The performance of the oil and gas sector has been hugely volatile this year. After significant optimism in the early part of the year, the oil price disappointed significantly. However, after gains in recent months, it reached a two-year high. This means that the outlook for oil and gas companies has generally improved and could mean they are worthy of higher valuations.
With that in mind, now may be a good time to buy Pantheon Resources (LSE: PANR). That’s especially the case since the exploration company reported positive news last week.
On Thursday, the company announced that the VOBM#4 well has reached its target depth of 12,050 feet. In doing so, it encountered the Wilcox horizon. This was a welcomed bonus for the company and has the potential to be hugely successful given its 75% working interest in the well. The wellbore is currently being prepared for logging operations, while the gas facility is progressing as expected. Higher production rates are anticipated as the wells clean up in future.
Looking ahead, the stock is expected to move from five years of losses to a profit in the next financial year. It’s forecast to record pre-tax profit of over £5m, which puts it on a forward price-to-earnings (P/E) ratio of 25. While not exactly a low rating, the company appears to have significant growth potential, not just from its improving operational performance, but also from the prospect for a rising oil price.
Although the level of supply over the medium term may be uncertain, various oil-producing countries have indicated that may be supportive of a higher oil price. Therefore, Pantheon Resources could see its profit rise, which may make its current valuation seem attractive over the long run.
Also set to deliver a black bottom line after a troubled period is resources sector peer Glencore (LSE: GLEN). The company has experienced three years of losses in the last five, which is clearly disappointing for its investors. However, after a major cost-cutting programme that has left the company with lower leverage on its balance sheet, it’s expected to move into profit in the current year.
Despite this, Glencore continues to trade on a relatively low P/E ratio. It currently stands at 12.1 on a forward basis, which suggests that it may be cheap when compared to some of its sector peers. And with its financial and operational performance on the up, it may be much easier for investors to justify a higher valuation. This could act as a catalyst on the company’s future share price performance.
Clearly, commodity prices could be volatile over the medium term. However, with what appears to be a wide margin of safety and a lower-risk business model after its debt reduction plan, Glencore could be a worthwhile investment for the long term.
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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.