A return to modest profit

Lower oil prices and challenges relating to a big loss-making contract have affected the company’s business over the last of couple years. But February’s full-year results for 2016  revealed that revenue was up 15% and there was a return to a positive net profit of $1m, compared with a loss of $617m during 2015.

In an indication of how cash continues to flow into Petrofac’s coffers, net debt plunged 10%, which can only be a good sign, in my opinion. The directors showed their cautious optimism by maintaining the dividend at 2015’s level and said that the payout is “well covered” by free cash flow.

The statement outlined Petrofac’s plan for recovery, which is to focus on core strengths and reduce capital intensity. By focusing on costs and generating cash from operations, the directors believe Petrofac can maintain a strong balance sheet, and the news that debt is reducing lends weight to assertions that the recovery plan is working.

Chief executive Ayman Asfari reckons that the firm’s markets are competitive, but bidding activity has increased in recent months. He says Petrofac has a decent pipeline of opportunities across its core markets and has enjoyed recent success tendering for contracts. The firm’s backlog of work commitments, he says, provides “excellent” revenue visibility for 2017.

The elephant in the room

Petrofac’s business seems to have stabilised and, in my view, looks poised to recover and gain more ground operationally from here on, even if the price of oil stays where it is. Today’s slimmed down Petrofac looks fit for the current operational environment. The oil industry can’t put off maintenance and development work forever and that’s why Petrofac is seeing a stream of new contracts coming through now.

The elephant in the room is the possibility that the price of oil could plunge to half its value again and stay there, pulling the rug from under the entire industry and rendering many operations economically unviable. If that happens, Petrofac will see its workload plummet, along with its profits and its share price. However, reading the tea leaves, I think that outcome seems unlikely and it’s just a risk we must take to hold shares in Petrofac today.

A valuation anomaly?

Perhaps the fear of a future plunge in the price of oil keeps Petrofac’s valuation modest. Today’s 915p share price puts the firm on a forward price-to-earnings ratio around 10 for 2018 and the forward dividend yield runs near 5.9%. City analysts following the firm expect earnings to cover the payout just over 1.7 times.

This valuation compares well to the median forecast of all stocks on the London stock market that have estimates, which shows an average P/E ratio of 14.1 or so, and an average dividend yield of around 3.2%.

Assuming investor confidence grows that the oil price will not plunge, and that Petrofac can continue its operational progress, I reckon the firm’s valuation could re-rate closer to this median forecast level, perhaps before the end of 2017, suggesting around 40% upside potential for the share price on top of gains due to potentially higher profits.

The post Why Petrofac Limited could trade 40% higher by 2018 appeared first on The Motley Fool UK.

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Kevin Godbold owns shares in Petrofac. The Motley Fool UK owns shares of and has recommended Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Hefty contract wins like this strike me as a sign that the industry is moving on after crunching its gears with the collapse of the price of oil and other resources over the last few years. Maybe now is a good time to buy, or hold onto, stocks such as Petrofac. 

A strong presence in Oman

Petrofac signed the deal with a subsidiary of Oman Oil Facilities Development Company LLC (OOFDC), and the work involves the engineering, procurement and construction (EPC) of OOFDC’s Salalah LPG extraction project in the southern part of Oman.  

Under the contract, Petrofac will construct the liquefied petroleum gas (LPG) unit and associated facilities, including tie-ins to existing pipeline infrastructure, together with LPG storage and jetty facilities at the Port of Salalah. 

Petrofac’s group chief operating officer, Marwan Cheidd, says the contract is the firm’s 11th in the Sultanate and reinforces Petrofac’s commitment to Oman. The company has been doing business there since 1988.

In 2015, Petrofac’s revenue came in around $6,844m, so this one deal won’t transform the company. However, I find it encouraging that deals like this are flowing in the industry and for Petrofac. 

Return of the oil bull?

