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?

Positive performance

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.

Uncertain prospects

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.

The post Will the GKP share price ever recover to 300p? appeared first on The Motley Fool UK.

More reading

• Suddenly investors can’t get enough of GSK shares! What’s going on?
• £5,000 invested in Greggs shares in October 2024 is now worth…
• Where will Rolls-Royce shares go next? Let’s ask the experts
• No savings at 45? Here’s how investors could still build a £17,360 second income
• How to invest £10,000 to aim for a £6,108 annual passive income

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.

Nicely Diversified

The AIM-listed £585m group, which has a focus on the Appalachian Basin, is up 52% in the past year, and today’s results for the six months to 30 June suggest the momentum could continue.

It has materially increased production through acquisitions, including Alliance Petroleum for $80.7m in March, $89.3m of conventional assets from CNX Resources in April, and $575m of gas, oil and midstream assets from EQT Corporation (the largest acquisition by an oil and gas company in the history of AIM).

Right balance

Average daily production was 19.3 kilo barrel of oil equivalent (kboed) over the period, hitting 60 kboed in post-period July. It also revealed strong adjusted EBITDA margins of 40% and “significantly strengthened balance sheet and liquidity”, with $439m of new gross equity raised. It now has an enlarged credit facility of $1bn, with a $600m committed borrowing base. Overall, it has a strong liquidity position of $187m.

CEO Rusty Hutson hailed “a period of transformative growth” with acquisitions boosting production by more than 90% without risking the balance sheet. He said the real impact of the group’s “game-changing acquisitions” are still to come, in materially increased cash flow, lower costs and enhanced EBITDA margins.  

Diversified will start paying dividends in September and City analysts forecast a yield of 7.4% for 2018, and 8.3% for 2019, alongside whopping earnings per share (EPS) growth of 28% this year, and 86% in 2019. A lot can go wrong with AIM-listed energy explorers but this looks an intriguing option.

Big and beautiful

At the other end of the size scale, £109bn energy titan BP (LSE: BP) has also been having a good year, its share price up 21%. It’s been given a fair wind by the recovering oil price, with Brent crude currently hovering around $80bn on latest Iran concerns and Hurricane Florence fears.

I was intrigued by a bullish report on Big Oil from analysts Berenberg yesterday, which hailed BP a buy with a target price of 665p, suggesting a 20% uplift from today’s 550p, if you trust in these things.

Lower costs, growing output and higher crude oil prices should all help drive BP’s free cash flow, while cost-cutting when crude dipped below $30 is now paying off handsomely. Don’t forget that BP quadrupled its second-quarter profit in the year at the end of July, and increased its dividend for the first time since 2014.

Ultimate BP

There are the inevitable strategic uncertainties as the world looks to shift away from fossil fuels, with a new report from the Carbon Tracker Initiative suggesting oil demand could peak as early as 2023. But you cannot set too much store on these arguments, as anyone who remembers the frenetic Peak Oil debate knows.

You can set store on BP’s 5.7% yield, though, combined with a forecast valuation of just 12.5 times earnings. EPS are forecast to rise to 222% this year, then 12% in 2019. I recently described BP as my ultimate FTSE 100 long-term buy and hold and see no reason to change that view today.

The post This energy growth monster has completely thrashed the BP share price appeared first on The Motley Fool UK.

More reading

• BP share price forecast: can oil prices and buybacks push the stock higher in 2026?
• Does the Iran war spell long-term disaster for BP and Shell shares?
• Here’s how a £10k ISA could generate £1,845 in monthly passive income
• 5 years ago, £5,000 bought 354 Shell shares. But how many would it buy now?
• At 570p, is it too late to consider buying BP shares?

harveyj 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.

If a firm has the cash to spend, investing now could pay off down the line, and that’s the tactic that US-focused Diversified Gas & Oil (LSE: DGOC) is employing.

Oil in the blood

The firm came to the London AIM market in February raising $50m for its war chest, which makes the company all the more interesting to me because the shares of newly-listed firms often do well. At the point of flotation they can be well financed and driven by entrepreneurial management teams keen to make their mark.

Diversified Gas & Oil’s chief executive is certainly equipped with a full-blooded oil company boss name in Rusty Hutson, Jr (I’m already thinking of Red Adair and Dallas). He explained in this month’s full-year results report that during 2016, strategic acquisitions increased cash flow and profitability. Now, the firm’s flotation on the London market has “leveraged these foundations to execute our more ambitious strategic objectives,” he reckons.

Focused in the good old US of A

Indeed, the firm announced today the acquisition of certain producing gas and oil wells, close to the company’s existing operations in the Appalachian Basin in the eastern United States, from Titan Energy. The deal will almost double the size of operations and Mr Hutson reckons it will be transformational for the company, making it a leading conventional player in the Appalachian Basin, with low-cost production and predictable cash flow. He thinks the synergies and streamlining of the firm’s expanded operations will enable lower operating costs, making the business resilient in an ongoing low-commodity-price environment.

Meanwhile, the directors are focusing on a “buoyant” acquisition pipeline, which they hope to pursue after the Titan Energy acquisition. To finance all this activity, the firm will use existing funds along with a further placing this month that raised $35m at a share price of 70p, and a $110m loan facility.

A massive uplift in earnings

City analysts see the firm as on course to lift earnings around 260% next year and the forward price-to-earnings (P/E) ratio sits just below 15. I reckon the company has every chance of outperforming its larger peers such as BP (LSE: BP) over the next few years.

BP looks set to grow earnings by around 28% during 2018 and the forward P/E rating runs just under 14. The big difference between BP and Diversified Gas & Oil is that BP pays a dividend with the forward yield running at 6.8%, although future dividend payments are on the agenda at Diversified Gas & Oil, too.

Reshaping for growth

Since the Gulf-of-Mexico oil blow-out disaster and its aftermath, BP has been selling assets and reconfiguring operations to support a more-nimble approach to growth. But I think the firm’s sheer size is against it as a growth proposition. With a market capitalisation of £88bn or so, it dwarfs little £81m Diversified Gas & Oil. To me, investor capital gains seem more likely from Diversified. However, the two firms could complement each other in a balanced portfolio if you are looking for exposure to commodities.

The post This oil and gas stock looks set to outperform BP plc appeared first on The Motley Fool UK.

More reading

• BP share price forecast: can oil prices and buybacks push the stock higher in 2026?
• Does the Iran war spell long-term disaster for BP and Shell shares?
• Here’s how a £10k ISA could generate £1,845 in monthly passive income
• 5 years ago, £5,000 bought 354 Shell shares. But how many would it buy now?
• At 570p, is it too late to consider buying BP shares?

Kevin Godbold has no position in any shares mentioned. 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.