With the oil price now up to $45 per barrel, many investors may be feeling rather more optimistic than they were earlier in the year. After all, a $17 rise from oil’s low of $28 per barrel is a staggering increase in a matter of months. And looking ahead, there could be more to come since the supply and demand outlook for black gold may be shifting.
One reason for this is that producing oil at $45 per barrel is simply uneconomic for a number of companies. Therefore, it seems likely that supply will moderate over the medium term, while the lack of exploration spend and investment by oil majors means that in the long run oil supply could be hit yet further. Meanwhile, demand from the emerging world is showing little sign of slowing down and could increase gradually, thereby providing an even brighter outlook for the price of oil.
Focused on the long term
With investors more confident about the future of oil, the shares prices of oil-focused stocks have increased in recent months. For example, Premier Oil (LSE: PMO) has recorded an increase in its share price of 102% in the last three months and there could be further to go since the company seems to have a sound strategy through which to return to profitability.
For example, Premier Oil has acquired E.ON’s North Sea assets and this shows that it is focused on the long term, and now could prove to be a good time to buy high quality assets at discounted prices. Premier Oil is also reducing costs and seeking to become more efficient. And while its bottom line is forecast to remain in the red in the current year and next year, it is due to narrow its loss and take major steps toward profitability. As such, it could be a top performer, although a doubling of its share price may not happen again in the next few months.
Profit due to double
Shares in Nostrum (LSE: NOG) have also performed exceptionally well of late, rising by 49% in the last month alone. Like Premier Oil, Nostrum reported a loss in 2015 as difficult circumstances started to bite. However, in the current year it is due to bounce back with a black bottom line and this could cause investor sentiment in the company to improve yet further.
Looking ahead to next year, Nostrum is expected to more than double its pre-tax profit and, with its shares trading on a price to earnings growth (PEG) ratio of only 0.1, they could do the same. Clearly, it is highly dependent upon the price of oil and a fall in the price of black gold could hurt investor sentiment. But for less risk averse investors Nostrum could be a sound buy.
A tough year ahead
Meanwhile, Soco International (LSE: SIA) has failed to follow Nostrum and Premier Oil’s share price growth in 2016. Its valuation has fallen by 6% year-to-date and while it has been able to turn a profit in each of the last five years, in the current year Soco is forecast to slip into the red. This seems to be a key reason for its share price fall, as investors begin to price in a tough year ahead for the Vietnam-focused oil producer.
Still, with a relatively strong balance sheet and an appealing asset base, Soco is due to return to profitability next year. While this has the potential to improve investor sentiment, Soco trades on a forward price to earnings (P/E) ratio of 34.4 and so looks somewhat overvalued. As such, and while its long term future may be bright, it could be worth waiting for a lower share price before buying a slice of the business.