Why did the Tullow Oil share price crash in 2019?

Tullow Oil is an exploration and production company for crude oil. Its share price suffered a major hit towards the end of 2019 that was only exacerbated by the pandemic. So what happened?

This seems to be a classic case of over-expectations by the management team. In the months leading up to the share price crash, the company had been hyping up two new oil fields in Guyana. What was supposed to be a dream discovery that would re-risk the petroleum system in the area quickly turned into a nightmare.

After further analysis, Tullow Oil discovered that both sites were contaminated with heavy oil. Why does that matter? Heavy oil is a highly viscous material, meaning it cannot easily flow to production wells under normal conditions. Therefore, drilling and extracting the tar-like substance is exceptionally difficult, which questions the financial viability of both these sites.

Then the pandemic created significant disruption for the entire oil industry and triggered a sharp decline in oil prices. Combining that with the heavy oil discovery resulted in the Tullow Oil share price plummeting by 95% between October 2019 and March 2020 – the largest drop in over two decades.

The road to recovery

In its 2020 full-year results, the pandemic’s impact on the business was made pretty clear. Total revenue fell by 19%, and the company reported a loss of $1.22bn. What’s more, due to a planned shutdown at one of its main sites, the total production forecast for 2021 fell to between 60,000 and 66,000 barrels for 2021. By comparison, 74,900 barrels were produced in 2020.

But there’s reason to be optimistic about the future. The reported loss wasn’t as big as 2019’s $1.69bn, and the firm’s debt levels are falling thanks to ongoing negotiations with its creditors. Also, oil prices are now back to nearly $70/barrel as travel restrictions are beginning to ease. And the management team has noted that its assets in West Africa are expected to significantly boost production as of 2022. 

Overall, this is undoubtedly good news for Tullow Oil, and consequently, its share price has returned to pre-pandemic levels. However, there is still a long way to go before completely recovering.

The bottom line

Personally, I think the Tullow Oil share price is already on track to return to 2019 levels. But due to the reduced production forecasts, this recovery will likely be a multi-year process.

For now, I’m going to wait and see how things develop throughout 2021, so I’m not adding the stock to my portfolio today.

The post Will the Tullow Oil share price recover in 2021? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Zaven Boyrazian does not own shares in Tullow 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.

The shares are up 2% at 187p, as I’m writing, giving the company a market capitalisation of £2.6bn. This is still well below the valuation it once commanded. In an improved oil price environment and after today’s results, is Tullow a top turnaround buy?

Improving performance and bright future

The Africa-focused group’s revenue of $1.72bn was 36% ahead of 2016, as its working interest production surged 32% to an average of 94,700 barrels of oil equivalent per day (boepd).

Despite $682m of write-offs and impairments, it managed a small operating profit of $22m, although after net finance costs of $310m and a tax credit of $111m, the statutory bottom-line was a loss of $189m. However, with the write-offs and impairments being non-cash items, the cash flow picture was considerably better: the company generated free cash flow of $543m.

Tullow got through the oil rout with a millstone of debt, helped by supportive lenders. Net debt remains relatively high at $3.5bn but is falling and is now only just above management’s target level of below 2.5 times EBITDAX (earnings before interest, taxes, depreciation, depletion, amortisation and exploration expenses).

Looking ahead to 2018, the company has guided on production of between 86,000 and 95,000 boepd. City analysts are forecasting earnings per share (EPS) of around $0.20 (14.4p at current exchange rates), giving a price-to-earnings (P/E) ratio of 13. This looks an undemanding rating to me as I see scope for production upgrades this year, while the company’s valuable development and exploration assets bode well for the longer term. As such, I rate Tullow an attractive ‘buy’.

Moving towards full potential

Also on my buy list of turnaround oil stocks is Gulf Keystone Petroleum (LSE: GKP). This producer, whose operations are in the Kurdistan Region of Iraq, is a smaller company than Tullow, having a market capitalisation of £268m at a current share price of 117p.

Gulf Keystone hasn’t released its results for 2017 yet but said in an update in January that average gross production for the year was 35,298 bopd. It also guided on production for 2018 of between 27,000 and 32,000 bopd, the lower range being due to a delayed investment programme from last year.

Subject to the resolution of certain commercial matters and the government continuing regular payment of monthly invoices, management intends investing to expand production capacity to 55,000 bopd in the near-to-medium term. This would be a significant step towards development of the full potential of its field and production of around 100,000 bopd.

