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Are these 3 resources stocks on the cusp of stunning returns?

Last week’s quarterly operational report from South32 (LSE: S32) shows the company is making encouraging progress despite a challenging market. Its production either met or exceeded guidance for the period for the majority of its operations and with its shares up 71% since the turn of the year, investor sentiment is on the up too.

Clearly, much of this is down to an improved outlook for commodity prices, but South32’s focus on value over volume has also helped it deliver improved financial performance. And its delivery of two major projects on budget and ahead of schedule shows that it has the capacity to operate and be successful within a difficult environment.

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Looking ahead, South32 is forecast to increase pre-tax profit from around £125m in the most recent financial year to just under £400m in the current one. This is clearly dependent on prevailing commodity prices, but with South32 trading on a price-to-earnings growth (PEG) ratio of around 0.3, it seems to offer a sufficiently wide margin of safety to merit purchase now for the long term.

Return to profits

Also offering an upbeat outlook is Tullow Oil (LSE: TLW). The oil explorer has responded to a lower oil price environment by focusing to a greater degree on production and this is set to boost its profitability in the short run. In fact, Tullow Oil is expected to return to profitability in the next financial year, with its Project TEN in Ghana being a major reason for that.

Although the profitability of the project will be lower than previously anticipated due to a lower oil price, the cost per barrel of producing oil at the deepwater project is just $20. Therefore, oil could fall by up to 60% from its current level and still leave the new project economically viable.

And with Tullow Oil expected to rapidly improve its cash flow in the coming years, concerns surrounding its degree of leverage may subside and cause investor sentiment to improve. Therefore, now could be a good time to buy it – even if the oil price disappoints over the short-to-medium term.

Lagging its peers?

Meanwhile, Cairn Energy (LSE: CNE) has benefitted from a rising oil price in 2016, with its shares up 20% year-to-date. It continues to have a bright long-term future, with the company having a strong financial position through which to develop its lucrative asset base. And with the prospects for the oil price now being stronger than a number of months ago, investor sentiment towards Cairn could improve over the coming months.

However, with a number of other resource-focused companies having black bottom lines and forecast to grow their earnings at a rapid rate, the appeal of Cairn on a relative basis may be somewhat limited. That’s not to say that it’s a stock to avoid, but rather investors may prefer to buy the likes of South32 or Tullow, which may prove to be on the cusp of stunning returns thanks to their high forecast earnings growth rates over the next year.

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Peter Stephens owns shares of South32. 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.

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