It’s been a challenging few years for the resources sector. The prices of commodities including oil have been volatile and have generally moved lower. However, against this backdrop, a number of stocks have been able to improve their operational performance and could now begin to reap the benefits. With that in mind, here are two companies which could be worth buying ahead of improving financial performance.
Reporting on Wednesday was Victoria Oil & Gas (LSE: VOG), with the business updating investors on the two well drilling programme at the company’s Logbaba gas production site. So far, the company has been successful on La-107 in securing 35m of gas-bearing reservoir sands in the Upper Logbaba. It will continue drilling and completion work on La-107 through to production. The company will then drill and complete La-108.
The net sands encountered thus far of 135m in both wells shows there could be significant potential in the long run. This compares favourably to the 54m of net sands encountered in the primary production well, La-105. Due in part to its successful drilling programme, the company’s shares have risen in value by 31% in the last six months. However, further upside could be ahead.
A potential catalyst for the Victoria Oil & Gas share price could be its bottom line. It is expected to move into profit in the current year. Despite this, it trades on a forward price-to-earnings (P/E) ratio of just 10.2, which suggests it offers a wide margin of safety. Therefore, while a potentially risky and volatile share to own, it could deliver high capital gains in the coming years.
Also offering upside potential as a result of its bright future outlook is sector peer Soco International (LSE: SIA). As with Victoria Oil & Gas, it has recorded somewhat disappointing financial performance in recent years. For example, its pre-tax profit declined from $445m in 2012 to just $5m last year. This is a major reason why the company’s share price has moved 60% lower in the last five years.
Looking ahead, it could mount a successful recovery. The company is expected to report a rise in pre-tax profit to $22m in the current year, followed by further growth to $37m next year. While both of these figures are lower than they were in the past, they could represent relatively strong performance given the downbeat near-term prospects for the oil price.
In terms of how oil could perform in future, its outlook remains highly uncertain. Even though supply has been cut by OPEC, sluggish demand growth means that it could remain at depressed levels for the short term. In the long run though, the oil price is forecast to gradually rise, which could provide a tailwind for Soco International’s sales and profitability. This could help it to become a successful recovery stock.
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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. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.