For 2018, City analysts are forecasting EPS of around $0.15 (10.8p), giving a P/E of under 11. Visibility on commercial agreements and payments appears to be improving in Kurdistan and with Gulf Keystone having a strong balance sheet and looking more confident about investing to increase production, the low P/E makes the shares look very buyable to my eye.

The post Is Tullow Oil plc a top turnaround buy after final results? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

G A Chester 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.

Gleeson’s shares have more than 10-bagged since their financial-crisis low in December 2008. However, despite this performance and an apparently benign outlook, there are three reasons I’d sell the stock today.

Why I’d sell

First and foremost among the three reasons is valuation. A forward price-to-earnings (P/E) of 14.7 may not seem particularly demanding for this fast-growing business. However, a price-to-book (P/B) ratio of 2.5, an operating margin of over 20% and return on capital employed of over 25% have reached the sort of levels we see at the peak of the housing cycle. Investors who have enjoyed a 10-bagging return from Gleeson bought the stock at the bottom of the cycle when the P/B was just 0.2, profit margins and return on capital were negative and the P/E off the scale.

In addition to the current top-of-the-cycle valuation (and at a time when consumer debt is at historically unprecedented levels), I’m concerned that housebuilders’ bumper profits and dividends are starting to attract unfavourable political scrutiny. The government’s Help to Buy scheme has done little to close the gap between housing starts and new household formations.

Finally, we’re seeing some huge share sales by shrewd veteran directors at a number of housebuilders. On this front, Gleeson notified the market on 8 November of a 1.5m sale at 726p a share, followed by a further 1.5m at 725p on 23 November, which together netted close to £22m. The sales were made by North Atlantic Smaller Companies Investment Trust and Oryx International Growth Fund, both part of Harwood Capital. Gleeson non-executive director Christopher Mills is the founder of Harwood and the investment manager of both funds.

Cyclical recovery

Tullow Oil (LSE: TLW) is the opposite of Gleeson. Over the period the housebuilder has 10-bagged, Tullow’s shares have fallen almost 70%. Furthermore, the fall to 179p is even more dramatic when taken from a high of over 1,500p in 2012, before the oil price crash.

Today, Tullow is in a similar position in many respects to that of Gleeson in December 2008. The oil company’s profit margins and return on capital are currently negative and the P/E is off the scale. Its P/B of 1.2 isn’t at the discount Gleeson displayed in its darkest days but it’s far below the housebuilder’s current 2.5.

With the oil price having turned upwards, Tullow looks to be at the start of a cyclical recovery. In a trading update last month, the company increased its production guidance for the current year, reduced capex guidance and said it expects to deliver free cash flow of $0.4bn.

Net debt stood at $3.6bn at the end of October (down from $3.8bn at the end of June) and Tullow has refinanced $2.5bn of reserve based lending credit facilities with its supportive banks. I expect debt to continue falling fairly rapidly, as free cash flow rises on an improving oil price, increasing production and operational cost savings. On this basis, I rate the stock a ‘buy’.

The post One 10-bagger growth stock I’d sell to buy Tullow Oil plc appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

G A Chester 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.

The worst part of Ocado’s struggles is that the company does offer a compelling product. It forced traditional grocers to change their business plans and seriously contemplate the idea that consumers would order groceries online and have them delivered to their home. Ocado’s continued popularity is evident in the 13.9% year-on-year increase in active customer numbers and 14.8% jump in revenue it recorded in fiscal 2016.

Unfortunately, increased competition from the big four grocers and the recent introduction of Amazon Fresh into the market have re-created the price war that decimated profits in the traditional grocery market just a few years ago. We see this in Ocado’s EBITDA margins falling from 7.3% in 2015 to 6.6% last year. It’s hard to believe this trend will reverse as deep-pocketed Amazon seeks to entice customers to its Prime product and grocers such as Tesco and J Sainsbury exploit what is one of the few growth markets available to them.

Furthermore, with year-end net debt rising to twice EBITDA at £164.9m, Ocado lacks the balance sheet to continue a price war for years and years. With a long-awaited international partnership yet to materialise, shares trading at an astronomical 200 times consensus forward earnings and competitive pressures mounting, I’m steering well clear of Ocado this year.

