The resources sector is a ‘sea of red’ today, with the prices of a number of oil, gas and mining companies falling heavily. For example, KAZ Minerals (LSE: KAZ) is currently down by over 20% as fears surrounding Chinese demand for copper and other metals have caused investor sentiment to worsen.
And it would be of little surprise if the company’s share price — and the wider sector’s valuation — continued to come under pressure in the short run, as the global growth outlook remains highly uncertain.
However, KAZ Minerals remains a relatively attractive company for the long term. The copper price has, of course, been hit hard in recent years but, with supply likely to be reduced across the industry as higher cost mines are closed, the price of copper could realistically stabilise and even begin to recover over the medium term.
In fact, KAZ Minerals is due to move from a loss-making position to a profitable one next year. Certainly, its pre-tax profit forecast of £4m for 2016 is rather puny compared to the £1.6bn it generated in 2011, but it could be enough to improve investor sentiment and push the company’s share price considerably higher. Furthermore, with KAZ having an appealing asset base and trading on a price to book value (P/B) ratio of just 0.5, capital gains are very much on the cards over the medium to long term.
Similarly, Genel Energy (LSE: GENL) is down 4% today, despite the company being forecast to increase its bottom line by 30% next year. This puts Genel on a forward price to earnings (P/E) ratio of only 15.7 which, for a company with valuable underlying assets and upbeat long term growth potential, seems to be rather low.
Furthermore, Genel’s cash flow was given a boost recently by the Kurdistan Regional Government’s decision to make regular payments for oil exports from the region. This should enable Genel to more effectively budget and apportion its capital moving forward and also provide the market with a degree of confidence in its financial standing. Clearly, it operates in a challenging environment, with a conflict occurring in close proximity, but Genel’s margin of safety seems to be wide enough to merit investment given its positive medium to long term prospects.
Similarly, oil services company Lamprell (LSE: LAM) also has huge potential, with it being forecast to return to profit growth next year following what is set to be a challenging 2015. In fact, Lamprell’s earnings are expected to fall by as much as 41% this year, as capital expenditure and investment across the oil industry is slashed due to a lower oil price.
Lamprell, though, is likely to cope with such challenges and remains a financially sound business with a strong competitive advantage. And, while earnings growth of 4% next year may not sound all that appealing, it could be enough to change investor sentiment towards the company and push its forward P/E ratio of just 10.5 significantly higher.
