Is Now the Time to Buy Tullow Oil?http://www.fool.com/investing/international/2012/10/30/is-now-the-time-to-buy-tullow-oil.aspx Rupert Hargreaves, Fool U.K.
October 30, 2012
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:
So let's look at the numbers.
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?
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.
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