It may seem rather strange to mention resources companies and the word ‘growth’ in the same sentence. After all, the sector has been ravaged by falling commodity prices which have left the vast majority of its incumbents with declining top lines, collapsing bottom lines and major share price falls.
However, drilling deep into the sector, there are a number of stocks which are forecast to post relatively impressive earnings figures over the next couple of years. One such company is Petrofac (LSE: PFC). Its net profit is due to drop by 70% in the current year and this has been a key reason why its shares are now priced at only two-thirds of their level from a year ago.
Looking to next year, though, Petrofac is expected to return to strong growth and its net profit is expected to rise by as much as 178%. This would offset the bulk of the current year’s earnings fall and, despite having such upbeat prospects for 2016, Petrofac trades on a forward price to earnings (P/E) ratio of only 8.4. This indicates that there is significant upward rerating potential and, while guidance could be downgraded, there appears to be a sufficiently wide margin of safety to merit investment in Petrofac at the present time.
Also offering a relatively wide margin of safety is Genel Energy (LSE: GENL). Clearly, this is a prerequisite for any investor, but is even more relevant in Genel’s case due to the major risks that it faces.
For example, the region in which it operates continues to suffer from considerable political instability, with recent world events heightening the uncertainty surrounding the future of Iraq/Kurdistan. As such, Genel’s future operational capacity could be put in doubt if the outlook deteriorates. Furthermore, Genel has not received in full monies owed by the Kurdistan Regional Government (KRG) and, while it has now committed to a payment plan, there is still a risk that changes to the situation in the region place a huge alternative demand on cash resources over the short to medium term.
Despite this, Genel Energy could still be a sound long term buy. Its asset base is highly appealing and, with it trading on a price to earnings growth (PEG) ratio of 0.8, it offers upside potential for less risk averse investors.
Meanwhile, Rockhopper Exploration (LSE: RKH) has enjoyed a successful 2015 with regards to its drilling programme. It has made two successful discoveries in the North Falklands basin; both of which were somewhat unexpected since the South Falklands basin was forecast to have the greater potential of the two. And, with the company’s European assets also moving in the right direction in terms of production potential, the company’s future is relatively bright.
Like any small exploration company, there are risks to Rockhopper’s long term story. A further fall in the price of oil is an obvious potential problem, while the company’s partners may also endure disappointing financial performance and put the prospects for the jointly-owned asset under question. That said, Rockhopper’s price to book value (P/B) ratio of 0.6 indicates that a relatively wide margin of safety is on offer and, with strong long term growth potential, it could be a shrewd buy for investors who can live with a high degree of uncertainty.
