For many investors, the oil sector has next to no appeal at the present time. After all, the oil price is showing little sign of life and the market consensus appears to be that the price of black gold will remain at or near to its current level over the next few years. As such, there appears to be little in the way of a potential catalyst to push sector profitability or share prices higher, meaning that valuations are low as investors look elsewhere for capital growth potential.
However, Shell (LSE: RDSB) could prove to be a surprisingly strong performer. That’s because any industry which endures the scale of challenges faced by the oil industry is likely to experience a degree of consolidation, whereby stronger, more financially sound operations purchase assets or businesses which are failing. That’s not to say that Shell’s takeover of BG represents the purchase of a failed business, but it is an example of Shell’s high degree of financial firepower which, in future months, could realistically mean that multiple asset purchases are undertaken so as to strengthen its long term profit profile.
In the meantime, Shell continues to be one of the highest yielding stocks on the FTSE 100. Its yield currently stands at an incredible 7.6% and, while profitability is coming under severe pressure, Shell’s bottom line is still set to cover dividend payouts next year. That’s not to say the prospects for a dividend cut are slim, but it does provide further evidence that Shell is in a relatively strong financial position and could use this to increase its domination of the oil sector in future years.
Meanwhile, oil support services company Hunting (LSE: HTG) is also seeing its bottom line come under severe pressure. After having posted five consecutive years of earnings growth, Hunting’s net profit is set to decline by as much as 88% in the current year, which is the main factor in the share price fall of 40% which has been experienced year-to-date.
Looking ahead, though, Hunting could be due for a rebound since its earnings are forecast to rise by 40% next year. While this will not recover the lost ground of the current year, it would indicate that the sector does offer growth potential and, with Hunting trading on a price to earnings growth (PEG) ratio of just 0.9, it appears to offer growth at a reasonable price.
Similarly, Nostrum (LSE: NOG) is forecast to bounce back from a challenging 2015, with this year’s decline of 82% in earnings due to be somewhat offset by a 105% rise in net profit next year. Clearly, this degree of volatility is likely to cause fear among investors, but in terms of the risk reward opportunity, Nostrum’s PEG ratio of 0.2 indicates that there is a considerable margin of safety on offer for medium to long term investors.
In addition, Nostrum forward yield of 2.4% is due to be covered 2.2 times by profit next year. This indicates that dividends could rise at a brisk pace and contribute to improving investor sentiment following the stock’s 13% fall since the start of the year.