The prospects for the oil and gas sector have improved significantly in the last nine months. The price of oil has increased by around 50% during that time, with many investors expecting further growth over the medium term.
As such, now could be a good time to buy oil and gas stocks such as BP (LSE: BP). The company’s financial performance is due to improve, while it continues to offer a relatively low valuation. However, it’s not the only company in the industry which could deliver improving share price performance in future.
Reporting on Tuesday was oil and gas exploration and production company Regal Petroleum (LSE: RPT). It was able to increase annual production by 65% in 2017 versus the prior year, with production of 2,800 barrels of oil equivalent per day (boepd). This was largely because of the significant contributions of the new MEX-109 well, in addition to the successful workover of the SV-2 well.
Due in part to higher production, the company’s profit for the year was $2.3m. This is a significant improvement on the previous year when the business made a loss of $1.3m. Cash generated from operations of $18m should help to fund the company’s 2018 development programme and is set to provide it with greater financial flexibility over the medium term.
With a focus for the current year on the completion of geophysical studies at the MEX-GOL and SV fields, Regal Petroleum seems to have a positive outlook. With a cash position of $14.2m and the potential for improving investor sentiment from a buoyant oil price, it could prove to be a strong performer in a rising sector.
Total return potential
Clearly, BP offers a lower-risk investment opportunity than its smaller sector peer. While it may have experienced significant difficulties in the last decade as a result of the 2010 oil spill, it now seems to offer an enticing risk/reward ratio.
The higher oil price is expected to boost profitability for the company and means that it trades on a forward price-to-earnings (P/E) ratio of around 14. This suggests that it offers a wide margin of safety at a time when the wider stock market is still trading at a relatively high level. And with profitability set to improve, dividend growth could be on the horizon. Dividend coverage of 1.1 times in the current year could prompt a higher payout that could increase the appeal of the stock at a time when it yields 6%.
Of course, a falling oil price would be likely to hurt the performance of BP and its sector peers. But with demand growth set to be higher than supply growth during the current year, the near-term prospects for the industry appear to be bright. And with efficiencies having been made in recent years, profitability across the sector could improve and make it a worthwhile place to invest for the long run.
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Peter Stephens owns shares of BP. The Motley Fool UK has recommended BP. 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.