Why I’d sell Sound Energy plc to buy this turnaround stock

This company appears to have a better risk/reward ratio than Sound Energy plc (LON: SOU).

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The oil and gas sector faces an uncertain outlook. The oil price continues to offer little sign of gains in the near term, and companies such as Sound Energy (LSE: SOU) are therefore facing a challenging outlook. The upstream gas company with interests in Africa and Europe has seen its share price decline by 29% since the start of the year. Looking ahead, more volatility could be on the cards and this could make a fellow resources stock a stronger risk/reward opportunity for the long term.

Growth potential?

Of course, the strategy being employed by Sound Energy could deliver improving performance in future. On Tuesday it confirmed the completion of its acquisition of the interests of Oil & Gas Investment Fund in Eastern Morocco. It now owns net 47.5% positions in the Tendrara petroleum agreement, the Anoual petroleum agreement and the Mararka reconnaissance exploration licence.

In order to fund the acquisition, the company is conducting a placing of 27% of its share capital. The new shares will start trading on 18 September. The company has already prepared exploration programmes for the acquired areas, and the news flow concerning them has the potential to positively catalyse its share price over the medium term.

However, with the outlook for the oil and gas industry being uncertain as demand growth remains sluggish and supply levels remain high, focusing on a different stock in a different sector within the resources industry could be a logical move.

Turnaround potential

The company in question is gold miner Petropavlovsk (LSE: POG). It has endured a hugely challenging period which has included a period of lossmaking that has caused its share price to decline by 98% in the last five years.

But according to its half-year results released on Tuesday, the company is making encouraging progress. Its revenue increased by 20%, while operating profit moved 91% higher. This was partly as a result of a rise in gold production from 195,600oz to 232,400oz, as well as a gold price which has been strong during the period.

Looking ahead, the price of gold could rise yet further if the geopolitical outlook for the world economy remains uncertain. The potential for conflict in North Korea, political risks in the US and a higher inflation rate could cause the price of gold to rise as investors may seek less risky assets.

Petropavlovsk has also been able to keep costs to a minimum. Total cash costs increased by just 2% in the last six months, while it was able to reduce net debt levels by 5% in order to create a financially stronger business. With a forecast growth rate in earnings of 19% next year, the company has a price-to-earnings growth (PEG) ratio of just 0.2. This suggests that while its past performance may have been disappointing, it could deliver stunning share price growth in the long run.

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 does not own shares in any of the companies 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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