Drowning in debt

With its share price up around 75% over the past year I would begin to think about taking my profits if I were a shareholder of African oil producer Tullow Oil (LSE: TLW). Tullow’s share price has risen so rapidly largely due to the rally in crude prices after they bottomed out at under $30/bbl in early 2016.

But with year-end net debt reaching an unsustainable $4.8bn and little reason to believe oil prices will soon break out of their $50-$55/bbl range, I think now is the time to reconsider owning Tullow shares. On the first point, Tullow management points to an expectation to be free cash flow positive with oil at $50/bbl as a reason that this debt level is manageable. However, if oil prices continue to trade around $53/bbl, Tullow won’t be generating the massive amounts of cash flow necessary for paying down debt.

Although daily production will be ramping up in 2017 due to the massive TEN Field off the Ghanaian coast coming on-line, I fear that if oil prices remain subdued in the near term, Tullow has little hope of quickly paying down its massive pile of debt. This will constrain shareholder returns and future growth by limiting exploratory capex budgets. If I were a risk-averse Tullow shareholder now might be the time to cut and run.

The post 2 FTSE 250 mid-caps I’d sell in February appeared first on The Twelfth Magpie.

More reading

• Here are 2 FTSE shares I’m excited about this July — and 1 I’m avoiding
• Can anything save the Ocado share price?

Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Debenhams

The outlook for the UK retail sector remains tough and this is a key reason why Debenhams’ (LSE: DEB) share price has fallen by 3% this year. This puts it on a price-to-earnings (P/E) ratio of just 9.2, which indicates that there’s significant upward rerating potential on offer.

Despite the wider retail sector being forecast to record a tough year as uncertainty surrounding the UK economy continues, Debenhams is expected to report a rise in earnings in each of the next two financial years. For example, in the current year its bottom line is due to rise by 2%, followed by 4% next year.

With Debenhams having a relatively loyal customer base, enviable locations and such a low share price, it would be unsurprising for it to become a bid target. That’s especially the case since it has a sound balance sheet and the capacity to invest in its estate to generate improved sales and profitability in the long run.

Shire

Also trading on a very appealing valuation is pharmaceutical company Shire (LSE: SHP). It’s expected to record a rise in its bottom line of 16% in the next financial year but despite this, the company’s shares trade on a price-to-earnings growth (PEG) ratio of just 0.8. This indicates that they offer strong growth prospects at a very reasonable price.

Of course, Shire’s valuation is so appealing because of its recent combination with Baxalta. A number of investors are concerned that the two companies won’t make a perfect fit and as with any major merger, there are always integration risks as well as the potential for fewer synergies than were previously anticipated.

However, with Shire offering defensive qualities and a low valuation, it could become increasingly popular over the medium-to-long term. This could cause its shares to easily outperform the wider index, making now a sound time to buy it.

Tullow Oil

With the oil price having recovered to around $50 per barrel this year, it’s of little surprise that Tullow Oil’s (LSE: TLW) share price has surged by 47% year-to-date. Despite this, it still offers excellent upward rerating potential, with Tullow Oil trading on a PEG ratio of only 0.1.

A key reason for such a low valuation is that Tullow Oil is expected to increase production over the coming months as its focus continues to transition away from exploration and towards production. This seems to be a sensible strategy to adopt given the depressed outlook for the price of oil. And with Tullow Oil set to generate significantly improved cash flow over the medium term, its financial standing could improve and cause investors to upgrade its valuation.

The post 3 bargain basement stocks: Tullow Oil plc, Debenhams plc and Shire plc appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens owns shares of Debenhams. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Financial fears

Battered banking play Standard Chartered (LSE: STAN) has managed to defy gravity in recent times, the stock galloping higher despite escalating fears over economic cooling in Asia.

Indeed, the firm has gained 20% in value during the past three months, the company’s value surging in lockstep with a strong uptick in commodity prices. One source of revenues troubles at Standard Chartered has been the steady erosion in metals and energy prices. But the Brent benchmark’s surge back towards $50 per barrel has led many to speculate that these troubles may finally be behind the bank

Shares in Standard Chartered leapt yesterday following results that showed the bank swing to profits of $589m during January-March, improving from losses of $4.1bn in the prior quarter.

But Standard Chartered warned that “depressed commodity prices, volatility in Chinese markets, weak emerging market sentiment and concerns around interest rate and other policy actions” continue to circulate, providing plenty of red flags that could significantly hamper the bank’s recovery.

