The outlook for the resources industry has improved dramatically in the last couple of years. After a period of declining commodity prices and a high degree of uncertainty, the prospects for rising profitability in the industry seem high. As such, buying resources stocks now could be a shrewd move, with their valuations being relatively low in many cases.
With that in mind, oil and gas exploration company Hurricane Energy (LSE: HUR) could offer strong turnaround potential. However, it’s not the only resources company offering the potential to generate improving share price performance in future.
Releasing a production update on Friday was diversified resources stock Vedanta (LSE: VED). Its third quarter performance was relatively upbeat, with its earnings before interest, tax, depreciation and amortisation (EBITDA) rising by 21% versus the same period of the prior year. This was driven by rising volumes and higher commodity prices, although this was offset to some degree by higher input commodity cost inflation.
Furthermore, the company’s ramp-up plans across its asset base are on track. In the third quarter, its Zinc India production increased by 7%, aluminium production was up 40% and Copper Zambia production increased by 12%. There was also progress made in its oil and gas division, with contracts being awarded for growth prospects announced in November 2017. Meanwhile, its iron ore and power business units continue to make encouraging progress.
With Vedanta’s share price having fallen 23% in the last year, it now trades on a relatively low valuation given its financial outlook. The company is expected to report a rise in earnings of 62% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.1, which suggests that it could offer strong turnaround potential.
Also falling in the last year have been shares in Hurricane Energy. It is down around 26% during the time period and it has suffered to some extent from uncertainty regarding its future prospects. Its strategy has been called into question in recent months, while changes in management have had a destabilising effect on investor sentiment.
However, the company continues to make good progress with its Lancaster Early Production System (EPS), with it targeting first production in 2019. This could mean that the stock is able to generate significantly improved financial performance over the next couple of years. This may mean that investors begin to place a higher valuation on the business over the medium term.
Furthermore, Hurricane Energy could see its valuation rise due to the higher oil price. Oil is now trading at its highest level since 2014 and with demand and supply forecast to be close to equilibrium this year, the current price level appears to be sustainable. As such, the company could be a strong turnaround option and while risky, its potential rewards could be high.
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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.