With the oil price having taken a battering in the last year, investors are understandably wary about investing in the sector. Certainly, things could get worse before they get better for oil producers, with the price of oil as likely to fall in the short run as it is to rise. However, supply/demand imbalances tend to correct in the long run and, while $100 oil may not be around in the short to medium term, in the long run demand from emerging markets and an economically improving developed world may provide a boost to the price of black gold.
However, even if this takes many years to come to fruition, there is still opportunity within the oil sector. Two stocks spring to mind for very different reasons. The first is BP (LSE: BP) (NYSE: BP.US), which has clearly endured a very challenging handful of years. In fact, few FTSE 100 companies have faced anything like the problems that BP has in recent years, with the Deepwater Horizon oil spill, Russian sanctions and lower oil price hurting its financial performance.
Despite this, BP remains a high quality company with a very strong and impressive asset base. In fact, BP is expected to post superb growth numbers over the next couple of years which, with or without a rising oil price, could push its share price considerably higher.
For example, BP is forecast to double its earnings in the current year before posting a further increase of 21% next year. This would be a truly astounding rate of growth and, while it may not be replicated in future years and there is a chance that current guidance will be downgraded, BP has a very wide margin of safety via a price to earnings growth (PEG) ratio of just 0.6. This indicates that its share price performance should be strong over the medium to long term and, alongside a dividend yield of 6%, BP’s total return could be well ahead of the wider index.
Also offering a wide margin of safety is Falkland Oil and Gas (LSE: FOGL). Unlike BP, it is a loss-making entity and, due to it being a much smaller business, its operations are naturally less diverse. However, it trades on a price to book (P/B) ratio of just 0.6 and, looking ahead, this appears to sufficiently price in the risky outlook that may lie ahead for the business.
And, while Falkland’s share price performance has been rather impressive thus far in 2015, with it being up 35% year-to-date, more capital gains could be on the cards. Its 2015 drilling programme is fully funded and appears to be making excellent progress, with the recent discovery at Isobel Deep in the North Falkland Basin showing that positive news flow is very realistic over the medium term.
So, while BP and Falkland are two very different businesses in terms of their size, scale and diversity, they both have wide margins of safety which mean that, while their futures may not be plain sailing, they are likely to be very profitable for their respective investors.