax losses of £7m in the current year. This may not prove to be a problem in the short run, since Ophir has a rather healthy balance sheet at the present time, but with investor sentiment at a low ebb, it may act as a brake on the company’s share price at a time when many other energy companies are seeing their bottom lines move upwards at a rapid rate.
Looking Ahead
Clearly, both Tullow and Ophir have considerable long term potential and could prove to be strong buys at the present time. However, while the former has a clear path to improved profitability and trades on a hugely appealing valuation, the latter is still coming to terms with the loss of a key shareholder and may be unable to invest as heavily in its asset base as it would have wished to. As such, while Tullow seems to be a great buy right now, it may be best to keep an eye on, rather than buy, Ophir at the present time.