Investing in the resources sector has been a risky endeavour in recent years. The prices of a range of commodities, including oil, have been exceptionally volatile and difficult to forecast. As such, while it has been possible to generate large capital gains, many investors have been left deep in the red by their investments in resources companies.
However, looking ahead there could be a bright future for the sector and for a number of its constituents. Here are two smaller companies within the industry which could be worth a closer look.
Upbeat update
Reporting on Monday was Central Asian oil & gas company Caspian Sunrise (LSE: CASP). It provided an update on its key BNG Contract Area, in which it has a 99% interest. It continues to progress with its drilling programme. Of notable mention is Well 144, which was spudded in May 2017. It has now been drilled to a total depth without incident. Four intervals have been perforated for flow testing. The first interval tested is flowing at the rate of around 1,000 bopd using an 8mm choke. The company now plans to engage in long-term testing in order to assess the well potential.
The early results from Well 144 have made the company more bullish on its future prospects. The reason for this is that it should increase the proven size of the structure, and also increase Caspian Sunrise’s aggregate production capacity to over 2,000 bopd.
Clearly, a lower oil price has caused costs across the industry to fall. This may have benefitted Caspian Sunrise to some extent, although the lower oil price may have also held back investor sentiment. In the long run, a higher oil price is forecast and with the company making progress on its drilling programme, it seems to offer upside potential.
Low valuation
Also offering capital gain potential within the oil & gas sector is Enquest (LSE: ENQ). Like a number of its sector peers, its share price has fallen heavily this year as the price of oil has failed to deliver positive growth. Its share price is down 23% year-to-date and, realistically, further falls could be ahead in the short run. That’s mostly due to the scope for further volatility in the price of oil.
In the long run though, Enquest is expected to deliver improving financial performance. Although it is due to report a loss in the current year, its bottom line is forecast to move into the black next year. This has the potential to improve investor sentiment over the next couple of years.
Furthermore, Enquest has a relatively low valuation which suggests it may have a wide margin of safety. Using next year’s forecast earnings figures means the company trades on a price-to-earnings (P/E) ratio of just 2.7. Clearly, there is scope for a downgrade to forecasts, but with a low valuation it could prove to be a worthwhile buy in the long run.