The outlook for the oil industry keeps going from bad to worse. As a result, the share prices of companies operating in the sector continues to weaken and, given the current glut of supply, there is a real threat that the price of oil could move to below $40 per barrel in the coming months.
Very enticing
Certainly, the valuations of a number of oil producers, explorers and support services companies reflects a very pessimistic outlook for the price of black gold. For example, Premier Oil (LSE: PMO) has fallen by almost 11% today on doubts surrounding the global growth outlook and future demand for oil. The company now trades on a staggeringly low price to book value (P/B) ratio of 0.33 and a forward price to earnings (P/E) ratio of only 11.4.
Both of these figures indicate that investors are expecting things to get worse for oil producers before they get better. But while further asset write downs are a very real possibility, and would hurt Premier Oil’s future profitability and reduce the value of its net assets, the current margin of safety on offer appears to more than compensate for this risk. In other words, the potential rewards from the future performance of Premier Oil (and the wider oil sector) seem to have been forgotten by the market and, as such, the risk/reward ratio is very enticing.
A superb buy?
It’s a similar story with energy services provider for the oil and gas industry Hunting (LSE: HTG), which has seen its share price collapse by a third in the last three months. Prior to the current year, it had delivered five successive years of positive earnings growth but it is expected to undo all of that this year, with a fall in its bottom line of 84%.
Clearly, investor sentiment is deteriorating and while this situation could realistically continue in the next few months, Hunting’s financial performance is expected to improve dramatically next year with growth in net profit of 53%. Although this will not offset this year’s expected fall, it puts Hunting on a price to earnings growth (PEG) ratio of just 0.4, which indicates that its shares could be a superb buy at the present time.
Impressive potential
Of course, oil exploration companies have also seen their share prices come under pressure this year. Falkland Oil and Gas (LSE: FOGL), though, has bucked the trend and its shares are up 7% year-to-date after a better than expected drilling campaign.
Looking ahead, the second half of the drilling programme has the potential to yield further impressive results and, even if it disappoints, the company’s stake in the Falkland Basins looks set to yield excellent production numbers over the medium to long term. Certainly, it may not be as economically appealing as it was before the oil price collapsed, but the discoveries are likely to be economically viable and have the potential to turn Falkland Oil and Gas into a highly profitable business over the medium to long term.
