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2 forgotten growth stocks with massive potential

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The collapse of the oil price between mid 2014 and early 2016 put paid to investor interest in a number of stocks that had previously been considered to have outstanding growth potential.

I’ve had my eye on a couple of these forgotten favourites and I reckon the risk/reward outlook for investors at today’s prices is better than it’s ever been.

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Scope to re-rate higher

Shares of Gulf Marine Services (LSE: GMS) were trading above 150p before the oil price went into freefall. They reached a low of around 30p in the darkest days but have since recovered to 56p. I believe they have a lot further to go, as the market refocuses on the growth prospects of the business.

GMS is the world’s leading provider of advanced self-propelled self-elevating support vessels serving the offshore oil, gas and renewable energy sectors. Despite the challenging conditions over the last few years, it continued to make a profit, invest for the future and pay a dividend (running yield of 2.9% at the current share price). It was also able to secure a new $620m debt facility on attractive terms, demonstrating the banking community’s confidence in its business model and prospects.

The company is seeing increasing tender activity and vessel utilisation and in a recent trading update said it had a contracts book of $251m at 1 May, compared with $175m at 31 December. Net debt at 1 May stood at $362m — relatively high compared with a market capitalisation of £196m — but management said deleveraging is progressing as planned and the year-end number is expected to reduce to $335m.

GMS trades on a current-year forecast price-to-earnings (P/E) ratio of 10.4, falling to just 5.7 next year. As such, the stock has scope to re-rate considerably higher from its current level and I believe now could be a great time to buy a slice of this business.

Better placed than ever

UK onshore producer and explorer IGAS Energy (LSE: IGAS) suffered a more torrid time than GMS during the oil rout. Indeed, it came within an inch of its life as profits turned to losses and its debt-loaded balance sheet threatened to sink it.

Management — which included a new chief executive — did a remarkable job of saving the business through a capital restructuring, albeit at huge cost to the existing investors. The painful process was completed with a share consolidation earlier this month, which means that the current share price of 73p is equivalent to 3.7p in ‘old money’.

IGAS represents an attractive proposition for new investors today. Net debt is $8m, compared with $122m at 31 December 2016. The company is cash flow generative at current oil prices and its shale development plan is well funded by its partners with a carried work programme of up to $230m.

Now on a considerably firmer financial footing, IGAS looks better placed than ever to become a leading player in the nascent UK shale gas industry. I consider this a more speculative ‘buy’ than GMS but with a current market cap of £89m the rewards for investors could be substantial.

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G A Chester 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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