2 small-caps with strong growth outlooks

These two smaller companies could offer improving financial performance.

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The Oil & Gas industry has experienced a hugely challenging period in recent years. Declining prices caused by higher supply and sluggish demand have meant that companies across the sector have seen their financial performance come under strain. Looking ahead, more pain could lie ahead, since the outlook for the industry is exceptionally uncertain.

However, now could be the right time to invest due, in part, to the potential for improving bottom lines. Here are two companies which could offer just that over the medium term.

Encouraging progress

Announcing an operational update on Monday was upstream gas company Sound Energy (LSE: SOU). It reported that operations to re-enter and test the Koba-1 well at Sidi Moktar have now commenced. The company expects to perforate and test the Lower Liassic, as well as a potential testing of the Argovian. This is due to last around 10 days, with the rig then planned to move to the Kamar-1 well for the second stage of the operation.

In addition, the company’s drilling programme at the Badile exploration well in Italy is continuing. It has reached a measured depth of 4,328m within the Medolo Formation. Drilling will continue towards the reservoir which the company expects to penetrate later this month.

The update has not been particularly well-received by the market, with Sound Energy’s share price declining by around 4%. However, with the company’s shares having soared by 278% in the last year, it could be a case of some profit-taking after further encouraging news.

Looking ahead, more share price growth could be ahead for Sound Energy. It has a relatively robust financial position, with its drilling programme for next year already funded. As such, now could be the right time to buy it, with the company remaining relatively risky due partly to an uncertain outlook for the wider sector.

Improving prospects

Also having upbeat potential is sector peer Faroe Petroleum (LSE: FPM). Unlike Sound Energy, it is expected to move from loss to profit within the next two years. This has the potential to boost its share price performance after a gain of 25% in the last year, since investors may see a black bottom line as a milestone regarding the progress being made by the business.

While Faroe Petroleum’s shares appear to be rather generously priced, earnings growth could mean they demand a higher valuation. For example, they currently trade on a price-to-earnings (P/E) ratio of 31 using next year’s forecast earnings growth rate. However, with the company having a relatively strong balance sheet and an impressive asset base, it has the potential to grow earnings in order to justify its current valuation over the medium term.

Faroe Petroleum has been able to double production in the last year, while also increasing its reserves. Against a challenging industry backdrop, this shows that the company’s strategy is working well, and further increases could positively catalyse investor sentiment. Therefore, despite being a relatively high-risk stock, now could be the perfect time to buy it.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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