Shares in resources companies have been hugely volatile in recent weeks and buying them now seems to be a risky move. After all, the outlook for the industry is highly uncertain – the oil price could continue to fall, causing profitability and investor sentiment to decline yet further.
Even so, a number of investors may be wondering whether now finally represents the right time to buy resources companies. After all, their share prices have already fallen by a huge amount and they could prove to offer good value for money. The decision therefore, is whether the level of potential reward is sufficient for the amount of risk being taken.
Cost-cutting
With Enquest’s (LSE: ENQ) shares having fallen by 62% in the last year, it could be viewed as offering a tremendous amount of upside potential. While this may be the case, in the near term Enquest is expected to struggle to tread water in a depressed oil price environment, with the company forecast to record a fall in its pre-tax profit of £37m in the current year.
As a result of this, it has today announced the loss of 45 jobs at its North Sea operations. This is part of a cost cutting process, in which Enquest is rumoured to be seeking to sell off stakes in various assets to strengthen its financial outlook. Although the company’s shares have fallen in value, it may prudent to stick with profitable businesses which still offer high potential rewards and less risk.
Expanding
Of course, a depressed oil environment creates opportunities for companies to take advantage of assets trading at discounted prices. For example, Amerisur (LSE: AMER) recently announced the acquisition of Platino Energy for $7m, with 22.7m shares being issued in order to fund the deal.
This move is in-line with Amerisur’s strategy of expanding the company’s asset base and could strengthen its long term profit outlook, as well as providing a degree of diversification. As with Enquest, Amerisur’s bottom line has come under pressure in recent years, but following a challenging 2015 it is due to return to a pre-tax profit in 2016. However, with its shares trading on a forward price to earnings (P/E) ratio of 16.2, there appear to be better options elsewhere in the resources sector.
Struggling
Meanwhile, Petroceltic (LSE: PCI) was thrown a lifeline in January when its lenders agreed to a debt waiver on its senior bank facility. In addition, it is rumoured to have become a potential bid target for its major shareholder, Worldview, which holds a near-30% stake in Petroceltic. If a bid were made — by Worldview or anyone else — then it could lead to significant short term gains for investors in Petroceltic.
However, there is no guarantee that any such bid will be made, and with Petroceltic struggling to service its debts, it appears to be facing a very uncertain future. So, while the potential rewards may be high, the risks appear to be sufficient to dissuade even the least risk averse of investors from buying a slice of the company.
