With the resources sector carrying on its poor performance from 2015, it’s little wonder that many investors are left feeling pessimistic regarding its prospects. After all, there is a glut of supply for a number of commodities and, when coupled with the potential for falling demand from China, the supply/demand outlook for the resources sector looks likely to be challenging over the short to medium term.
However, buying now could prove to be a sound, albeit risky, move. Certainly, in the short run there is the potential for further share price falls, but in the coming years a number of resource-focused stocks could prove to be among the best performing shares in the index.
One oil stock with huge potential is Tullow Oil (LSE: TLW). It has shifted its focus away from exploration and towards increasing production from existing assets. This appears to be a sensible move that should aid the company’s financial position at a time when a number of investors are casting a close eye over the sector’s financial standing.
And with increased production likely to mean improved cash flow, Tullow could begin to increase dividends at a rapid rate – especially since it is due to pay out just 7% of this year’s profit as a dividend. Moreover, rising dividends could provide the market with a degree of confidence in the company’s long term outlook, since it is an indicator of management’s belief in Tullow’s future. With dividends expected to rise by 57% this year, Tullow could begin to gain favour among the investment community.
Meanwhile, Amec Foster Wheeler (LSE: AMFW) also has huge appeal, with its shares trading on a price to earnings (P/E) ratio of just 6.2. A key reason for their valuation being so low is disappointing financial performance, with Amec’s bottom line having fallen by 8% in 2014 and by an expected 27% in 2015. Both of these figures indicate that further declines in net profit are a very realistic threat, although Amec’s bottom line is due to flat line in 2016.
Looking ahead, Amec expects the current challenging market conditions to continue, although due to its strong pipeline and low-risk multi-market model it appears to be well-positioned to ride out the present difficulties in the resources space. With Amec’s share price having fallen by 55% in the last year, it appears to be a strong buy for long-term, less risk-averse investors.
Also falling heavily in recent months has been shale gas company IGAS (LSE: IGAS). Its shares are down by a further 10% today and this means that they have fallen by 41% in the last six months alone, even though the company recently increased its acreage by around 25%.
Of course, IGAS reported a widening of its losses at the interim results stage and, while this was disappointing, it included asset and goodwill impairments. And while there could be further such charges, the underlying performance of the business was better than appeared to be the case at first glance.
However, with a number of other oil and gas companies offering a black bottom line and future growth potential, IGAs does not appear to be a strong buy right now. And with concerns still being present regarding its financial outlook, there appear to be better options elsewhere.
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Peter Stephens 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.