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Is There An Opportunity For Handsome Returns With Unloved Glencore plc, Tullow Oil plc and Premier Oil plc?

It’s hardly breaking news — the price of oil and many other resources have collapsed. Whilst there are many moving parts involved in the slide in prices, investors can broadly put the weakness down to supply outstripping demand.

As the chart below painfully demonstrates, this has been a very testing time for investors in the companies involved in natural resources sector, such as Glencore (LSE: GLEN), Tullow Oil (LSE: TLW) and Premier Oil (LSE: PMO).

A Chart to Behold

As the chart shows, anyone who bought these stocks at this time last year would be looking at a lot of red in their portfolio right now. All three stocks show a loss of between 70% and 80%, thereby significantly under-performing the FTSE 100.

The Weeks Biggest Losers

Indeed, all three of these stocks have been under considerable pressure in the last seven days – at Fridays close their performance according to Digital Look was:

  • Glencore – down 22.84%
  • Tullow Oil – down 15.17%
  • Premier Oil – down 14.02%

So the question is: with falls like this, are there bargains to be had?

Well, to be honest. I think that investors could well see the share price performance of all three company’s under review today continue to be downwards – here’s why:

Firstly, and for me, most importantly, all of these companies have little in the way of control over the price of the particular commodity that they pull from the ground and/or trade in. It seems to me that we are currently in a position where supply is outstripping demand, the result being downward pressure on the price. True, each management team have the ability to slow production or close less profitable operations whilst waiting for prices to recover, trim costs and make the business leaner, but there is only so much they can do.

Secondly, all three have seen brokers downgrading their earnings estimates continuously for the last twelve months, indeed, Premier is now expected to make a loss for the year ending 31 December 2015. Both Glencore and Tullow are still expected to turn a profit, but expectations have been slashed by over 75% over the last twelve months according to data from Stockopedia.

Finally, all three carry a significant amount of debt. Investors in Afren will be all too aware of the implications that this can carry. I wouldn’t be surprised is a significant proportion of the current share price weakness is due to concerns around this issue alone. To give credit where it is due, management at Glencore have taken action and placed more shares with institutional investors earlier this month, in addition, both the CEO and the CFO made significant purchases, too. As an investor, I would like to see similar transactions at Tullow and Premier.

This Fools Take

Sometimes the best way to get rich is to avoid the big losses. I can remember a similar situation with the banks around the time of the financial crisis, just as I was starting to invest proper. I can remember thinking that surely their share prices couldn’t drop any further? Guess what – they could and they did!

Personally, I now pause for thought prior to rushing into a share that has been subject to large price falls – I find that it has usually fallen for a reason – and shares can indeed fall further.

And while I don’t pretend to know which way the oil, copper or iron ore prices are  headed, I’d want to see a better balance in the supply versus demand then we currently have before dipping my toe into this sector.

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