Having traded at just over 300p at the end of August, the GKP (LSE: GKP) share price has fallen by 37% to 190p.
Investors have responded negatively to a falling oil price, with a number of operators across the sector seeing their valuations come under increasing pressure. Since GKP is a relatively risky stock which lacks the diversity and financial strength of some of its FTSE 100 and FTSE 250 peers, its shares appear to have been hit relatively hard.
In the long run, could there be scope for a successful recovery? Or, should investors wait before considering the purchase of GKP and a sector peer which released an investor update on Monday?
The company in question is US-based oil and gas producer Diversified Oil & Gas (LSE: DGOC). It released an operations and trading update which showed that, based on its performance since the start of the year, its financial performance for the 2018 financial year is expected to be materially ahead of expectations. This news was well received by investors, with its share price rising by as much as 9%, at the time of writing.
The company appears to be making progress in terms of integrating the most recently-acquired assets from Core, as well as extracting the maximum value from its expanded portfolio. The dynamics for natural gas pricing in its region have remained positive, benefitting from a material rise in local pricing.
Looking ahead, the company is expected to report a rise in earnings of 86% in the 2019 financial year. This puts Diversified Oil & Gas on a price-to-earnings growth (PEG) ratio of 0.1, which suggests that it could offer a wide margin of safety. While potentially risky, its reward potential could be high, in my opinion.
As mentioned, a falling oil price has been a major contributor to the decline in the GKP share price since late August. In fact, WTI crude oil has fallen from around $76 per barrel in October to trade at $53 per barrel presently. Concerns surrounding future demand as a result of the prospect for a slowing world economy seem to be weighing on investor sentiment towards the sector.
Furthermore, Iranian sanctions are unlikely to lead to the drop in supply which was anticipated due to waivers being implemented for the next 180 days. As such, the oil price could come under further pressure in the near term.
As a result, the prospects for GKP could be uncertain. Investors may demand a wider margin of safety, with its lack of financial strength versus industry majors potentially working against it as the sector is currently viewed less favourably than it has been for a number of months.
However, with GKP now having a PEG ratio of 0.1, it could be of interest to less risk-averse investors. Clearly, though, it remains a risky stock that could move lower in the near term, in my opinion.
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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.