With the resources sector having endured an exceptionally difficult period, it is understandable that many investors are feeling nervous about its future prospects. After all, there is a real chance that things could get worse before they get better. And while a number of resources stocks offer unappealing risk/reward ratios, some could be worth buying for the long term.
Exceptionally low valuation
A prime example is the world’s largest silver producer Fresnillo (LSE: FRES). Its financial performance started to come under pressure long before the current commodity crisis really took hold — the price of silver peaked around five years ago and has failed to mount a successful comeback ever since. As a result, Fresnillo’s profitability has come under severe pressure and its shares have been a relative disappointment in recent years.
However, Fresnillo has been able to stay in the black throughout, and while the prospects for silver are rather uncertain, it could be worth buying simply because it trades on an exceptionally low valuation. For example, it has a price to earnings growth (PEG) ratio of just 0.4 and with relatively stable finances and an efficient business model, it could be a good bet for the long term.
Major questions remain
The risk/reward ratio for Gulf Keystone Petroleum (LSE: GKP), though, seems to be rather unattractive. On the one hand it has a highly appealing asset base which should provide the company with low cost production over the long term. However, external challenges pose a real threat to Gulf Keystone Petroleum’s operations and could hurt its long term outlook.
Central to this is the political instability in the Northern Iraq/Kurdistan region, which is showing little sign of abating. Although this has not prevented Gulf Keystone Petroleum from conducting its oil production activities in recent months, it is still waiting for full payment for past production. While this situation has been alleviated somewhat byrecent payments, there remain major questions about the company’s long term financial outlook. As such, there seem to be better buys within the oil space at the present time.
Very encouraging update
Meanwhile, shares in US-focused oil development and production company Nighthawk Energy (LSE: HAWK) have soared by over 13% today, after it released a very encouraging production update. For the year to 31 December 2015 gross production was 654,800 barrels, which represents a 7.3% decline compared with the 706,319 barrels produced in 2014. The reason for this fall was a natural decline rate on existing wells, which was offset to a degree by the results from Nighthawk’s behind pipe and solvent treatment programmes.
However, the key part of today’s release is that Nighthawk now expects revenue for the full year to be significantly higher than current market expectations. This is clearly excellent news for the company’s investors and with Nighthawk having a price to book value (P/B) ratio of 0.3, it could be worth a closer look for less risk-averse investors.