Investing in oil stocks is popular among thick-skinned investors, but it comes with unpredictability. FTSE All-Share members Tullow Oil (LSE:TLW) and Premier Oil (LSE:PMO) are enduring a tough year as depressed oil prices compound their debt problems and suppress their share prices. The rumour mill has been rife with takeover talk and speculation about their possible demise. So, what is the latest outlook for these two oil stocks?
Tullow share price challenges
The Tullow Oil share price took a 30% tumble then 70% crash late last year when the company announced a string of production cuts. Free cash flow numbers were slashed, and the CEO resigned. This year, the pandemic piled further pressure on the oil industry and plummeting oil prices have not helped. Tullow suspended its dividend in early March, which pushed its share price to its lowest point this year.
Tullow Oil has an 85% debt ratio and negative earnings per share. So, is there hope for the African oil producer? While some oil stock shareholders are sitting on significant losses, the future is now looking more favorable. Tullow is focused on reducing its debt, with a $1bn fundraising plan in place. In April, it sold its Ugandan project to Total for $575m. Then in May, it declared force majeure on its main licences in Kenya. This gave it an opportunity to resolve tax issues it is facing in the country.
PMO has ambition and determination
Meanwhile, from a low of 12p a share in the March market crash, the Premier Oil share price has rebounded to pass the 30p mark. Premier remains massively indebted and is focused on making further debt-fuelled acquisitions, which are being opposed by one of its creditors, Asia Research & Capital Management. However, a court recently ruled in PMO’s favour on the first of these buys and it proves the determination and ambition of the company should not be ignored.
How well the PMO share price recovers from this year of challenges very much hinges on the future price of oil. Premier previously said its break-even price is under $50 a barrel. Last month the company said it is preserving its liquidity with $330m of available credit facilities and $160m in cash.
Production cuts and shutdowns
Short-term demand for oil remains uncertain in the West, but demand has already started returning to China. The longer-term outlook still looks as if global demand for oil and gas will not be diminished quickly.
A glut of oil means storage space is limited, so OPEC+ is meeting tomorrow to examine extending its oil production cuts. Agreeing to these cuts should extend oil price gains and keep Brent Crude above $40. In another positive sign for oil prices, the price of West Texas Intermediate (WTI) futures for July is rising. It was panic-selling of these in May that caused the WTI price to fall into negative territory. On the flip side, the oil price stabilising too quickly may bring US shale producers back on-line, which would be counterproductive to reducing the glut.
I don’t think traditional energy markets will disappear soon and there is still money in investing in oil. I think the Tullow and PMO share prices will continue to rise as long as the oil price stays above $40. Just remember they are volatile and remain riskier investments than many other shares.
