Investing in the oil sector may appear to be a rather unfavourable move at the present time. After all, the industry is currently in the midst of a crisis which has seen profits wiped out, investment slashed and investor sentiment collapse. And, in the short run at least, further problems could lie ahead since many commentators and the senior management of a number of oil companies are predicting a low oil price for the medium term.
However, buying oil-focused stocks right now could lead to long term gains. That’s because many of the anticipated problems could already be priced in, with a number of companies which operate in the sector having already endured a rough ride in terms of their valuations. For example, support services company Lamprell (LSE: LAM) has posted a fall in its share price of 23% during the course of the last year.
A key reason for this is a forecast fall in the company’s net profit of 40% in the current financial year, which is clearly hugely disappointing. However, Lamprell is due to increase its bottom line by 3% in 2016 and this indicates that investor sentiment could begin to improve in the coming months. Certainly, there is scope for a downgrade to earnings guidance, but with Lamprell trading on a price to earnings (P/E) ratio of only 9.5, there appears to be a sufficiently wide margin of safety on offer to warrant purchase at the present time.
Furthermore, Lamprell also has income potential even though it only yields 2.4%. That’s because dividends are covered 4.5 times by profit even after the current year’s disappointment is taken into account. This means that rapid dividend rises may be on the horizon, with 2016’s dividend per share expected to rise by 37%, for example. As such, Lamprell may become a viable option for income-seeking investors and rising shareholder payouts may also become a positive catalyst for its share price over the medium to long term, too.
Meanwhile, UK Oil & Gas (LSE: UKOG) has bucked the trend in the last year, with its shares soaring by 165% as a result of a major oil discovery in the UK. Although there was some confusion regarding the size of the potential find, to me UKOG remains a company with strong long-term prospects to increase its oil production from the four sites in which it currently has an interest.
Clearly, smaller oil companies may be at a disadvantage versus their larger peers when it comes to financing, since they lack the size, scale and diversity of a number of their peers. However, with UKOG having raised £6m via a placement in June of this year to contribute to £8m in cash and receivables as of its half year results, it appears to be sufficiently well financed to progress with its strategy over the medium term. Furthermore, as at its half year results it also had £9.6m of undrawn debt facilities which can be accessed if they are needed.
Clearly, the full potential of the company’s asset base is not yet known and the value of such assets is likely to be relatively volatile simply because of an uncertain outlook for the oil sector. However, with UKOG being up 15% today and having a relatively bright future outlook, less risk averse investors may wish to consider its purchase for the long term.