The oil price touched lows below $30 at the beginning of 2016 and today’s $56 or so indicates a decent recovery. I’m tempted to believe that the early 2016 low might act as a floor for the price of oil. Indeed, many observers and commentators are predicting a return of the oil bull market from here, pointing to an agreement between Russia and the OPEC oil supplying nations led by Saudi Arabia to reduce the global supply of oil in an effort to boost the price. 

Such efforts combine with a positive outlook for economic activity in 2017 to make me optimistic about the price of oil and Petrofac’s potential as an investment. However, I keep my own analysis of Petrofac’s attraction as a stock as simple as possible and find well-known outperforming fund manager Neil Woodford’s approach useful. He reckons his total return expectation for a stock equals its dividend yield plus the anticipated rate of dividend growth. On that score, Petrofac is appealing right now.

Cyclical value

At today’s share price of 925p, Petrofac’s dividend yield runs at 5.6% and City analysts following the firm expect the payout to increase around 4.3% in 2017. Forward earnings look set to cover the dividend around 1.8 times. To me, Petrofac looks attractive, so I plan to continue holding and will view any increased earnings due to further oil price recovery as a bonus.

Although recent oil price lows could form a bottom on the chart there’s no doubt that Petrofac operates in a cyclical industry. To me, that means the firm deserves its low forward price-to-earnings rating that runs around 9.5 for 2017. So I’m not expecting a valuation uprating, just steady operational progress as exemplified in today’s contract win announcement.

The post Should you buy, sell or hold Petrofac Limited after today’s announcement? appeared first on The Motley Fool UK.

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Kevin Godbold owns shares in Petrofac Limited. The Motley Fool UK owns shares of and has recommended Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The profitability of both these companies clearly depends on the price of oil, and their recent share price performances reflect their similarities. However, these two companies are far from being identical. Shell is a £146bn integrated oil & gas major, while oilfield services company Petrofac has a market capitalisation of just £2.8bn.

The risks and rewards for both stocks are also quite different, as are their underlying sector fundamentals. Below, we will take a look at some of the similarities and differences between both companies to determine which stock makes a better investment.

Petrofac

Although weak energy prices don’t directly lead to lower profits for oilfield service companies, they’re nonetheless affected by volatility in the commodity’s price. That’s because lower oil prices force producers to cut investment in drilling new wells, causing oil service and equipment revenues to fall and margins to compress.

But Petrofac has been shielded from the worst of the cuts because of its heavy focus on the Middle East. Keen to protect their market share and take advantage of their relatively low production costs, producers in the region, particularly sovereign oil companies, have either maintained or increased their oil spending.

This helped to lift Petrofac’s revenues for the first half of 2016 by 22%, to $3.89bn, and the company is back in the black with a profit of $12m. Its order backlog did shrink somewhat though, but is still worth $17.4bn, which equates to around two-and-a-half years of revenues.

Shell

Shell, on the other hand, has fewer places to hide. While it can shift its focus to operations that have held up better, by boosting LNG capacity and cutting back on high-cost production, its global scale and diversification mean this has a relatively small impact on its overall earnings. So revenues in H1 2016 fell by 23%, while underlying CCS profits were 89% lower, at $1.05bn.

And although its downstream operations have acted as a cushion against weak upstream profits, refining margins have lately come under pressure from increased competition. So unless oil prices bounce back strongly soon, earnings could have a lot further to fall.

Valuations and dividends

Shell is the more expensive stock, with a forward P/E of 26.1, based on city forecasts of earnings per share (EPS) for 2016 of 74.3p. This compares unfavourably to Petrofac, which thanks to a bullish outlook on Middle East oil spending, has a forward P/E of just 11.6.

On an income perspective, both stocks offer generous dividends. Shell has the higher dividend yield – 7.8% compared with Petrofac’s 6.1% – but its dividend isn’t fully covered. Shell’s forecast dividend cover for 2016 is a mere 0.5 times and the consensus forecasts show city analysts don’t expect earnings to fully cover dividends for at least another two years.

