The oil price has been exceptionally low for a number of years. At its lowest, it fell to under $30 per barrel, which represents a major decline from its previous three-figure high.
However, after a period of growth that has been centred on reduced supply, the price of oil recently increased to above $70 per barrel. This could suggest that the prospects for oil and gas companies is improving, and may mean the sector could have investment potential. With that in mind, here are two stocks operating in the sector that could generate high total returns in the long run.
Reporting on Wednesday was Kurdistan-focused oil and gas exploration and production company Genel Energy (LSE: GENL). It confirmed a 40% replacement of proved reserves at its Taq Taq field, following the success of well TT-29w. The news reflects the stability in cash-generative production that the company has seen from the field in the second half of 2017.
However, the company also announced that the proved plus probable reserves at Taq Taq are now estimated at 54.7m barrels. This is down from 59.1m barrels around one year ago.
Looking ahead, Genel Energy is expected to deliver a rise in earnings of 39% in the current year. This is set to put the stock on a price-to-earnings (P/E) ratio of 8.6. This suggests that it offers good value for money, even when the geopolitical risks it faces are factored-in.
Therefore, while it lacks the diversity and financial strength of some of its industry peers, the company could generate relatively impressive levels of capital growth. That’s especially the case if the oil price continues to gain momentum over the medium term.
Also offering upside potential at the present time is BHP Billiton (LSE: BLT). The company may not be a pureplay oil and gas producer, but its petroleum division remains a key part of the business. As such, it is likely to benefit from a rising oil price.
Additionally, the company’s mix of other operations could help to offset the volatility in one particular commodity. This may mean that BHP Billiton has a lower risk profile than some of its pureplay oil and gas peers. And with the company having spun-off non-core operations in recent years and sought to lower its cost base, it seems to be in a strong position to deliver improving levels of financial performance.
With the company’s bottom line forecast to rise by 21% in the current financial year, it has a price-to-earnings growth (PEG) ratio of just 0.6. This suggests that it is undervalued at the present time and may be able to generate strong share price growth in future. Certainly, its performance is linked to the prices of the commodities it produces. But with a wide margin of safety and a diverse set of operations, it seems to have a favourable risk/reward ratio.
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Peter Stephens owns shares in BHP Billiton. 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.