With the price of oil sinking below $40 per barrel this week, many investors are feeling highly pessimistic about the sector’s potential for next year. In fact, oil support services company Cape (LSE: CIU) stated in its trading update from a few weeks ago that it expects the current conditions in the oil sector to persist throughout 2016.
Despite this, Cape appears to be in a relatively strong position to overcome the near-term challenges which it and most of its peers currently face. For example, it has a balanced and diversified business across multiple geographies and sectors, while the company’s increasing focus on maintenance work provides a degree of protection against the effect of a lower oil price.
Looking ahead, Cape’s bottom line is expected to fall by a much smaller amount than many of its oil-focused peers. For example, in the current year its earnings are set to be 12% lower, followed by a further decline of 4% next year. While such performance is disappointing, Cape’s margin of safety appears to be sufficiently wide to merit investment at the present time. For example, it trades on a forward price to earnings (P/E) ratio of just 9.8, which indicates that its shares have significant upward rerating potential over the medium term.
Likewise, Lamprell (LSE: LAM) is also relatively well-positioned to cope with a lower oil price. Its Project Evolution strategy is having a positive impact on the company’s performance, improving efficiencies and allowing the business to remain commercially competitive during a challenging period.
While Lamprell’s bottom line is due to come under pressure in the next two years, the company is forecast to increase dividends by 60% next year so that its shares are set to yield 3.3%. While this is lower than the index’s yield of 4%, it shows that the company’s management has confidence in its future outlook. And, with Lamprell paying out just 29% of profit as a dividend even after next year’s planned rise in shareholder payouts, there is considerable scope for further rises in dividends over the medium term.
Meanwhile, Genel (LSE: GENL) is arguably less prepared for a low oil price environment than support services companies such as Cape and Lamprell, with the nature of oil production meaning that it is susceptible to further falls in the price of black gold. In addition, its geographic location adds to its risk profile, with northern Iraq/Kurdistan posing significant political challenges for 2016. As such, a wide margin of safety is required to merit investment in Genel.
Encouragingly, Genel has a price to earnings growth (PEG) ratio of just 0.4, and a key reason for this is its low rating. With Genel’s shares having fallen by 72% since the turn of the year, it now trades on a P/E ratio of just 20 which, for a company with growth forecasts of 47% for next year and a very appealing asset base, seems to be rather low. As such, there is capital gain potential on offer via Genel, although in the short run its shares are likely to remain volatile and, as such, may only be suitable for less risk averse investors.
