The resources sector has enjoyed a promising 2016. Commodity prices have improved in recent months and investor sentiment has picked up. Today, three resources companies released results and they tell us a great deal about their future investment potential.
Cairn Energy
Cairn Energy’s (LSE: CNE) half-year results show that the company is making strong progress with its drilling and exploration programme. The successful appraisal of the SNE discovery in Senegal has significantly increased the best estimate of contingent resources (2c) to 473m barrels, which is an increase of a third on the previous figure. Furthermore, Cairn’s best estimate for gross oil in place in the SNE field stands at 2.7bn barrels, with exploration potential for around 500m barrels.
Drilling is scheduled to recommence in Senegal soon. Cairn is likely to be a beneficiary of the low oil price in one sense, since drilling costs have fallen heavily across the sector. This will ease the pressure on its financial performance and with Cairn having $414m of net cash on its balance sheet, it’s in a strong position to develop its asset base. It remains lossmaking, but could become a sound long-term investment.
Sirius Minerals
Sirius Minerals (LSE: SXX) has released interim results today, highlighting the strong progress made by the company during the period. Although Sirius made a loss of £4.1m, this was a narrowing of the £4.7m loss made in the April-September period of last year. Furthermore, its cash resources remain significant, with cash on its balance sheet of £16.9m.
The period saw Sirius complete its definitive feasibility study for the polyhalite project. It also announced the funding requirement for stage one of the project, with Sirius requiring $1.09bn. Although progress is being made towards raising those funds, the reality is that resources companies remain out of favour among many investors due to the difficult period prior to 2016, when commodity prices slumped.
Therefore, a question mark remains over Sirius’s ability to generate the funding for the project on attractive terms. As such, it may be prudent to wait for further news regarding this issue before buying a slice of it.
Wood Group
Also reporting today was Wood Group (LSE: WG). Although its sales fell by 17% in the first half, its cost-saving programme reduced overheads by $50m. It continues to focus on a major reorganisation that will make the company increasingly efficient and improve customer delivery at a time when trading conditions are exceptionally challenging.
Wood Group has maintained its guidance for the full year. In addition, it sees the very early signs of a modest recovery in some areas and when this is combined with its strategy of reducing costs, it could begin to deliver improved profitability over the medium term.
Furthermore, it has today announced a contract win with TCO worth $700m. This shows that while Wood Group’s future is uncertain, it remains a sound business that’s performing well given the current conditions. Due to it being profitable and having a brighter financial outlook than Cairn and Sirius Minerals, it’s my pick of the three resources companies.
