Since the turn of the year, shares in Tullow Oil (LSE: TLW) have risen by a whopping 50%. Clearly, that’s at least partly because of the rising oil price, with it having almost doubled from its 2016 low. This has caused improved investor sentiment towards the wider oil and gas sector, with it reducing uncertainty regarding the financial outlook for Tullow Oil and its peers.
On this front, Tullow Oil is forecast to return to profitability in the current year. Clearly, the higher oil price has a lot to do with that and should mean that asset impairments are somewhat reduced in the short-to-medium term. However, Tullow Oil is also set to increase production at a rapid rate with its Project TEN in Ghana expected to come on-stream in the coming months.
This increased production is due to increase Tullow Oil’s pre-tax profit from £36m in the current financial year to as much as £198m in the next financial year. Such a rapid rise in profit growth could cause investor sentiment to improve significantly, thereby pushing Tullow Oil’s share price considerably higher. And with the company’s shares trading on a price-to-earnings growth (PEG) ratio of only 0.1, there seems to be major scope for an upward rerating alongside rapid profit growth.
New strategy
As with any commodity, the price of oil could fall. But the key takeaway is that Tullow Oil has a wide margin of safety at the present time. It’s a similar story for fellow resources company Anglo American (LON: AAL), with its shares trading on a PEG ratio of just 0.3 as its bottom line is forecast to rapidly rise over the medium term.
A key reason for this is a new strategy, which is likely to have a positive impact on Anglo American’s financial performance. For example, it’s selling off non-core assets as it seeks to become increasingly efficient, while a reduction in its operating divisions should help to make the company more streamlined. And with cost reductions likely to positively impact its financial performance, Anglo American’s earnings are forecast to rise by 43% in the next financial year.
In addition, Anglo American is expected to recommence dividend payments in 2017. If it does so, this could indicate to investors that it’s gradually returning to full financial health. Although its forward yield stands at just 0.4%, rapidly rising profitability could cause shareholder payouts to increase at a brisk pace over the coming years.
As with Tullow Oil, shares in Anglo American have risen rapidly this year. They’re up by 124% since the turn of the year and while this may indicate to some investors that profit-taking is ahead, the company’s wide margin of safety shows that now could be an excellent time to buy for the long term.