A huge decline in impairments is of course a welcome step in the right direction — these fell to $471m in the first quarter from $1.1bn between October and December. And massive restructuring that will see 15,000 roles slashed during the next few years is also raising hopes of a marked turnaround at the bank.

However, the scale of financial turbulence in Asia may significantly hamper any revenues recovery at Standard Chartered further down the line, particularly as the firm drastically reduces its presence in these growth regions. And of course the chronic supply/demand balances washing across the commodities sector casts a huge shadow over the bank’s turnaround story, too.

The City expects the financial giant to flip from losses of 6.6 US cents per share in 2015 to earnings of 27.9 cents this year. But this figure creates a huge P/E rating of 43.4 times. Considering the numerous challenges Standard Chartered still faces, I believe such a reading is ridiculously high, and reckon that now is the time for savvy investors to cash out.

On shaky ground

Like Standard Chartered, fossil fuel giant Tullow Oil (LSE: TLW) has seen its share price explode despite its dodgy revenues outlook. The firm’s share price has rocketed 66% since the end of January, with Tullow Oil unsurprisingly also fuelled by the impressive recovery in fossil fuel values.

But crude’s ascent has been underpinned by fragile hopes of an output freeze by Russia and the OPEC cartel, speculation that is yet to come to fruition. Meanwhile, global crude inventories continue to tick steadily higher as patchy demand persists.

Tullow Oil saw net debt balloon 30% in 2015 to stand at a colossal $4bn by December, the result of colossal capex costs in a low oil price environment. So while recent oil price rises may provide some respite, Tullow Oil remains on shaky ground in my opinion.  

The number crunchers may expect the oil producer to snap from losses of 113.6 US cents per share in 2015 to earnings of 8.6 cents this year as its TEN project in Ghana comes online. However, I believe a consequent P/E rating of 84.1 times is far too high given Tullow Oil’s muddy earnings outlook, leaving in danger of a harsh share price retracement.

The post Why now is the perfect time to sell Standard Chartered plc & Tullow Oil plc appeared first on The Twelfth Magpie.

More reading

• Down 7% to around £19! Is now the time for investors to consider this FTSE 100 banking giant’s deeply-undervalued shares?

Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

A bit dim?

Shares in Dialight (LSE: DIA) have exploded by almost a third in March, with the stock still chugging higher during the course of post-Easter trading.

Dialight announced earlier this month that it had printed a pre-tax loss of £3.9m during 2015, swinging from a profit of £15.5m the prior year. The LED lightning manufacturer advised that “a downturn across a number of our markets exacerbated operating challenges.“

 Still, the market has cheered Dialight’s plans to tackle these problems through aggressive restructuring that kicked off during the second half, including plant closures and a streamlining of operational processes.

The number crunchers expect these measures to produce a 31% earnings bounce in 2016, resulting in a heady P/E rating of 28.6 times. But this number topples to 17.1 times for next year thanks to expectations of an extra 90% earnings bump.

However, it could be argued that Dialight remains too expensive given that prolonged trading difficulties look to be on the cards. I reckon the business could suffer a significant share price re-rating as a result.

Risks outstrip possible rewards?

A recovery in commodity prices has sent investor appetite for minerals and energy stocks spiralling higher in recent weeks.

Diversified giant Glencore (LSE: GLEN) and fossil fuel play Tullow Oil (LSE: TLW) have both seen their stocks values appreciate by double-digit percentages since the start of March. But share values have moderated, as fear has once again gripped the market — indeed, the firms were both dealing lower in Tuesday business.

And I believe more but prweakness can be expected in the coming days. Further swathes of poor data from raw materials glutton China has accelerated fears of a sudden collapse in commodities demand, concerns which could gain traction when the next Chinese manufacturing PMI  survey is released on Thursday, March 31st.

As well, sentiment towards the oil segment is becoming increasingly twitchy as hopes of a supply cap by certain OPEC members and Russia evaporate. Cartel members Iran and Libya have already poured scorn on a possible output freeze, leaving already-bloated inventories in danger of exploding.

Allied to concerns over deteriorating supply imbalances, a resurgent US dollar has also heaped further pressure on the commodities sector. Positive data from the United States in recent days has provided a double-whammy, boosting market appetite for the world’s reserve currency as well as raising the prospect of another Federal Reserve rate hike in the not-too-distant future.

