I have been combing the markets for stocks that could have the potential to double my money this year. I think there are a handful of these companies in the FTSE 250. In particular, I believe investors are overlooking the oil and gas sector. This could change as we move through the year, and rising oil prices enable these businesses to generate blockbuster profits.
Undervalued FTSE 250 producer
Harbour Energy (LSE: HBR) is the UK’s largest independent oil and gas business. It was formed in 2020 through the merger of Premier Oil and privately-held Chrysaor Holdings. The combination has created a champion with lower operating costs, a stronger balance sheet, and a wider operating footprint, supported by some of the largest commodity traders in the world.
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Unfortunately, despite the company’s advantages, it is still an oil and gas producer. This means it is still a slave to commodity markets. In 2020, the group’s losses hit $1.3bn as low oil prices and the costs from the merger drained the business.
However, with oil prices now back at a multi-year high and natural gas prices surging, the corporation is on track to report substantial profits over the next two years. According to City analysts, who have used the company’s projections in their research, the group can report a net profit of $423m in 2021, followed by just over $900m of income for 2022.
Based on these projections, the FTSE 250 stock is trading at a forward price-to-earnings (P/E) multiple of 4.6. By comparison, Harbour’s larger peers are selling at double-digit multiples. This suggests the shares can double if they return to the sector average multiple.
Of course, there is a reason why investors are not paying a sector-average multiple for the shares today. Oil prices are highly volatile, and Harbour’s fortunes can change overnight. The firm also has a lot of debt, which is another risk I will be considering. Rising interest rates could jack up the cost of the group’s debt and hit profit margins.
Potential to double
I think the stock has the potential to double this year. This is based not only on its valuation but also on progress in reforming the group.
I believe investors are still waiting to see how the enlarged enterprise will fare in different market environments. Over the next 12 months, as the world returns to normal, the market should be able to gather this information. At the same time, with cash pouring into the firm’s coffers, the company can start to make headway paying down its $3.3bn debt mountain.
There is also speculation that the corporation can introduce a dividend over the next two years. If it can return cash to investors, this could be a solid sign to the market that Harbour’s management is committed to improving shareholder returns. Such a development could also help drive a re-rating of the shares.
As such, I would buy shares in the FTSE 250 oil producer for my portfolio in 2022, as I believe the stock has the potential to double in value.