While the falling oil price has hurt the valuations of most oil sector constituents, Genel Energy (LSE: GENL) has also had to contend with a hugely uncertain outlook within the region in which it operates. In fact, the conflict in Iraq/Kurdistan, where Genel’s asset base is located, is showing little sign of ending anytime soon and, as a result, it appears as though it is a risk factor that will remain with the company for the foreseeable future.
Of course, Genel’s asset base is extremely appealing. It has the potential to deliver stunning levels of profitability in the long run and, with a strong, experienced management team, it appears to be well-placed to capitalise via a growing bottom line.
In fact, even with a depressed oil price and challenges surrounding its operations, Genel is expected to return to profitability in the current year following a tough 2014. Having posted a pretax loss of over £200m last year, Genel is expected to deliver pretax profit of £43m this year, followed by a pretax profit of £65m next year. This turnaround has the potential to stimulate investor sentiment in the stock and push Genel’s share price higher after it has fallen by 63% in the last year. And, while its future is highly uncertain, a forward price to earnings (P/E) ratio of 11.4 indicates that it offers good value considering its upbeat long term prospects.
Similarly, Rockhopper Exploration (LSE: RKH) also operates in a region which is somewhat politically unstable. Although the Falkland Islands are clearly much more stable than Iraq/Kurdistan at the present time, the issue of sovereignty remains in the foreground and looks set to be a feature over the coming years. Still, Rockhopper is making excellent progress with its drilling operations and its management team appears to be relatively prudent regarding its finances, with sufficient cash on hand to push through its planned drilling programmes over the medium term.
While Rockhopper is set to make a loss in each of the next two years, this is to be expected for an oil exploration stock. And, while there are concerns among investors regarding the finances of smaller exploration stocks, Rockhopper’s cash flow appears to be sufficient to provide a degree of confidence in its future activities. Moreover, with it trading on a price to book (P/B) ratio of just 0.88, it appears to offer good value for money, too.
Meanwhile, Indus Gas (LSE: INDI) continues to make excellent progress regarding its profitability. For example, it is forecast to increase its earnings by 181% in the current year, followed by further growth of 37% next year. Despite this, it trades on a price to earnings growth (PEG) ratio of just 0.2, which indicates that its share price has considerable scope to move upwards after falling by a whopping 73% in the last year.
Clearly, investor sentiment in the company is somewhat weak. However, it is highly profitable at the present time and offers a superb growth rate. Furthermore, it could be argued that it suffers from less geographical risk than either Genel or Rockhopper and, with its growth rate being higher and valuation being lower, Indus Gas appears to be the pick of the three companies at the present time.
