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Should we now pile into Sound Energy plc after crashing 25%?

The last year has been volatile for the share price of oil and gas exploration company Sound Energy (LSE: SOU). Its share price has fallen over 25% during the period, as investor sentiment has remained somewhat changeable. Despite this, the company appears to have a bright future, with recent news flow showing that the business could deliver on its potential.

Therefore, could now be the right time to buy it? Or could there be a more opportune moment to buy the small-cap resources play?

Risk/reward

Clearly, as with any exploration stock there are significant risks. The company’s future share price performance is closely linked to the quality of its news releases. However, it appears to have an asset base which could deliver positive news flow. Its Eastern Moroccan operations could provide a catalyst for its share price, with it having sought to de-risk its exploration potential. As well as this, it has a cash balance of $50.1m (as at 30 June), which indicates that its exploration activities may be well-funded over the medium term.

Industry outlook

As well as the quality of its news releases, Sound Energy and sector peers such as Cairn Energy (LSE: CNE) are also highly dependent upon the outlook for the wider oil and gas industry. In 2017, there has been a marked improvement in the prospects for the oil price. It has risen to a two-year high and many investors are now becoming more bullish about its future growth potential – especially since OPEC and non-OPEC members have stated that they are keen to support the oil price at its current level.

Of course, there is scope for the oil price to fall. Disagreement among OPEC members could mean the supply cuts that have helped to push its price higher are discontinued over the medium term. As such, it remains a risky place to invest compared to other industries and sectors.

Growth potential

However, the inherent risks of the industry could mean the potential rewards are also greater. As mentioned, Sound Energy now trades 25% lower than it did a year ago, and this could mean there is greater upside potential on offer. Similarly, Cairn Energy has ambitious production plans over the next few years which could see its financial performance transformed. Although it trades on a price-to-earnings (P/E) ratio of 30 using forecast earnings for 2018, in future years it has the capacity to deliver rapid growth in earnings as production increases.

Therefore, both stocks seem to offer upbeat investment outlooks for the long term. Neither may be suitable for more risk-averse investors, since they are likely to remain volatile in 2018 and beyond. However, for investors seeking exposure to exploration companies in the oil and gas sector, Sound Energy and Cairn Energy could offer relatively strong share price growth potential 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.