While the price of oil is still just over $60 per barrel, it has risen by around 30% since its lows earlier on in the year. Of course, it is still just over half the level at which is stood less than a year ago but, while it could resume its downward trend, the prospects of oil at less than $40 per barrel seems less likely than they were a couple of months ago.
Of course, oil producers such as Premier Oil (LSE: PMO) have been hit hard, with it reporting impairments to its asset base and falling into loss-making territory last year. This is particularly disappointing for the company’s investors, since it has a high quality and diversified asset base that could deliver strong growth over the medium to long term. And, with Premier Oil having been profitable in four of the last five years, it remains a relatively robust and stable operator which is set to return to profitability this year.
In fact, Premier Oil is expected to post a pretax profit of £71m in the current year, followed by £79m next year. This may appear to be rather disappointing when Premier Oil was generating a pretax profit of 50% more than that all the way back in 2010, but this is a different operating environment and, with Premier Oil’s share price having fallen by 47% in the last year, its shares appear to price in a period of lower profitability. As such, with it having a price to earnings growth (PEG) ratio of 0.3, Premier Oil offers a wide margin of safety which indicates that its shares could be a top turnaround play.
Meanwhile, Ithaca Energy (LSE: IAE) has also seen its share price hit hard in the last year, with it falling by 60% since May 2014. Like Premier Oil, it slipped into loss-making territory last year and, while the current year is set to see further losses, Ithaca is expected to return to profit next year. This could help to boost sentiment in the meantime and, with Ithaca reporting positive news flow recently from the flow testing of its final well in the Stella field, it could prove to be a rewarding, albeit risky, buy at the present time.
Of course, not all oil stocks have seen their share prices fall in the last year. Solo Oil (LSE: SOLO) is up a whopping 238% over the period, with recent developments having the potential to further improve investor sentiment moving forward. In fact, Solo’s deal to exchange its stake in Pan Minerals Oil and Gas for around 16% of shares in Burj Petroleum Africa could make a significant difference to the company’s top and bottom lines, with Burj bidding for two oil fields in Nigeria that have previously been drilled and, as such, come with less risk.
And, while the potential of the Horse Hill licence area near Gatwick may not provide a boost to Solo Oil in the short run as a result of sufficient work not yet having been undertaken to determine the total level of reserves in which Solo Oil has a 10% stake, its medium to long term future appears to be bright.
So, while they remain relatively risky, Premier Oil, Ithaca Energy and Solo Oil could be worth buying right now. Certainly, the oil price could come under pressure in the short run, but for long term investors it remains a highly lucrative sector.
