I have been scouring the market for stocks that can benefit from inflationary price rises. Commodity exposure has proved a good diversifier for my portfolio in the past for this. I recently discussed my pick of commodity stocks, focusing on bigger names like Shell and BP. But I do not want to overlook lesser known oil explorers that may offer me better long-term value. The Tullow Oil (LSE:TLW) share price at £0.50 looks cheap when I consider its future growth potential.
The shares have underperformed for around a decade, but I believe they look set for takeoff. Here are my reasons why.
A cheap portfolio diversifier
The stock is down 70% over the last three years. It is easy for me to forget that the shares traded for well over £10 each a decade ago. But I believe the turnaround story is afoot.
In my view, Tullow Oil is deeply undervalued compared to peers. It also has higher earnings growth potential due to some recent cash-generative acquisitions. I am a long-term investor, so these value-oriented features are highly attractive to me.
Can the share price grow from here?
The mid-cap does not pay a dividend. But in an environment with high inflation and a high risk of economic recession, income is not the top of my agenda. Growth is.
I think the near-term picture, as well as the long-term one, look promising for the Tullow Oil share price.
The company has rewarded existing shareholders with a total return of 4.1% in the last 12 months. Of course, these recent returns are much better than the loss of 11% per year over the previous five years. Tullow Oil’s earnings growth forecast also exceeds both its sector and the broader market.
These are all indicators to me of a bargain worth adding to my portfolio.
The rally is coming
As oil prices have hit multi-year highs, oil majors like Shell and BP have seen their share prices rally by more than 50% over the past 12 months.
Meanwhile, Tullow as a smaller oil producer, has lagged, rising by a meagre 15% or so.
Make no mistake here, I am well aware that Tullow is a loss-making company. But I also feel that the market is under-rating its potential. The company has grown net income year on year, from a loss of -£1.22bn to a smaller loss of -£80.70m despite declining revenues. Meanwhile, the company is expected to break even financially a year from now, according to several oil and gas analysts.
I expect this trend of the company operating more profitably to continue.
Meanwhile, I believe the price of oil is likely to be stubbornly and persistently high, beyond 2022 and 2023. Positively, this feeds into the hands of Tullow Oil. Though, of course, rising oil prices are no guarantee.
But in the event oil prices continue rising, the stock could be gold dust for me in what is likely to be a challenging environment for growth over the coming business cycle.
Thus, it will be interesting to see signs of continued operational improvements in Tullow’s latest earnings results due tomorrow. If so, then it could well be a signal for me to buy and hold over the long run.