Calling the bottom on the current meltdown in the resources sector is hard. That’s because nobody knows what will happen to commodity prices in the short run and, while there may be a number of great value resources companies on offer now, the reality is that 2016 could be another tough year for the sector.
However, for investors who can look beyond the next year and can live with a high degree of volatility, there are a number of resource-focused stocks that offer a wide margin of safety. Now could be the time to start buying them.
Fresh outlook
Tullow Oil (LSE: TLW) has seen its share price slump by 62% since the start of the year as a falling oil price caused investor sentiment to decline. In fact, a lower oil price has also caused Tullow to refresh its strategy, with the company now more focused on extracting as much value as possible from its current assets, while concentrating to a lesser extent on exploration activities.
This means that the company’s production is set to ramp up in 2016, with existing projects due to deliver increased output. More significantly, the TEN project in Ghana was 75% complete as of last month and is expected to come on-stream in mid-2016.
As a result of the TEN project, Tullow Oil is set to see a step change in production levels and because of this, it’s due for a pre-tax profit of £142m in 2016. This means that its shares trade on a price-to-earnings growth (PEG) ratio of just 0.2 currently, which indicates that it could be a very strong performer during 2016.
Projects on target
Similarly, Lamprell (LSE: LAM) also offers a wide margin of safety, with its shares having a price-to-earnings (P/E) ratio of only 8.2. So even if profitability comes under further pressure after this year’s anticipated 42% fall in earnings, Lamprell could still offer strong share price performance in 2016 following its 22% decline in the current year.
Looking ahead to next year, Lamprell’s financial performance is likely to be rather weak, with an expected decline in net profit of 2%. However, with Lamprell stating in its recent trading update that its projects are progressing as planned and that it’s improving its business model to become more efficient, the long-term future remains bright. On such a low valuation, it appears to offer a highly appealing risk/reward ratio, especially with a dividend yield of 3.5% that’s covered 3.2 times by profit.
Investment potential
Meanwhile, BHP Billiton (LSE: BLT) is down 49% since the turn of the year, with the diversified resources company’s shares showing no sign of bouncing back in recent months. Looking ahead to 2016, its bottom line is due to fall by 57% in the current financial year. This should cause investor sentiment to come under further short-term pressure.
Longer term, BHP Billiton has substantial investment potential. That’s mainly because the company is improving its business model, with it already having spun-off non-core assets. This will enable it to focus on the assets with the most appealing risk/reward opportunities and, in doing so, generate considerable efficiencies and cost reductions over the coming years.
With BHP Billiton having a strong balance sheet and impressive asset base, it seems likely to emerge from the downturn in a stronger position relative to its peers. So for less risk-averse long-term investors, now could be a sound moment to buy a slice of it.
