Is this stock the best buy in the resources sector after today’s results?

Should you pile into this stock right now or are two of its industry peers better buys?

| 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.

Ithaca Energy (LSE: IAE) has risen by 3% today after releasing an upbeat set of first-half results. Notably, Ithaca’s production has been ahead of guidance, with its average production being 9,378 barrels of oil equivalent per day (boepd), which is ahead of guidance of 9,000 boepd.

Alongside this, Ithaca has reduced costs. Its unit operating costs have now been lowered to $25 boe, which is a reduction of 17% on previous guidance. This should help the company to become increasingly competitive in a low oil price environment.

Furthermore, Ithaca’s cash flow from operations was $82m in the first half of the year. This has helped it to reduce net debt from $800m in the first half of 2015 to $606m at 30 June 2016. This deleveraging of the business reduces Ithaca’s risk profile and means that its long-term future is now increasingly sustainable. And with it having an attractive group of investment opportunities available within its portfolio, it’s well-positioned to make further improvements to its business even with current low oil prices.

Set to outperform?

Clearly, this is still a tough period for resources companies such as Ithaca. Sector peer Tullow Oil (LSE: TLW) is also seeking to improve its cash flow and reduce its debt levels, with its strategy to pivot towards production set to boost its profitability in future.

A key part of this is Project TEN in Ghana, which will see Tullow’s production levels increase rapidly in the near future. As such, it’s forecast to report a rise in earnings of 184% in the next financial year, which puts it on a price-to-earnings growth (PEG) ratio of only 0.1. This indicates that now is an excellent time to buy it and with Tullow having a stronger profit growth outlook as well as a larger and higher quality asset base than Ithaca, it looks set to outperform its smaller peer over the medium-to-long term.

Lower risk

However, Tullow lacks income appeal and on this front industry peer Petrofac (LSE: PFC) has huge potential. It currently yields 6% and with its dividends being covered 1.9 times by profit, they appear to be sustainable and have room to grow at a brisk pace.

Furthermore, Petrofac is forecast to increase its earnings by 25% next year and this puts it on a PEG ratio of only 0.4. While this is higher than Tullow’s valuation, Petrofac has a more stable balance sheet and therefore offers a lower risk profile. Its strategy of cost-cutting has also made a positive impact on the company’s outlook, while its diverse business model provides a degree of protection against further oil price falls.

Petrofac reported a change in its CFO today, but with a strong wider management team and a sound strategy, it seems to be a better buy than Tullow and Ithaca. All three could outperform the wider index, but Petrofac offers the best overall total return prospects and the most favourable risk/reward ratio.

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 owns shares of Petrofac. The Motley Fool UK owns shares of and has recommended Petrofac. 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

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

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

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »