Oil and gas explorer Caspian Sunrise (LSE: CASP) has declined by 25% today after it released an operational update. The company has experienced delays in its operational activities which have caused investor sentiment to come under severe pressure.
In the short run, there could be further declines as the market absorbs today’s update. However, could the stock be worth buying for the long run?
Challenging period
The company’s recent performance has been hampered by poor weather conditions. Normal operations have now resumed, although there have been further difficulties at its deep well A5. It has experienced a blockage, with the company seeking to remove it in recent weeks.
Despite this, it has been unable to do so and has now called in a contractor with more specialised coil tubing equipment. The permitting required to bring coil tubing operations is expected to be finalised by the end of March, with the 90-day flow test then due to resume.
However, the company has made progress with deep well 801. The planned side-track work from a depth of 4,516m is now under way. Provided that work is successful, the well will be placed on a 90-day flow test.
Clearly, Caspian Sunrise has experienced a challenging period, and this has been reflected in its share price decline. Its strategy appears to be sound, and progress is being made in terms of moving towards its end goals.
While potentially volatile in the near term, the company could deliver improving performance in the long term. That’s especially the case since the prospects for the oil price remain upbeat. As such, for less risk-averse investors Caspian Sunrise could offer an enticing risk/reward ratio.
Low valuation
Also experiencing a difficult period is energy support services company Petrofac (LSE: PFC). The business is currently under investigation by the Serious Fraud Office (SFO), which appears to have hurt investor sentiment in the stock. For example, it has fallen by 47% in the last year even though it has shown signs of a potential recovery in recent weeks.
With the price of oil having risen in recent months, the potential for increased activity in the oil and gas sector remains high. This could lead to greater demand for Petrofac’s services and may create a catalyst for its earnings over the medium term. So while its bottom line is due to fall by 15% this year and by a further 14% next year, its financial prospects may be more positive over an extended timeframe.
Furthermore, investors appear to have factored in the difficulties facing the company. It trades on a price-to-earnings (P/E) ratio of around 9. This factors in its projected decline in earnings over the next two years and suggests that it may offer a wide margin of safety. Therefore, while risky, it could offer capital growth potential in future.
