The outlook for the resources sector remains challenging. Commodity prices may have risen in recent months, but there’s no guarantee this trend will continue. As such, President Energy’s (LSE: PPC) 81% gain since the start of the year may not be repeated in future.
The oil and gas exploration company has today released an operational update that provides clues as to whether it’s a better buy than two of its resources sector peers, Cairn Energy (LSE: CNE) and Sirius Minerals (LSE:SXX).
President Energy’s update is rather mixed. On the one hand it has experienced unforeseen issues with its new well at the Puesto Guardian concession. This has caused delays to the drilling programme, with five days of non-productive time lost due to electro-mechanical issues relating to the drilling rig. However, this was at zero cost to President and since then the drilling rates of penetration have been ahead of the company’s expectations.
Furthermore, production from Puesto Guardian is now at 510 barrels of oil per day (bopd) following an average of 440 bopd in July. And with production in Louisiana likely to rise to 250 barrels of oil equivalent per day (boepd) by the end of September following a period of lower production, President’s long term outlook is becoming brighter.
Similarly, Sirius Minerals has the potential to deliver a high level of profitability in the long run. Its update this week showed that it’s making encouraging progress with its funding strategy, with multiple financial institutions indicating their support for the second stage of its two-stage plan.
Clearly, there’s still some way to go before Sirius Minerals is a profitable entity as its £1bn-plus potash mine is a major project that will only bear fruit in the long run. However, with crop studies for its polyhalite fertiliser generally being positive and global demand for food likely to increase as the population rises yet further, Sirius Minerals could prove to be a very rewarding, albeit higher risk, buy for the coming years.
The right mix?
However, Cairn Energy appears to have a more enticing risk/reward ratio than either President Energy or Sirius Minerals. It’s a lossmaking business at the present time and is dependent on the price of oil in the long run for its profitability. But it has a strong balance sheet with a net cash position as well as an excellent asset base that could allow it to deliver high levels of profitability in the long run.
Furthermore, Cairn’s losses are forecast to narrow from £368m last year to £53m in 2017. It’s also benefitting from a falling cost of exploration that’s helping to keep its costs down in the short run. Due to its size, financial strength and appealing asset base, it’s a better buy than President and Sirius Minerals, although both of those two stocks have the potential to rise over the medium-to-long term should the commodity environment remain favourable.
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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.