With the resources sector having endured a challenging outlook over a prolonged period, the valuations of a number of its constituents have tumbled. In fact, there have been times in recent months when it felt as though things couldn’t get any worse, and then they did just that.
The prices of commodities could fall further and heap additional pressure on the outlooks of mining and oil and gas companies. This could lead to a decline in investor sentiment and falling share prices. But now could be an opportune moment to buy high quality companies at distressed prices, thereby maximising the potential for long-term capital growth.
Bargain basement
One stock that’s cheap and appears to be worth buying is Petrofac (LSE: PFC). Its shares have fallen by 59% in the last three years as the company’s bottom line has come under pressure. In fact, Petrofac’s earnings dropped 11% in 2014 and are expected to decline a further 71% in the 2015 financial year.
While disappointing, investors may begin to look past that performance, since Petrofac’s valuation appears to more than take account of it. The shares trade on a price-to-earnings growth (PEG) ratio of just 0.1. That figure is so low mainly because Petrofac is expected to record a rise in its bottom line of 174% in the 2016 financial year, with a record order backlog having the potential to positively stimulate its financial performance over the medium term.
Additionally, Petrofac is responding to the difficulties it has faced by implementing a restructuring programme. This will include targeted efficiency savings that should help to reinvigorate the company’s bottom line and aid in the delivery of a dividend yield that currently stands at an impressive 5.9%.
Riding the wave
Also trading on a relatively low valuation is Nostrum (LSE: NOG). Its shares have fallen almost 20% in the last year, although the company looks set to avoid the worst of the oil price slump. That’s because it has hedged 7,500 barrels of oil equivalent (BOEPD) at $85 per barrel. And with Nostrum having $232m in cash as at its interim results, it appears to be in a relatively strong financial position to ride out the current oil price crisis.
Furthermore, Nostrum trades on a PEG ratio of only 0.2 and this indicates significant share price growth potential ahead. With Nostrum having remained profitable throughout the last five years and being set to double production by the end of 2018, now could be the perfect time to buy a slice of it.
Risky bet
Meanwhile, platinum producer Lonmin (LSE: LMI) has posted even greater share price losses in recent years, with its shares now being worth just 0.3% of their level from one year ago. Clearly, the falling platinum price has been a key reason, with Lonmin forced to raise funds from investors in order to proceed with its strategy for the medium term.
Undoubtedly, the market is bearish on Lonmin, as evidenced by its price-to-book (P/B) ratio of just 0.2 and the fact that 29% of shares in its rights issue were unsubscribed by investors. However, with Lonmin implementing a cost-cutting plan, seeking to make major efficiencies and last year achieving its highest level of platinum sales since 2007, the company appears to have the right strategy through which to overcome its present woes.
Despite this, Petrofac and Nostrum appear to offer superior risk/reward ratios, although Lonmin may still be of interest to less risk-averse investors for the long run.
