Shares in Nostrum (LSE: NOG) are flat today after the company released a third quarter update. Although revenue has tumbled from $620m in the same quarter of last year to just $375m this year, the company continues to make encouraging progress. For example, the GTU3 project continues to move forward on budget and is on target to complete by the end of 2016, with Nostrum planning to double its production capacity within the next 13 months.
In addition, Nostrum’s third quarter was relatively stable, with it delivering daily production in excess of 44,000 barrels of oil equivalent per day (boepd) and keeping margins steady at 54%. Part of the reason for this is the $85m hedge which the company has in place on the price of oil, with it clearly being highly beneficial during the current low oil price environment.
Looking ahead, Nostrum appears to be relatively well-placed to overcome future difficulties within the oil industry. For example, it has $200m of cash on its balance sheet and is relatively flexible on its 2016 drilling programme so as to maintain its financial strength. With its shares trading on a price to earnings growth (PEG) ratio of just 0.2, Nostrum appears to be a sound buy with a wide margin of safety.
Also offering high potential returns within the oil sector is BP (LSE: BP). Clearly, it has been hit exceptionally hard by the falling oil price and, according to its management team, it expects oil to remain at or below around $60 in the medium term. As such, it is likely that BP will scale back on capital expenditure in the coming years in order to help protect its dividend, which the company has stated remains a key priority.
On that topic, BP currently yields 6.9%, which indicates that the market is anticipating a cut in shareholder payouts. This seems fairly likely, since BP’s dividend is expected to represent 109% of profit next year. However, with such a high yield even a cut to dividends would be unlikely to change BP’s position as a relatively appealing income play. This, plus earnings growth forecasts of 63% for the current year and 8% for next year could mean that BP’s total return is strong over the medium to long term.
Meanwhile, oil and gas support services company Hunting (LSE: HTG) is also expected to turn around its disappointing earnings performance. In fact, the current year’s forecast decline in net profit of 89% is due to be offset somewhat by a rise in the company’s bottom line of 48% next year, which puts Hunting on a PEG ratio of just 0.8. And, while there is scope for a downgrade to forecasts, the market may begin to factor in the anticipated improved performance as we move through 2016.
Although capital expenditure and investment in the oil and gas sector has fallen and is set to continue to fall, Hunting remains a sound long term buy. In the long run, demand for energy is expected to increase by 35% between 2015 and 2040. And, while renewables are expected to increase their share, fossil fuels are still expected to dominate in the coming years. This bright long term outlook combined with its strong growth potential and low valuation indicate that now could be an opportune moment to buy a slice of Hunting.
