After A Disastrous 2015, Will Premier Oil PLC, Xcite Energy Limited And Kenmare Resources plc Soar In 2016?

Should you buy these 3 resources stocks ahead of improved share price performance? Premier Oil PLC (LON: PMO), Xcite Energy Limited (LON: XEL) and Kenmare Resources plc (LON: KMR)

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

While 2015 may be remembered by some as the year that the Chinese growth story came across a reality check, it will more likely be regarded as the year that the bottom fell out of the resources market. Certainly, the credit crunch saw larger price drops across the entire index but, for investors in mining and oil stocks this year, blood has most certainly been running in the streets.

Clearly, all investors are aware that the financial performance of resources stocks is highly correlated to the price level of commodities. However, few investors believed that the oil price would slump to below $50 (and show little sign of making a sustained rally), gold would decline to a 5-year low and iron ore, the steel-making ingredient, would plummet to a 10-year low. As such, the share price falls of resources stocks have been huge, simply because the market is pricing in further falls in future.

For example, the share prices of oil stocks such as Premier Oil (LSE: PMO) and Xcite Energy (LSE: XEL) have collapsed by 49% and 21% respectively since the turn of the year. In addition, Mozambique-focused mining company, Kenmare Resources (LSE: KMR), has seen its share price drop by 21% year-to-date.

Looking ahead, the performance of all three companies is clearly highly dependent upon the prices of commodities which, in turn, affects investor sentiment. However, Premier Oil appears to be relatively well-placed to post much improved share price growth, simply because it is so cheap and has a relatively appealing asset base. For example, it trades on a price to book (P/B) ratio of just 0.4 despite being forecast to post a pre-tax profit of almost £100m next year. This puts it on a forward price to earnings (P/E) ratio of just 7.6, which indicates that its shares have a sufficient margin of safety to merit purchase.

In addition, Premier Oil is better diversified than many of its resources peers. Certainly, its North Sea operations may be struggling, but the drilling programme at its joint venture operation in the Falkland Islands is progressing well and sizeable reserves have already been uncovered despite the programme not yet being complete. As such, with the potential for positive news flow as well as a dirt cheap share price, Premier Oil seems to be a very appealing buy at the present time.

Xcite Energy, meanwhile, also has a very strong asset base. Its 100% owned Bentley field in the North Sea would, with a higher oil price, be hugely appealing. However, the problem is that operating costs in the North Sea have historically been somewhat higher than in other parts of the globe, making margins tighter and, with a low oil price seemingly likely to remain over the medium term, this could cause investor sentiment in Xcite Energy to come under a degree of pressure. Certainly, it could prove to be a sound long term investment, but there appear to be more favourable options in the oil space at the present time.

As with Premier Oil, Kenmare Resources is expected to move from being a loss-making business to a profitable one in 2016. Certainly, its forecast pretax profit for next year is just £12m which, when you consider that Kenmare made a loss of £100m last year, is not particularly high on a relative basis. However, investor sentiment in the stock could pick up strongly in the months ahead – especially since Kenmare trades on a P/B ratio of just 0.2. And, while the company has a substantial debt pile, it was refinanced earlier this year. Therefore, while it is a relatively risky investment, Kenmare’s margin of safety appears to be sufficient for less risk averse investors to buy a slice of it.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

1 Warren Buffett stock I’m buying now

Coca-Cola is the fourth-largest holding in Warren Buffett’s Berkshire Hathaway. I’ll explain why I’m following Buffett and buying more.

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

I bought 4,403 Lloyds shares in June and 4,856 in September. Here’s what they’re worth now

Harvey Jones thought he was bagging a FTSE 100 bargain when he bought Lloyds shares on two occasions last year.…

Read more »

Young woman holding up three fingers
Investing Articles

I’m itching to buy these 3 hidden FTSE gems in a Stocks and Shares ISA

Harvey Jones is keen to add these three FTSE 100 companies to his Stocks and Shares ISA before April. Only…

Read more »

Close up of a group of friends enjoying a movie in the cinema
Investing Articles

How I’d try and turn just £1 a day into a fabulous £54,485 passive income for life

By investing small, regular sums in FTSE 100 shares I can potentially generate a huge passive income stream. It won't…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d aim for a million buying under a dozen shares

Christopher Ruane explains why less could be more when it comes to building a share portfolio if he wants to…

Read more »

Investing Articles

Rolls-Royce shares are up over 1,000% since 2020! Am I too late to buy?

Rolls-Royce shares now cost over tenfold what they did in the firm's 2020 rights issue. Our writer thinks they may…

Read more »

Investing Articles

1 top UK growth stock for my tech portfolio in 2024

Up 30% in just one year, this growth stock looks positioned to continue on the path of substantial gains, according…

Read more »

Buffett at the BRK AGM
Investing Articles

I’d follow Warren Buffett to target effortless passive income

Warren Buffett knows a thing or two about building passive income streams. By learning from the Sage of Omaha, so…

Read more »