The share price of oil and gas producer and explorer Amerisur plc (LSE: AMER) has dropped by 10% today after it released multiple updates. Clearly, this continues to be an uncertain period of time for the resources industry, but the stock now seems to offer a wide margin of safety. As such, it could offer a favourable risk/reward ratio.
However, it’s not the only resources company that could be worth buying right now. Another company with a low valuation may offer the potential for high returns in the long run.
While Amerisur’s share price is down today, its news releases appear to be positive overall. It announced that it has made its first complete tanker loading from Esmeraldas on 22 March of 350,000 barrels of crude.
It also announced the rig mobilisation to, and spudding of, the Pintadillo-1 well. This is the first of up to three wells which will target the N Sand anomaly within the Platanillo block. There are four anomalies in total, with the well targeting estimated P50 resources of 11.44m barrels of oil.
Looking ahead, Amerisur is expected to deliver improving financial performance over the next couple of years. Despite this, it trades on a forward price-to-earnings (P/E) ratio of around 10, which suggests that it may be undervalued. That’s especially the case since it has significant exploration potential which could allow it to deliver improving levels of profitability over the medium term.
As such, while its share price may continue to be volatile in the near term, the company could be a strong performer over the coming years. An improving oil price may help to boost investor sentiment in the stock over the long term.
Margin of safety
Also offering a wide margin of safety in the resources industry is Vedanta (LSE: VED). It offers a diverse business model which could provide it with a lower risk profile than many of its industry peers. Certainly, its financial performance is highly dependent on the prices of a range of commodities. But with the outlook for the global economy being relatively upbeat, it could generate improving levels of profitability over the medium term.
In fact, Vedanta’s earnings are due to double in the current financial year. This puts it on a forward P/E ratio of around 6, which suggests that it offers a wide margin of safety. And with it yielding around 6% from a dividend that is expected to be covered 2.7 times by profit this year, the company appears to offer high total return potential.
Although investor sentiment may take time to improve after what has been a tough period for the commodities sector, solid financial performance could lead to higher valuations across the sector. Therefore, while not without risk, now could be the perfect time to buy Amerisur and Vedanta for their long-term growth prospects.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended Amerisur Resources. 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.