The City expects Glencore to return to the black this year, although projected earnings of 5.3 US cents per share result in a massive P/E ratio of 49.1 times. And predicted earnings of 5.7 cents at Tullow Oil creates an earnings multiple of 49.2 times.

I believe that these readings are far too heady given the huge risks associated with commodities markets at present, and therefore both Glencore and Tullow Oil are in danger of a severe correction should economic data keep on disappointing.

The post Can March’s Winners Glencore PLC (+14%), Tullow Oil plc (+18%) & Dialight Plc (+32%) Keep Charging? appeared first on The Twelfth Magpie.

More reading

• Down 10% to below £6 now! Here’s why Glencore’s share price looks a bargain to me anywhere under £12.13
• Warren Buffett warns on valuations — is market cap-to-GDP flashing a bubble signal again?
• 2 FTSE 100 dividend stocks that stand out for shareholder returns
• Up over 100%, are these FTSE 100 names still among the top stocks to buy?
• Up 103% with a P/E of 261 — is this FTSE 100 stock still worth buying?

Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

With Tullow holding a 40% stake in the block, it’s clearly good news for the company. And with its shares rising by around 4% today, it seems to have been well-received by the market. Looking ahead, there’s the scope for further improvements to investor sentiment in Tullow, since it’s expected to ramp-up production in the current year as Project TEN in Ghana comes on-stream. This could significantly increase the company’s profitability and cash flow, allowing the prospect for a sustained share price rise over the medium term.

Clearly, Tullow’s share price performance is highly dependent on how the oil price performs in future. However, with it trading on a price-to-earnings growth (PEG) ratio of 0.1, it appears to have a rather enticing risk/reward ratio.

Long-term play

While Tullow appears to be worth buying, Genel Energy (LSE: GENL) continues to be a relatively high-risk option within the oil space. Certainly, its asset base is very appealing even though it recently reduced its reserves estimates, which caused an impairment of around $1bn to the value of its asset base. As such, it has the potential to deliver excellent profitability in the long run.

The problem though, is that the potential rewards on offer seem to be outweighed by the risks it faces. The geopolitical instability of the Northern Iraq/Kurdistan region could hurt its production capabilities in future, while there are also concerns surrounding payment for oil.

Although recent payments have caused investors to become somewhat more upbeat regarding the payment of outstanding amounts owed to Genel Energy, the situation could easily change and leave Genel with a cash flow issue. With a number of oil stocks being cheap and offering less risk, there seem to be better options available elsewhere.

Investor sentiment

Meanwhile, shares in North Africa and Middle East oil and gas exploration company Gulfsands Petroleum (LSE: GPX) have soared by 36% since the turn of the year. In fact, the company released a statement just last week stating that it’s unaware of any reason for the share price movement. It’s likely that a buoyant oil price has caused investor sentiment to improve towards the wider sector and this has benefitted Gulfsands Petroleum to a degree.

Of course, this comes after a challenging period for the company which saw its management team replaced last year. And while it has undertaken a successful fundraising recently and has the potential to deliver profitability in the long run, there appear to be better funded and less risky exploration plays on offer elsewhere.

The post Are Tullow Oil plc, Genel Energy PLC And Gulfsands Petroleum plc 3 ‘Must-Have’ Oil Stocks? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Indeed, Brent’s dive back below the $40 per barrel marker typifies the precarious footing upon which most resources markets stand on. The ‘black gold’ price had risen by almost a quarter since mid-February, but fresh swathes of disappointing Chinese data — combined with news of still-rising supply levels — have raised fears that recent price gains may have been overdone.

OPEC warns again

As a result, oil leviathan Tullow Oil (LSE: TLW) has retreated sharply from the four-month highs punched earlier this month, a 10% decline in Tuesday trading dragging the stock back below the 200p marker. And this retreat has much further to go in my opinion.

Just yesterday oil cartel OPEC trimmed demand forecasts for its own crude for 2016. The organisation now expects off-take to register at 31.5m barrels per day, a 90,000-barrel reduction from its previous reading.

With production from outside the group proving more resilient at current prices than previously thought, OPEC now forecasts total excess supply of 760,000 barrels per day this year, up from the prior projection of 720,000.

Despite this backdrop, Tullow Oil is expected to flip from losses of 113.6 US cents per share in 2015 to earnings of 14.4 cents this year as production from its TEN asset in Ghana starts flowing during the summer.

