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Gulf Keystone Petroleum Limited vs Soco International plc: Which Oil Stock Should You Buy?

The last week has been hugely challenging for investors in most stocks. After all, the FTSE 100 has been gripped by volatility on a scale not seen since the depths of the credit crunch. However, amidst the turmoil, there have been a number of winning stocks. Two examples are oil producers Soco International (LSE: SIA) and Gulf Keystone Petroleum (LSE: GKP), which have soared by 40% and 46% respectively in the last week. Looking ahead, which one is most capable of repeating such strong performance in the long run?

Challenging Performance

On the face of it, neither company is enjoying a purple patch. Both reported results recently which highlighted just how challenging the oil sector is at the moment and, with the price of oil seemingly more likely to fall than rise in the coming months, things could realistically get worse before they get better for the industry as a whole.

In fact, Gulf Keystone’s results showed that its financial position remains disappointing. Certainly, its production has increased and its operations are progressing exceptionally well despite being located close to a conflict zone. Despite this, its loss widened to $77m in the first half of the current financial year, which is more than twice the loss from the same period of 2014, where it was just under $30m. And, with Gulf Keystone having a considerable amount of debt on its balance sheet, its future prospects appear to be challenging even though the Kurdistan Regional Government (KRG) is set to make good on its promise to make regular payments for exported oil.

Improving Performance

Of course, Soco also experienced a very difficult first half of the year. Its pretax profit fell from $174m in the first half of 2014 to $32m in the same period of 2015. Clearly, that is disappointing but, encouragingly, Soco remains a profitable entity. And, looking ahead, its bottom line is set to soar by 113% in the current year and by a further 85% next year. This puts the stock on a price to earnings growth (PEG) ratio of just 0.1, which indicates that there is a very wide margin of safety and also highlights that the company’s share price could move significantly higher over the medium term.

Looking Ahead

Clearly, Gulf Keystone is being hit hard by a lower oil price. However, its asset base remains very appealing and has huge potential to deliver a black bottom line over the medium to long term. Soco, though, is profitable now and is forecast to increase its earnings at a rapid rate over the coming months. At a time when the oil industry is enduring a challenging period, this improved financial performance could cause investor sentiment in Soco to improve dramatically and push the company’s share price higher, while Gulf Keystone’s outlook may be hampered by political challenges as well as the potential for further payment delays.

As a result, Soco appears to be the better buy at the present time, with its risk/reward ratio being more appealing than that of Gulf Keystone.

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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.