Gulf Keystone Petroleum Limited vs Nostrum Oil & Gas PLC vs Ophir Energy Plc: Which Will Post Stellar Returns?

Deciding where to invest your hard-earned cash is never an easy task. However, when it comes to deciding which oil stock to buy, the uncertainty that is present across the industry makes things even more challenging for investors. After all, few people would be surprised if the price of oil either halved or doubled in the next year, which provides an indication of just how volatile the sector is at the present time.

Of course, the decline in profitability has hurt investor sentiment across the oil and gas space. As a result, investor sentiment has weakened and, for less risk averse individuals, this has presented a vast amount of choice, since it appears to be something of a buyer’s market at the present time.

However, there are some opportunities that are more appealing than others and, more so than ever, the financial standing of oil companies is being put under the microscope. That is simply because the outlook for oil remains very volatile and the survival of companies is of paramount importance to investors.

As such, the outlook for Nostrum (LSE: NOG) could boost investor sentiment among investors, with the company being forecast to post a rise in its earnings of 471% in financial year 2016. That may sound like a huge rise in profitability, but is at least partly because 2015 is due to be a disappointing year for the business, although it is expected to remain profitable nevertheless.

This growth potential puts Nostrum on a price to earnings growth (PEG) ratio of just 0.1, which indicates that there is a clear prospect of capital gains. Furthermore, such a wide margin of safety also indicates that Nostrum’s share price may not be hit as hard as many of its peers should the oil price fall or its financial performance come in lower than guidance. In other words, a wide margin of safety means a level of support as well as capital gain potential.

Meanwhile, Ophir Energy (LSE: OPHR) also has the scope to deliver share price rises. Unlike Nostrum, it is set to post a loss this year but, with a black bottom line forecast for next year, investor sentiment could improve in the months ahead as the market begins to factor in the company’s improved financial outlook.

Certainly, Ophir appears to be a less reliable stock than Nostrum, with the latter having generated a profit in each of the last three years, while Ophir has been loss making in three of the last four years. Therefore, with there being a real threat of further oil price weakness, Nostrum appears to be a more stable purchase at the present time.

Of course, when it comes to stability, Gulf Keystone Petroleum (LSE: GKP) has done a remarkable job to keep production at relatively high levels despite the vast challenges that it has faced in recent months. Notably, a lack of full payment from the Kurdistan Regional Government (KRG) and the conflict in Iraq have clearly dented sentiment in the stock, with it falling by 26% in the last month alone. And, while its production has been impressive and its asset base is exceptionally appealing, the instability of the region and the scope for cash flow challenges means that there is still further downside in the short to medium term.

Therefore, Nostrum appears to be the preferred option at the present time, with its greater stability and exceptional growth prospects likely to resonate more easily with cautious investors at the present time.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.