It’s been a hugely challenging year for investors in the resources sector, with the prices of a wide range of commodities coming under severe pressure as a result of global supply/demand imbalances. And, looking ahead, the situation looks set to continue in the short run at least, with the market seemingly pessimistic regarding the prospects for oil and gas, as well as mining stocks.
For long term investors, though, this could present an opportunity to buy high quality companies at great prices. Furthermore, the risk/reward ratio could be in investors’ favour right now, with considerable capital gains lying ahead if you can pick out the right companies.
Growth Potential
For example, oil and gas exploration and production company Nostrum (LSE: NOG) is expected to post excellent growth figures over the next couple of years. In fact, its bottom line is due to rise by an incredible 271% in 2016, which should allow it to commence dividends and yield a very appealing 4.5%.
Clearly, such figures are very enticing and, despite this, Nostrum continues to offer excellent value for money. For example, it has a price to earnings growth (PEG) ratio of just 0.1, which indicates that such excellent growth is still not being priced in to the company’s share price – even after a 25% rise since the turn of the year.
Similarly, diversified mining company, Vedanta (LSE: VED), is expected to report a much improved performance in 2016. In fact, it is expected to see its bottom line move from being in the red to being in the black, with pretax profit of over £670m being forecast for next year.
Furthermore, today’s rumours regarding a merger between Vedanta and its oil and gas subsidiary, Cairn India could reduce Vedanta’s debt and improve its financial standing, which would clearly be positive news for the company. And, with its shares trading on a forward P/E ratio of 15, it seems to offer good value for money at the present time, too.
Challenging Times
Of course, not all resources stocks may offer such improved performance. For example, Enquest (LSE: ENQ) continues to experience a relatively turbulent period and, looking ahead, things are set to get worse before they get better. That’s because its profit is due to remain in the red in the current year, before falling to minus £11m on a pretax basis next year.
Similarly, Ophir Energy’s (LSE: OPHR) earnings per share are also forecast to remain in the red in 2015 and 2016. And, while both it and Enquest have relatively appealing asset bases and could surprise on the upside, there appear to be a number of more favourable opportunities on offer; notably with companies that are profitable and are set to improve on their current financial performance next year. In other words, there are other stocks with clear catalysts that could provide greater capital gains moving forward.
Looking Ahead
So, while the resources sector is very risky, it could also prove to be highly rewarding. And, with the likes of Nostrum and Vedanta offering bright futures and good value, now could be the right time to add them to your portfolio.
