The rising oil price has caused investor sentiment towards the oil and gas industry to improve in the last year. A number of companies operating in the sector have seen their share prices rise, with the prospect of improving profitability causing investors to adopt an increasingly risk-on attitude.
However, the share performance of exploration company 88 Energy (LSE: 88E) has not been particularly impressive. Its valuation is flat on where it was 12 months’ ago, with investors seemingly unsure about the prospects for the business following disappointing flow-test results.
With the company reporting an update on Friday, could it be worth buying alongside another oil and gas company which seems to have an impressive long-term outlook?
88 Energy announced that it has increased its footprint on Alaska’s North Slope through an agreement with Arctic Slope Regional Corporation. This will see the company lease the hydrocarbon rights across 28,453 acres contiguous with the Western Fairway area of the current Project Icewine acreage.
Alongside this, the company has also entered into an agreement with Great Bear Petroleum to acquire a 69.1% working interest in 24,269 acres adjacent to, and north of, the Central Play Fairway at Project Icewine. Together, the two acquisitions increase the company’s lease position by 45,239 net acres to 371,478 net acres across its three main project areas on the Central North Slope of Alaska.
Clearly, the company has experienced a challenging recent period. Although Project Icewine seems to have significant long-term development potential, it’s proving to be somewhat difficult to turn its prospective resources into commercial reserves. Therefore, it may only be of real interest to less-risk-averse investors at the present time.
Improving financial outlook
As mentioned, the rising oil price looks set to boost the financial prospects for a number of companies across the oil and gas sector. One example is Cairn Energy (LSE: CNE), which is expected to report a rise in earnings of almost 200% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.1, which suggests there could be upside potential ahead, even after its share price rise of 18% in the last year.
The company may be facing regulatory risk due to an ongoing dispute with the Indian authorities. But with its production expected to rise, and it having further development potential in other assets, its medium-term outlook appears to be relatively positive.
With the potential for the oil price to move higher over the coming years, Cairn Energy could be an appealing stock to buy at the present time. While volatility may be high, its valuation suggests that a wide margin of safety is on offer. And with what appears to be a strong asset base and solid balance sheet, its financial prospects could provide a significant catalyst for its stock price over the coming years.
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Peter Stephens has no position in any of the 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.