The prospects for the oil and gas sector have been transformed in recent months. After years of challenges, the oil price has finally started to rise. It recently pushed above $70 per barrel, and the long-term prospects for black gold appear to be positive.
While the rise in the oil price has caused investor sentiment to pick up, the valuations on offer across the sector do not yet appear to factor-in the prospects of a rising oil price. As such, now could be a good time to buy the following two oil and gas companies ahead of what may prove to be a more profitable period than expected.
Rising share price
Gaining 11% on Monday was oil producer Enquest (LSE: ENQ). Investors responded positively to its operations update, with the company averaging 37,405 barrels of oil equivalent per day (boepd) in 2017. This was in line with previous guidance, with Kraken first oil delivered in the second quarter of the year. There was also a successful completion of the acquisitions of interests in Magnus and the Sullom Voe Oil Terminal during 2017.
Looking ahead to 2018, Enquest expects average production to grow by between 33% and 55% versus the prior year. This seems to have boosted investor sentiment, and this trend could continue in the near term.
Encouragingly, the company’s cash capital expenditure is expected to be materially lower in 2018 than in 2017. It is due to be around $250m and when combined with higher production, this could lead to stronger cash flow for the business. With the company expected to post a rise in earnings of 73% in the next financial year, it has a price-to-earnings (P/E) ratio of just 2.6 using 2019’s forecasts. This suggests that it could offer high potential rewards for the long run.
Also offering upbeat capital growth potential in the oil and gas sector is Cairn Energy (LSE: CNE). It has ambitious production plans over the next few years which could transform the financial performance of the business.
For example, it is expected to deliver profitability in the current year after a number of years of development and investment in its asset base. This in itself could help to improve investor sentiment, while a forecast rise in earnings of 49% next year could lead to stronger share price performance.
Despite its upbeat financial outlook, Cairn Energy trades on a price-to-earnings growth (PEG) ratio of just 0.4. This suggests there is a wide margin of safety on offer at the present time, and could mean that it has a favourable risk/reward ratio.
Certainly, there is scope for volatility and even a fall in the oil price. However, with the prospects of continued demand growth and further restrictions on global supply, the prospects for the oil price seem to be more positive now than they have been in a number of years.
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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.