Bargain hunters have been on red alert in recent months, with the resources sector undergoing a huge fall in valuations. It has left a number of companies offering much, much lower share prices than even a few months ago, which has led to value investors becoming increasingly excited about potential purchases.
Of course, while cheap, the sector also offers considerable risks. It seems likely that commodities such as oil will see their pricing come under further pressure in the coming months, with a glut of supply and a lack of rising demand likely to leave the oil bulls disappointed. However, in the long run there is opportunity for less risk averse investors to buy now, absorb a high degree of volatility, and profit further down the line.
One company for which this appears to be the case is Tullow Oil (LSE: TLW). Certainly, it has endured a very challenging number of years and its share price fall of 59% in the last year indicates that investor sentiment is very weak. However, with the company having refreshed its strategy so that it is now focused on maximising its producing assets rather than focusing on exploration, its profitability is set to rise at a rapid rate.
In fact, in 2016 Tullow’s bottom line is forecast to rise by a whopping 604% as new production capacity comes onstream partway through next year. This puts the company’s shares on a price to earnings growth (PEG) ratio of just 0.2, which indicates that they could be due for an upward rerating over the medium term. Furthermore, Tullow’s cash flow is expected to improve so that its minimal yield at the present time has the potential to rise briskly over the coming years.
Similarly, Gulf Marine Services (LSE: GMS) also offers upbeat growth prospects next year. The world’s largest provider of jackup barges is forecast to increase its bottom line by 14% next year and this puts it on a PEG ratio of just 0.4. This indicates that the share price fall of 23% posted over the last year could be reversed as the market begins to price in next year’s improved performance. That’s especially the case once the company moves on from what is set to be a disappointing 2015 where net profit is expected to have fallen by 28%.
As with Tullow, dividends could rise at a rapid rate since Gulf Marine pays out just 10% of profit as a dividend. Certainly, the company’s exposure to the oil and gas industry means that its shares are likely to be volatile, but they could deliver high total returns in the long run.
Meanwhile, Gulf Keystone Petroleum (LSE: GKP) continues to have a very appealing asset base and, with its shares falling by 71% in the last year, it now trades on a price to book value (P/B) ratio of only 1.3. This indicates that there is upside potential and, on the face of it, many value investors may be keen on the company.
However, while the potential rewards are high, so too are the risks. Gulf Keystone faces an increasingly complicated political outlook with Northern Iraq being a very unstable region. Furthermore, there is liquidity risk from the challenges of receiving prompt payment by the local government. For these two reasons, and even though Gulf Keystone has been able to maintain production during a highly challenging period, there appear to be better options elsewhere for value investors.
