Is Now the Time to Buy Tullow Oil?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 (UKX) and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at Tullow Oil (LSE: TLW.L  ) to determine whether you should consider buying the shares at 1,400 pence.

I am assessing each company on several ratios:

  • Price/Earnings (P/E): Does the share look good value when compared against its competitors?
  • Price/Earnings-to-Growth (PEG): Does the share look good value factoring in predicted growth?
  • Yield: Does the share provide a solid income for investors?
  • Dividend Cover: Is the dividend sustainable?

So let's look at the numbers.

Stock

Price

3-Year EPS Growth

Projected P/E

PEG

Yield

3-Year Dividend Growth

Dividend cover

Tullow Oil 1,400 285% 17.28 1.38 0.85% 70 % 6

The average analyst estimate for this year's earnings per share is $0.81 (12.5% growth) and a dividend per share of $0.17 (42% growth).

Trading on a projected P/E of 17.3, Tullow Oil looks expensive when compared with its peers in the Oil and Gas Producers sector -- which are currently trading on a lowly average P/E of 9.26. Tullow's high P/E and double-digit growth give a PEG ratio of 1.38, which implies the share price is slightly expensive for the earnings growth Tullow is expected to produce.

The dividend is poor, offering a 0.85% yield, which is currently less than a third of the Oil and Gas Producers sector average. However, Tullow has a three-year compounded dividend growth rate of 70%, implying the payout could soon catch up to that of Tullow's peers.

Indeed, the dividend is six times covered, giving Tullow plenty room for further payout growth.

Tullow looks expensive. Is this justified?
I don't like buying expensive growth stocks, and right now Tullow looks like one of those. Tullow has had an amazing past few years but still has a growth premium rating attached to it. With earnings growth predicted to slow to a more sustainable 12.5% for 2012, I believe Tullow's share price is overstating the current profit-expansion projections.

Tullow's share-price premium is partially down to a vast portfolio of oil-bearing assets the firm has available to it. These assets do contain significant potential for Tullow. However, they are still "potential" assets -- there'll always be some uncertainty as to their exact ultimate value.

Tullow produces sizeable free cash flow, allowing it to explore without borrowing heavily. Exploration costs will be high, however, and these costs may limit cash returns for Tullow's shareholders.

After the past few years of rapid growth, Tullow Oil now looks placed for a period of slower growth. Considering this likely deceleration, plus the low yield, high share-price premium, and potential exploration risk attached to the stock, Tullow, in my view, does not look appealing.

So, overall, now does not look to be a good time to buy Tullow Oil at 1,400 pence.

More FTSE opportunities
Although I think now may not be the time to buy Tullow Oil, I am more positive on the blue chips highlighted in "The Market's Top Sectors." This special report sees three Motley Fool Share Advisor analysts each studying a favorable industry -- and spotlighting a particular share to consider for this year and beyond.

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You can read "The Market's Top Sectors" today by requesting the report for free. But hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

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Further Motley Fool investment opportunities:

Rupert Hargreaves owns no shares mentioned in this article. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

 

Further Motley Fool investment opportunities:

David Kuo owns no shares in Aviva. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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