But this could present a buying opportunity for oil and gas shares such as Tullow. And with there seemingly being good value on offer across the industry, a FTSE 250-listed stock which released an update on Wednesday may also be worth a closer look in my opinion.

Improving outlook

The company in question is exploration and production business Energean (LSE: ENOG). It released news of a Gas Sales and Purchase Agreement with IPM Beer Tuvia to supply an estimated 5.5 BCM (billion cubic metres) of gas from its Karish and Tanin FPSO (floating production storage and offloading vessel) over a period of 19 years. The contract is in line with the company’s aim to secure offtake for the remaining capacity in its 8 BCM per year FPSO.

Looking ahead, Energean is expected to rapidly increase its profitability in the current financial year. In fact, the stock trades on a price-to-earnings growth (PEG) ratio of just 0.1. This suggests that it may offer good value for money at the present time, and that it has the potential to deliver improving share price performance. While it may experience a period of volatility and uncertainty, it could offer an improving risk/reward ratio when compared to some of its industry and index peers.

Low valuation

As mentioned, the near-term prospects for Tullow Oil appear to be relatively challenging. The company’s financial outlook may be negatively impacted by a falling oil price, and this could hurt investor confidence over the coming months. Since the company has a relatively high level of leverage versus some of its industry peers, it may be viewed as high-risk by investors. This may mean that it underperforms some of its more established sector peers in the short run.

However, with the stock now having a price-to-earnings (P/E) ratio of around 8.5, it could offer a wide margin of safety. Furthermore, the oil price has been negatively impacted by a six-month waiver placed on Iranian oil exports which may not be extended further. And since the medium-term outlook for the world economy remains relatively robust, according to various forecasts, demand levels for oil may remain at healthy levels.

As such, now could prove to be a good time to buy oil and gas companies such as Tullow Oil in my opinion. Although risky and potentially volatile, the reward potential on offer over the long run could be relatively high after what has been a challenging three months for the wider industry.

The post FTSE 250-member Tullow Oil’s share price is in freefall! This is what I think you should do appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any of the shares mentioned. 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.

Generally, as pure-plays on upstream, mid-cap producers have a lot more to gain from a sustained upswing in oil prices. At the same time, many mid-cap companies in the sector continue to trade well below their historic highs and are valued at big discounts to the market.

Tullow Oil

Shares in Tullow Oil haven’t exactly been sparkling of late — they’re up just 5% since the start of the year, to 216p. The Africa-focused oil and gas explorer clearly has some way to go before it’s fully out of the woods, but early signs suggest that things are beginning to move up for the company.

Thanks to higher oil prices and increasing production, Tullow swung back into profit in the first half of 2018, after making a loss of $348m in the same period last year. Profit after tax in the six months to 30 June was $55m, while free cash flow nearly doubled to $401m.

Progress is also being seen with the ramp-up in production from its offshore Ghana TEN oilfields, with estimated reserves of 300m oil-equivalent barrels. In a recent operational update, the company said it expects to hit full output capacity of 80,000 barrels a day by 2020, up from 56,000 currently.

Exploration

With Tullow’s financials coming back into shape, we are once again seeing more investment into growing its reserves. Although exploration always requires a bit of a gamble, finding new oil has always been its key strength. Tullow has one of the best track records of discovering new reserves, so increased spending on exploration has the potential for significant upside.

On the other hand, however, plans to resume dividend payments aren’t a priority. Despite a big jump in free cash flow, net debt is still rather high, at $3.1bn, meaning Tullow is highly leveraged to the price of oil.

Eastern Mediterranean

Elsewhere, Energean Oil & Gas (LSE: ENOG) is another stock that deserves a closer look. The FTSE 250 company, which raised $460m from listing its shares on the London Stock Exchange in March, has big plans to develop its gas prospects in the eastern Mediterranean.

The eastern Med has become an increasingly active exploration and production region, following a series of high-impact discoveries in Egypt and Israel, attracting a hive of investments from Exxon Mobil, BP, Eni and Total. With the appearance of the oil majors in the area, infrastructure is being developed, opening up supply routes for independent producers such as Energean.

Significant upside

Energean, which has its main production base in Greece, intends to use the proceeds of its equity sale to develop two major gasfield discoveries offshore from Israel, Karish and Tanin. Together, they have potential reserves of up to 2.4trn cubic feet of gas and 32.8m barrels of light oil and condensate, representing significant upside potential for a firm that has just 50m oil-equivalent barrels of commercial reserves.

Of course, there are major risks involved too. On top of the usual cacophony of execution and commodity price uncertainty, investors will have to contend with political risks and rivalries that are typical of the region.

The post Have £1,000 to invest? This growth stock could be a great turnaround story appeared first on The Twelfth Magpie.

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• This FTSE passive income star has an 11.2% forecast yield and is potentially 72% undervalued!

Jack Tang has no position in any of the shares mentioned. 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.