Should we now pile into Sound Energy plc after crashing 25%?

Does Sound Energy plc (LON: SOU) have more investment potential after a disappointing period?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The last year has been volatile for the share price of oil and gas exploration company Sound Energy (LSE: SOU). Its share price has fallen over 25% during the period, as investor sentiment has remained somewhat changeable. Despite this, the company appears to have a bright future, with recent news flow showing that the business could deliver on its potential.

Therefore, could now be the right time to buy it? Or could there be a more opportune moment to buy the small-cap resources play?

Risk/reward

Clearly, as with any exploration stock there are significant risks. The company’s future share price performance is closely linked to the quality of its news releases. However, it appears to have an asset base which could deliver positive news flow. Its Eastern Moroccan operations could provide a catalyst for its share price, with it having sought to de-risk its exploration potential. As well as this, it has a cash balance of $50.1m (as at 30 June), which indicates that its exploration activities may be well-funded over the medium term.

Industry outlook

As well as the quality of its news releases, Sound Energy and sector peers such as Cairn Energy (LSE: CNE) are also highly dependent upon the outlook for the wider oil and gas industry. In 2017, there has been a marked improvement in the prospects for the oil price. It has risen to a two-year high and many investors are now becoming more bullish about its future growth potential – especially since OPEC and non-OPEC members have stated that they are keen to support the oil price at its current level.

Of course, there is scope for the oil price to fall. Disagreement among OPEC members could mean the supply cuts that have helped to push its price higher are discontinued over the medium term. As such, it remains a risky place to invest compared to other industries and sectors.

Growth potential

However, the inherent risks of the industry could mean the potential rewards are also greater. As mentioned, Sound Energy now trades 25% lower than it did a year ago, and this could mean there is greater upside potential on offer. Similarly, Cairn Energy has ambitious production plans over the next few years which could see its financial performance transformed. Although it trades on a price-to-earnings (P/E) ratio of 30 using forecast earnings for 2018, in future years it has the capacity to deliver rapid growth in earnings as production increases.

Therefore, both stocks seem to offer upbeat investment outlooks for the long term. Neither may be suitable for more risk-averse investors, since they are likely to remain volatile in 2018 and beyond. However, for investors seeking exposure to exploration companies in the oil and gas sector, Sound Energy and Cairn Energy could offer relatively strong share price growth potential for the long term.

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.

More on Investing Articles

Investing Articles

Penny stocks to consider buying while their prices are this cheap

Some of the penny stocks I've been watching have already climbed above the 100p level. But I see potential in…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Revealed! One of the hottest growth, value, and dividend shares to buy today

This high-dividend, low-cost company is also one of the London stock market's most exciting growth shares, writes Royston Wild.

Read more »

Investing Articles

£20,000 in savings? Here’s how I’d target a £2,219 monthly passive income with FTSE 100 shares

Investing in FTSE 100 shares can be a great way to turn a regular investment into a life-changing passive income…

Read more »

Investing Articles

These are the most popular 2024 Stocks and Shares ISA picks so far

After a few tough years, it looks like the 2024 Stocks and Shares ISA season is getting off to a…

Read more »

Investing Articles

This FTSE 100 ETF may be the simplest way to become a stock market millionaire

Ben McPoland considers one very straightforward stock market investing strategy that could lead to a million-pound portfolio.

Read more »

Investing Articles

I’d buy 11,220 Legal & General shares for £200 a month in passive income

Our writer considers how much money investors would have to put into Legal & General (LON:LGEN) shares to target £2,400…

Read more »

Fireworks display in the shape of willow at Newcastle, Co. Down , Northern Ireland at Halloween.
Investing Articles

These 2 magnificent FTSE 250 shares are on sale right now!

These FTSE 250 companies still look cheap, despite recent share price gains. Here's why our writer Royston Wild thinks they’re…

Read more »

Blue NIO sports car in Oslo showroom
Growth Shares

Down 36% in 2024, how low could NIO shares go?

The electric vehicle sector has seen some tremendous volatility in recent years, but what does the future hold for NIO…

Read more »