With crude climbing towards $50 a barrel once again these three oil sector stocks look increasingly tempting. Should you take the plunge?
I’ve been keen on oil services specialist Petrofac (LSE: PFC) for some time, especially during January’s storms when it traded at just 6.3 times earnings. Since then, its share price has slavishly tracked oil, surging in the spring, only to retreat as crude failed to stabilise above $50 a barrel. I’m always wary of companies that are so exposed to events they can’t control, but that’s unavoidable in the oil sector today.
Petrofac has had its problems lately, suffering a $100m charge against the now completed Laggan-Tormore gas plant (delivered late and with cost overruns), and pulling out of its billion dollar commitment to build a super-size oil rig for lifting barges. But it has a healthy order book that should see it through further oil price instability, and is forecast to increase earnings per share by 25% next year. Better still, it yields 6%, and given that this dividend is covered 1.9 times, it looks safer than many in the oil sector.
So cool Soco
Last month I hailed Vietnam-based Soco International (LSE: SIA) as a rare oasis of calm in an otherwise stormy sector, supported by low cash operating costs of just $10 a barrel. This gives it enviable breathing space as it generates an average first-half realised crude oil price of $40.89 a barrel. However, I should have said relative calm, given that 2016 has still been a bumpy ride for investors.
Soco has much to recommend it, holding half year-end cash and liquid investments of $80.6m and no debt, plus fully funded 2016 exploration and development plans. Revenues did fall in the first half, from $116.6m to $72.7m year-on-year, turning last year’s first-half $5.9m profit into a $12.2m loss. Yet Soco remains operationally and financially “robust“, according to president Ed Story who claims its business model can deliver value for shareholders throughout the oil price cycle and geopolitical turbulence. Steady cash flows and a commitment to sustainable cash returns to shareholders provide some comfort, while a forecast leap in EPS from minus 1.96p to 5.86p in 2017 is enticing.
End of the Weir show
Glasgow-based engineer Weir Group (LSE: WEIR) has had a terrific year in share price terms, rising 70% in the last six months. Investors have dived in despite a disappointing set of full-year results in January, and a further 25% fall in pre-tax profit to £82m in the six months to 30 June.
This fall was smaller than expected and investors are no doubt banking on a fightback from the resilient US shale sector, which should revive demand for Weir’s hydraulic pumps. EPS are expected to fall 25% this year but forecast to rise 19% in 2017. I’m delighted to see Weir recover, having followed this stock for several years. But at 18.1 times earnings I fear any the recovery is more than priced-in. With its forecast yield falling to 2.7% following the share price surge, I fear the time to buy Weir Group has passed for now.