It’s been a difficult few years for the resources industry. Falling commodity prices have caused profitability to come under pressure across the sector. This has caused investor sentiment to decline, which has left many companies in the industry with significantly lower share prices.
However, the prospects for a number of commodities now seem to be improving. After growth in recent months, there could be the potential for even higher prices over the medium term. As such, now could be the right time to buy resources shares. With that in mind, here are two stocks that could deliver high returns in the long run.
Improving outlook
Reporting on Tuesday was oil and gas company Faroe Petroleum (LSE: FPM). Its production in 2017 averaged 14,300 bopd (barrels of oil per day), which is at the upper end of guidance. Its production for 2018 is expected to be between 12,000 and 15,000 bopd. In 2017, it delivered an increase in 2P (proved plus probable) reserves to 97.7 mmboe following the successful Brasse appraisal well. This means that its 2P reserves are up 20% to record levels.
Looking ahead, the company appears to have a bright future. The oil price has already pushed past $70 per barrel and could deliver further growth in the next year. There could be a demand deficit in future months, with there being the potential for continued cuts to supply from OPEC nations. This means that the company’s financial performance could improve substantially.
In fact, Faroe Petroleum is expected to report its first profit since 2013 this year. Next year it is due to record a rise in its bottom line of around 254%. This puts it on a forward price-to-earnings (P/E) ratio of around 11, which suggests that it offers a wide margin of safety. This indicates that now could be the right time to buy it.
Stronger business
Also offering upside potential within the resources industry is Glencore (LSE: GLEN). The company is finally expected to put the difficulties of recent years behind it, with it forecast to return to profitability in the current year. This in itself could have a positive impact on investor sentiment and its share price, since investors are likely to have priced in a degree of uncertainty regarding its financial performance.
Looking ahead to next year, Glencore is forecast to post a rise in earnings of 18%. This would represent a solid result in what may prove to be uncertain times for commodity prices. And while its performance is directly linked to commodity prices, investors also seem to have priced in some level of risk in this area. The stock’s price-to-earnings growth (PEG) ratio of 0.6 suggests that it could offer high returns, while its downside risks may be relatively low.
With Glencore having a diverse business model and a stronger balance sheet following a period of self-help initiatives, it could be a strong performer in the long run.
