The oil and gas industry has been a painful place in which to invest in recent years. The falling oil price has caused capital expenditure levels in the industry to plummet, which has meant support services companies focused on the sector have endured falling sales and profitability. However, in the long run there could be significant capital growth potential for long-term investors.
Reporting on Friday was oil and gas support services company Lamprell (LSE: LAM). Its financial performance in 2016 was hugely disappointing, with sales and profitability falling. The latter was negatively affected by a writedown, while the outlook for the industry is hugely challenging. The company expects more difficulties in the remainder of 2017. With the oil price not expected to surge, it could be another difficult year.
However, Lamprell offers significant turnaround potential. A key reason for this is its sensible strategy. It is seeking to reduce costs in order to become more sustainable in an era when the oil price may remain at below $100 per barrel for some time. It is also seeking to move into new projects, such as the potential participation in the Maritime Complex in Saudi Arabia.
While its strategy may improve its performance, a rising oil price could have an even bigger effect. In the coming months, the supply surplus is forecast to narrow and this may have a positive effect on the price of black gold. A rising oil price could mean higher profitability across the industry, which may improve investor sentiment in Lamprell. Trading on a price-to-book (P/B) ratio of just 0.75, there seems to be considerable upside potential on offer in the long run.
Of course, Lamprell is not the only support services company which has been negatively affected by the falling oil price. Sector peer Cape (LSE: CIU) has lost 52% of its value in the last five years, while it recorded a pre-tax loss last year of £44m.
While disappointing, a turnaround could be on the cards. Cape is forecast to return to profitability in the current year, which could improve investor sentiment in the stock. Although no growth is forecast for next year, the company’s valuation appears to be difficult to justify. Using the current year’s earnings forecast, Cape has a price-to-earnings (P/E) ratio of just 6.8. This indicates that a significant upward re-rating could take place.
Certainly, there is scope for more disappointment regarding the oil price. However, Cape’s valuation appears to fully factor-in the risks it faces. Buying a slice of it now may be viewed as risky by many investors. Its share price could become increasingly volatile. However, given its wide margin of safety and a logical strategy which is due to turn its performance around, now could be the perfect time to buy it for the long run.
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.