With the prices of various commodities having risen in the last few months, many investors may feel as though it has been a case of a rising tide lifts all boats. In other words, if commodity prices rise then resource-focused companies are bound to do the same. However, with a number of resources companies failing to match commodity price rises in 2016, it’s clear that stock selection remains imperative in all industries – including the resources sector.
For example, since its $28 per barrel low in January of this year, the price of oil has risen by around 86% to reach $52 per barrel. That’s a stunning performance, but shares in oil major Shell (LSE: RDSB) have failed to keep up. In fact, they’ve risen by 40%, less than half the oil price rise during the period.
Clearly, this is disappointing for Shell’s investors. However, it means that there may be additional upside on offer over the medium-to-long term as Shell may be undervalued relative to its sector peers. For example, Shell trades on a price-to-earnings growth (PEG) ratio of just 0.2 and this indicates that even if oil price rises are more modest in future, the company could still deliver exceptional share price gains.
Plus, with Shell being well-diversified and financially sound, its risks are likely to be lower than is the case for many of its rivals. As such, its risk/reward ratio remains relatively appealing.
Upside potential
Also failing to match the rising price of oil this year have been shares in Petrofac (LSE: PFC). They’re up by just 10% during the same time period despite Petrofac being set to benefit from improved sentiment within the resources sector.
Certainly, it’s less directly impacted by the oil price as it’s a support services company rather than a producer. But with it being dependent on levels of investment within the oil and gas industry which in turn are heavily affected by the oil price, it’s perhaps somewhat surprising that Petrofac’s shares have risen by much less than the price of oil in recent months.
This could create an opportunity for long-term investors to buy-in at a lower price and with Petrofac trading on a PEG ratio of just 0.6, its risk/reward ratio indicates significant upside potential.
Wide margin of safety
Meanwhile, shares in copper mining and exploration company Central Asia Metals (LSE: CAML) have largely followed the price of copper in 2016. Having risen by as much as 10% this year, the price of copper is now slightly below its 2016 opening level and with Central Asia Metals’ share price being down 3% year-to-date, its performance is perhaps as expected.
Looking ahead, Central Asia Metals has the potential to deliver strong share price gains. That’s because it’s forecast to increase its bottom line by 43% in the next financial year, which puts its shares on a PEG ratio of just 0.2. And while their performance is heavily dependent on the price of copper, Central Asia Metals appears to offer a sufficiently wide margin of safety to merit investment at the present time.
