The Motley Fool

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

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.

Do you own the best stocks in the resources sector?

Of course, finding stocks that are worth adding to your portfolio is a tough task, which is why the analysts at The Motley Fool have written a free and without obligation guide called 10 Steps To Making A Million In The Market.

It's a simple and straightforward guide that could make a real difference to your portfolio returns. As such, 2016 could prove to be an even better year than you had thought possible.

Click here to get your copy of the guide – it's completely free and comes without any obligation.

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.