One of the most difficult aspects of investing is timing. An investor can find a superb company which is enjoying a highly prosperous period and trades at a great price only for a deterioration in the wider industry outlook to hurt its forecasts and cause its valuation to tumble. As such, looking at investments in a long term context can help, since in the short run there is a random element to share price movements and, as a result, they are nigh on impossible to accurately predict over a short period.
With this in mind, the current state of the oil market is an excellent example of an industry which is incredibly difficult to call. On the one hand, oil at sub-$50 per barrel seems difficult to justify when global demand for energy is rapidly rising. On the other hand, with there being such a glut of supply and weak demand, further declines in the price of black gold cannot be ruled out.
This makes the task of identifying possible buys within the sector highly challenging. Focusing on the long term, though, the likes of Genel (LSE: GENL), Premier Oil (LSE: PMO) and Hunting (LSE: HTG) appear to be reasonably priced given their risk profiles.
In the case of Genel, it continues to suffer from not just a low oil price but also a high degree of uncertainty regarding the receipt of payments from the Kurdistan Regional Government (KRG) and, while they have recommenced in recent months, there is no guarantee that they will continue. That’s especially the case since the region remains unstable and its future is very uncertain.
However, with Genel trading on a price to earnings growth (PEG) ratio of just 0.7, its valuation appears to take into account the risks which it faces. And, with the company having a very appealing asset base as well as the potential to increase production over the medium to long term, now could be a good moment for less risk averse investors who can live with a relatively high degree of volatility to buy a slice of it.
Similarly, Premier Oil also faces significant risks, with the company’s debt position being a major concern ahead of a prolonged period of interest rate rises. Certainly, asset sales have helped to keep the company afloat and, with additional production potentially being a feature of 2016, the company’s bottom line is expected to move from being in the red to being in the black next year.
Clearly, Premier Oil’s North Sea assets may hold back its progress since costs in that region can be less competitive than in other parts of the world. But, with cost cutting being a major focus for the company, its profitability could prove to be a positive surprise. With Premier Oil’s shares trading on a price to book value (P/B) ratio of just 0.4, it appears to offer a favourable risk/reward ratio for the long term.
Meanwhile support services company Hunting is also due to deliver improved financial performance next year. In fact, its bottom line is expected to rise by 48% in 2016 and this means that it has a PEG ratio of just 0.8. Certainly, investor sentiment is very weak, as evidenced by Hunting’s share price fall of 38% since the turn of the year, but with the company due to remain profitable this year and then offer excellent growth next year, the market could quickly become increasingly bullish on its shares.
Undoubtedly, Hunting has the potential to fall further over the coming months as a result of further delays in capital expenditures across the oil industry. But, looking years ahead, the present time could prove to be a sound moment to initiate a position in what remains a highly volatile stock operating in an exceptionally volatile sector.