But with the company dealing on a huge P/E rating of 50.3 times, I believe the business is far too risky at these prices given the prospect of severe revenues weakness in 2016 and beyond.

Dropping like a stone

Precious stones producer Stellar Diamonds (LSE: STEL) has also seen its share price take a battering in Tuesday business, the stock recently dealing 22% lower from the prior close.

The diamonds play announced that it had conditionally raised £600,000 through an equity issue, creating 6m new shares at 10p each. The monies will be used to fund a trial mining and sales exercise at its Baoulé project in Guinea, as well as draw up a maiden resource statement. Funds will also be used to support Stellar Diamonds’ mine licence application in Tongo.

The business also furnished the market with news of a disappointing diamond auction in Antwerp. While Stellar Diamonds raised an extra $300,000 through the sale, an average price of $91.05 per carat represented a significant markdown from the $156 per carat achieved at the last sale in May 2015.

 Stellar Diamonds noted that the lower price was caused by “a different mix of goods with a higher proportion of lower quality stones as well as a broadly weaker rough diamond market since mid-last year“.

Although some stones fetched between $1,000 and $4,600 per carat, the huge difference between Stellar Diamonds’ material makes it a high-risk gamble, in my opinion. And the firm’s balance sheet could find itself under fresh pressure should Chinese diamonds demand continue to flail.

The post Should You Go Bargain Hunting At Tullow Oil plc & Stellar Diamonds PLC? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Mining giant Rio Tinto’s annual results may have included an $860m full-year loss, but the biggest news was the suspension of progressive dividend payments. Shareholders are still forecast to receive some $2bn in dividends this year, roughly 110 US cents per share, but this will pale in comparison to the $6.1bn returned to them in 2015. Income investors will decry this news, but it’s undoubtedly in their best interests over the long term.

Savings from the slashed dividend, $3bn in capex reductions through 2017 and an additional $2bn in operating cost reductions will allow the company to keep debt levels manageable. Gearing for the past year increased to 24%, but this is far better than most competitors and will be sustainable even if prices of key commodities remain low.

Rio’s relative lack of diversification has been instrumental in maintaining free cash flow as its low-cost-production iron ore assets are proving profitable even at today’s depressed prices. Rio shares may not skyrocket any time soon, but the company has maintained a healthier balance sheet than competitors and has fewer high-cost assets to offload. Given these advantages, Rio could be a smart bet for long term-investors seeking exposure to the commodities sector.

A barrel of woes

Unsurprisingly, independent oil producer Tullow Oil also reported significant losses for 2015. Post-tax losses were $1bn as revenue fell 27% year-on-year. More worryingly, net debt rose 30% to $4.2bn, sending net gearing up to 56%. Tullow retains $1.7bn in cash and undrawn credit lines, but this level of debt doesn’t bode well for the shares quickly moving upward even if crude prices rebound significantly over the medium term.

On the bright side, the large TEN oil and gas field in Ghana will come online mid way through 2016, adding some 35k barrels per day of production. With TEN-related capex nearly finished and these additional barrels, operating cash flow will increase significantly. However, the company’s cumulative assets are only break-even in the $38 to $45/bbl range. At current prices the company will be pumping oil at a loss simply to keep cash flowing to operations while still adding to the mountain of debt.

Stability… at a price

Insurer Aviva offers the most stability out of these three shares, but also the least upside. Shares may be trading at a very low nine times forecast earnings and offer a 4% yield, but growth potential is very low. Government changes to pensions that no longer mandate lifetime annuities have hit one of Aviva’s most profitable segments hard. Furthermore, low interest rates on government bonds are also crimping the insurer’s ability to meet payments to customers without moving into riskier assets such as equities or corporate debt. Despite an attractive valuation and a relatively good dividend, I believe competitors such as Prudential offer significantly more upside potential.

The post Are Rio Tinto Plc, Tullow Oil Plc & Aviva Plc Shares Set To Skyrocket? appeared first on The Twelfth Magpie.

More reading

• A £10,000 ISA buys 1,931 shares in these 6.5%+ yielding dividend stocks!
• 3 top passive income shares to consider with dividend yields above 5%
• How much do you need in a SIPP to target a stunning £750.75 weekly passive income?
• How to turn a £20k ISA into a £12,000 yearly second income
• Starmer resigns as PM — what could this mean for UK stocks and the FTSE 100?

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto and Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.