The outlook for the oil and gas sector continues to be highly uncertain. Despite improving sentiment at the end of 2016 following OPEC’s decision to cut supply, the oil price has failed to post significant gains during the course of the year. This situation could continue in the short run, since lacklustre demand growth and still-high production are combining to create an unfavourable operating outlook for companies operating within the sector.
Despite this, there are oil and gas companies which could be worth buying for the long term. Reporting on Friday was UK Oil & Gas Investments (LSE: UKOG), which could prove to be a highly rewarding long-term buy.
UKOG announced on Friday that the Environment Agency has granted the necessary permits to enable Horse Hill Developments to carry out extended flow tests at Horse Hill-1, store any produced oil, drill and test both a side-track from the existing HorseHill-1 well and new borehole Horse-Hill-2. This is positive news for the company because it has a 32.4% stake in the licenses. With them making progress and having the potential to become producing assets in future, the company’s outlook appears to be upbeat.
An application for long term production testing and further appraisal drilling was submitted to Surrey County Council in October 2016. It will now be decided at the Council’s planning meeting on October 18. This means that UKOG expects operations to commence in the fourth quarter of 2017, upon grant of the necessary remaining regulatory permissions. As such, the next few months could be an important period for the business, and investor sentiment could improve depending on news flow.
Clearly, the company remains a relatively volatile stock. However, with its strategy making progress and there being potential for positive news flow in future, it could be a strong performer in the long run.
Margin of safety
Also offering upside potential with considerable risk in the oil and gas sector is Petrofac (LSE: PFC). The support services company continues to perform relatively well as a business, but the Serious Fraud Office (SFO) investigation is continuing to hold back investor sentiment. The outcome of the investigation could have a positive or negative impact on the company’s share price.
Despite this risk, Petrofac seems to be worth buying at the present time. It has a wide margin of safety which indicates that the market has priced-in potentially negative news flow. For example, it has a price-to-earnings (P/E) ratio of just 6 and a dividend yield of 7.8%. Since dividends are covered more than twice by profit, they appear to be highly sustainable over the medium term.
Certainly, the company has a very uncertain future. It could be fined, for example, as a result of the SFO investigation. However, with such a low valuation, the rewards on offer appear to be hugely enticing and could make the stock of interest to less risk-averse investors.
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Peter Stephens owns shares of Petrofac. The Motley Fool UK owns shares of Petrofac. 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.