Are Premier Oil PLC, Antofagasta plc And Cairn Energy PLC In Danger Of Major Corrections?

Should you avoid these 3 resources stocks? Premier Oil PLC (LON: PMO), Antofagasta plc (LON: ANTO) and Cairn Energy PLC (LON: CNE).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When investing in resources companies, there’s always a danger of a major correction. That’s because they depend so heavily on the price of commodities that their profitability can easily swing wildly between positive and negative depending on the price of the commodity that they mine or produce. And even if they’re in exploration rather than production, investor sentiment can rapidly change due to a movement in commodity prices, making them just as volatile.

As a result of this, a correction could be just around the corner for all resources companies. However, this realisation is perhaps more palpable today after a horrific period for miners and oil producers that has seen billions wiped off their valuations. So it seems prudent to seek out only those companies with a wide margin of safety, given the scope for a renewed fall in commodity prices over the short-to-medium term.

One company that seems to offer a sufficiently wide margin of safety is Antofagasta (LSE: ANTO). The diversified mining company has strengthened its financial position through sales of non-core assets such as its water services division, while at the same time seeking to improve efficiencies to make its cost curve even lower. This is set to have a positive impact on the company’s profitability and with Antofagasta trading on a price-to-earnings growth (PEG) ratio of just 0.4, it appears to have a wide margin of safety and strong capital gain potential.

Furthermore, with the price of gold likely to benefit from slower-than-expected interest rate rises and proving popular during uncertain periods, Antofagasta’s exposure to the precious metal could cause investor sentiment to improve relative to its mining peers. While this doesn’t make Antofagasta a defensive stock, it does provide its investors with a degree of diversification.

Sound strategy

Also offering a relatively wide margin of safety is oil producer Premier Oil (LSE: PMO). Like Antofagasta, it seems to have a sound strategy to not only survive the present difficulties within the oil sector, but to also take advantage of them. It has slashed costs and become a more efficient entity, while also planning for future growth through the acquisition of EON’s North Sea assets.

While this could help Premier Oil to deliver rising profitability in the long run, the company is expected to stay in the red in the current financial year  and the next one. While this would be disappointing, Premier Oil’s price-to-book (P/B) ratio of just 0.5 indicates that it offers a sufficiently wide margin of safety to make it a relatively appealing long-term buy.

Long-term appeal

Meanwhile, Cairn Energy (LSE: CNE) continues to appeal regarding its long-term profit potential, with the exploration play having a sound balance sheet and a highly lucrative asset base. In fact, Cairn has a net cash position of over $600m and this could help to allay concerns among investors regarding funding for its operations over the medium term. And with Cairn’s North Sea assets due to begin production in 2017 and its operations in Senegal being a key focus this year, it may see an improvement in investor sentiment moving forward.

However, with Cairn having a P/B ratio of 0.8, there may be better options elsewhere. Certainly, it may be a stock to watch, but a wider margin of safety may be required before Cairn becomes a buy given the nervous climate in the resources space.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »