Risks outweigh rewards
Shares in Nighthawk Energy (LSE: HAWK) have fallen by as much as 11% today despite the company releasing positive news flow regarding its financial situation. The US focused oil development and production company has received an extension to certain loan covenants under the company’s Reserves Based Loan. This is to allow Nighthawk further time to agree to possible amendments to the covenant and debt repayment provisions of the loan in light of anticipated financial results.
The covenants have been waived until 28 April and encouragingly for Nighthawk’s investors, it expects that new banking arrangements will be in place at or before that time. Clearly, though, this is a highly uncertain time for Nighthawk and even though today’s update is positive, and the company has the potential to deliver improved profitability in the long run, it may be prudent to await further information regarding its borrowing situation before piling in. After all, with a falling oil price causing further misery for the resources sector, the risks appear to outweigh the potential rewards.
Upbeat growth potential
Also updating the market today was Amur Minerals (LSE: AMC). The nickel-copper sulphide mineral exploration and resource development company has completed the full restock and mobilisation of all newly purchased mobile equipment to its Kun-Manie project in Eastern Russia. This positions the company to undertake and continue its development of the project towards the completion of its definitive feasibility study.
Despite this, Amur’s share price has fallen by over 5% today. That could be due to a weaker wider resources market, but it provides an indication of how volatile smaller companies such as Amur can be. However, even when such volatility is factored in, Amur’s long term profit growth prospects remain very upbeat and its potential rewards for investors are substantial. However, with the resources sector offering a number of deeply discounted mid and large operators which are highly profitable, there may be better options available elsewhere.
Margin of safety
One such company is BP (LSE: BP). The oil and gas major has a highly diversified asset base and even though it has paid out $billions in compensation claims for the Deepwater Horizon oil spill in recent years, it still benefits from excellent financial standing which will stand it in good stead during the present commodity downturn.
Looking ahead, BP is expected to grow its bottom line by around 2.5 times in the next financial year. While this forecast is highly dependent upon the price of oil and gas during that period, BP’s current valuation seems to offer a sufficiently wide margin of safety to merit investment right now.
For example, it trades on a price to earnings growth (PEG) ratio of only 0.1 and this indicates that it offers long term growth potential at a reasonable price. So, while not being risk free, BP seems to have an appealing mix of high potential rewards and more financial stability than many of its smaller sector peers.
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Peter Stephens owns shares of BP. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.