The higher oil price is set to have a positive impact on the financial performance of Tullow Oil plc (LON:TLW) (TLW.L).
Having risen from $54 per barrel a year ago to around $77 per barrel today, the oil price has enjoyed a strong year. In my view, it could rise further due to supply disruption. Hurricane Florence could disrupt supply in the near term, while the geopolitical risks in countries such as Iran and Venezuela could provide a boost to the oil price over the medium term.
This could be good news for the sector, with investor sentiment having the potential to improve. This may lead to higher valuations, as well as capital growth in a number of FTSE 100 and FTSE 250 oil stocks.
In Tullow Oil’s case, the company is expected to post EPS growth of 11% in the next financial year. This has the potential to boost investor demand for its shares – particularly since they seem to trade on a relatively low valuation.
In terms of its P/E ratio, the stock has a rating of around 10, which suggests that a margin of safety could be on offer. This may mean that its risk to reward ratio is relatively appealing at the moment.
Looking ahead, Tullow Oil is expected to deliver improved free cash flow over the medium term. This could help to reduce its debt levels, which may create a stronger business which is better-equipped to cope with the potential volatility of the oil and gas industry. And with rising free cash flow having the potential to fund the company’s exploration prospects, it could create a stronger business in the long run.
As a result, and while the oil price could be volatile in the near term, I’m upbeat about the company’s long-term outlook. I think that it offers growth at a fair price, and this could lead to capital growth in the coming years.