Will Tullow Oil plc, Enquest Plc and Premier Oil plc ever recover?

Have Tullow Oil plc (LON: TLW), Enquest plc (LON: ENQ) and Premier Oil plc (LON: PMO) run out of steam after recent gains?

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Oil has been on an astonishing rally since the beginning of 2016.

The price of black gold has risen by more than 70% since the January lows. Brent crude currently trades at around $50 a barrel, up from around $30 a barrel as printed in the middle of January this year.

And as the price of oil has pushed higher, shares in oil producers have also recovered from their lows. In many cases, these shares have outperformed the underlying commodity.

Should you invest £1,000 in Enquest Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Enquest Plc made the list?

See the 6 stocks

For example, since mid-January shares in Tullow Oil (LSE: TLW) have gained more than 100%, easily outperforming all of the UK’s major indexes and racking up one of the best performances in the FTSE All Share.

However, it looks as if Tullow will struggle to match this performance going forward. Over the past month, the rally in the company’s shares seems to have run out of steam and over the last 30 days Tullow’s shares have lost 3.5%.

Reconsidering

It looks as if investors and now reconsidering their decision to rush to buy oil explorers during the first five months of 2016. Earlier in the year, with many explorers trading at extremely distressed valuations, the risk of buying into the sector was more than offset by the upside potential available. Now, after recent gains, many explorers are trading at premium valuations, which leaves little room for mistakes and as a result, the risk-reward profile no longer seems attractive.

Like Tullow, Enquest (LSE: ENQ) and Premier Oil (LSE: PMO) have both racked up some impressive gains since mid-January. Since January 26 shares in Premier have risen by more than 270% while shares in Enquest have gained 158%. But once again over the past month, the rally seems to have run out of steam. Enquest’s shares are down by 1.5% and shares in Premier have returned 5.8%.

Does this make sense and are the premium valuations these explorers now command really premium? It would seem so. Take Tullow Oil, for example.The company’s shares currently trade at a forward P/E of 76 for the year ending 31 December 2016. City analysts have pencilled-in earnings per share growth of 270% for the year ended 31 December 2017, but even if the group hits this forecast the shares will still be trading at a high valuation of 21 times forward earnings.

Meanwhile, Enquest and Premier aren’t expected to report a profit for the next two years, so it’s almost impossible to place a value on the shares of these two companies.

With this being the case, and after recent gains, it looks as if the market has got ahead of itself with these three explorers. The oil market hasn’t returned to normality, and there’s still a lot that could go wrong for Enquest, Premier and Tullow.

The bottom line

So overall, after recent gains, it might be wise to stay away from this trio as they may never return to previous highs.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. 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.

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