Since the turn of the year, a number of oil stocks have easily outperformed the FTSE 100. That’s hugely impressive and comes as a major relief for investors in the sector, since 2014 was a disastrous year due to the collapse in the oil price. And, while oil is still trading at a relatively low level compared to the halcyon days when it traded at $100+ per barrel, the outlook for the industry is much brighter now than it was even a few months ago.
Improving Sentiment
In fact, investor sentiment in oil and energy companies has increased significantly, with the likes of BP (LSE: BP) (NYSE: BP.US), Wood Group (LSE: WG) and Nostrum (LSE: NOG) all making excellent gains year-to-date. For example, BP’s share price has risen by 17%, Wood Group’s by 19% and Nostrum’s by a whopping 49%, with the FTSE 100 being up a comparatively poor 7% since the turn of the year.
And, looking ahead, investor sentiment could continue to improve in the short to medium term. That’s because further oil price falls had been included in the sector’s valuation, with many commentators stating that oil could fall to less than $40 per barrel by the end of the year. Now, though, that appears to be less likely and, as such, the wide margins of safety that were built in to the valuations of oil companies are being reduced somewhat.
Furthermore, with valuations still being relatively low, there is scope for takeover and other M&A activity, which could lift the share prices of oil stocks in the short to medium term, too.
Looking Ahead
So, while BP may not prove to be a bid target, it continues to trade on a very wide margin of safety and this could lead to an increase in its share price. For example, BP has a price to earnings growth (PEG) ratio of just 0.3, which indicates that its share price could move much higher. And, with there being less scope for asset write downs, its profitability could improve at a faster rate than is currently being anticipated by the market.
Meanwhile, it’s a similar story for Wood Group, with it having a price to earnings (P/E) ratio of just 12.7. That’s significantly lower than the FTSE 100’s P/E ratio of around 16, which indicates that Wood Group’s share price could rise at a rapid rate. And, with Wood Group still having the potential to be taken over, a bid premium could begin to creep into the company’s valuation moving forward.
And, when it comes to growth potential, Nostrum is a tough company to beat. That’s because it is forecast to increase its bottom line by an incredible 188% next year. Furthermore, despite its share price having risen strongly since the turn of the year, it still trades on a PEG ratio of just 0.1, which indicates that further share price growth is very much on the cards.