Meanwhile, Petrofac’s underlying dividend cover is forecast to exceed 1.4 times in 2016 and 1.8 times by 2017. For me, this combined with its valuations make Petrofac the more attractive stock right now.

The post Energy stocks head to head: Royal Dutch Shell plc and Petrofac Limited appeared first on The Motley Fool UK.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Payouts unsustainable

But although the oil price has made a strong recovery since mid-February, the medium-term outlook is less optimistic. Further gains in the oil price will likely be limited without more substantial cuts to global supply, which just do not seem likely given the failure of OPEC to reach an agreement on a production freeze.

What’s worse, Shell’s downstream profitability appears to have already peaked. In the first quarter of 2016, the company’s downstream earnings fell by almost a quarter against the same period last year. Bigger refining margins have acted as a cushion against weak upstream profits, but this cushioning effect seems to be fast shrinking. And unless upstream earnings bounce back more strongly than analysts currently expect, Shell’s earnings could yet have further to fall.

Today’s share price sees the dividend currently yielding 7.6%. But with earnings cover set to fall below 0.5x this year — ie, less than half of what is needed to fund its dividend, continued shareholder payouts at current levels don’t seem sustainable for much longer. The only way Shell can afford to maintain its payout without raising debt is to sell more assets. That’s akin to selling the family silver, and could worsen future dividend security by hurting free cash flow generation in the longer term.

Better energy plays

Instead, investing in oilfield service stocks could be a better play on the energy sector. This is because although cuts in capital spending by oil producers have hurt the sector, rising global demand for energy is expected to drive continued growth in global oil and gas development in the longer term.

Petrofac (LSE: PFC) is a value play in the sector, with its shares trading at 9.3 times expected earnings this year. The company is also a less risky play, because its focus on the Middle East has spared it from the worst of the spending cuts. Relatively low production costs in the region meant investment levels have held up and Petrofac managed to lift its order book to record high of $20.7bn this year.

At a share price of 815p, Petrofac’s dividend yield stands at 5.7%. That’s lower than Shell’s yield but, unlike the oil major, Petrofac’s dividend is well covered. Earnings this year are expected to cover its dividend 1.9 times, which suggests not only that the dividend is secure, but that there may also be opportunity for an increase in shareholder payouts this year.

An alternative play on the sector is Plexus Holdings (LSE: POS). The firm has seen the value of its shares drop by almost two-thirds over the past year, but its longer term fundamentals seem attractive. The Aberdeen-based firm owns an innovative proprietary well-head system that is more reliable and requires less maintenance than the type its competitors use. This gives it a competitive advantage and allows it to generate much wider operating margins than the industry average.

The company is worth a closer look for investors that are willing to tolerate a little more risk.

The post Is it time to get back into Royal Dutch Shell plc, Petrofac Limited & Plexus Holdings plc? appeared first on The Motley Fool UK.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Keep on pumping

Oil & gas services provider Petrofac has the benefit of consistent revenues whatever the price of oil, as long as producers continue pumping. And Petrofac’s main customers are Middle Eastern national oil companies that don’t appear ready to give up market share, no matter how long crude prices remain low. In fact, its order backlog grew 14% year-on-year to record levels as customers raced to keep ageing wells pumping. This goes some way to explaining why analysts are forecasting a staggering 174% increase in earnings per share for 2016. Total’s North Sea Laggan-Tormore project finally coming on-line will also be a major weight off the shoulders of executives as their move to branch out into offshore projects resulted in a $400m loss. Management appears to have learned from this mistake and its focus is now onshore projects, where margins are higher and the company has the most experience.

Petrofac’s balance sheet is in an enviable position, with cash reserves of $800m and a very manageable $1bn of net debt. Dividend payments are currently yielding 5.2% and are well covered at two times earnings, suggesting they’ll be safely maintained, if not increased, over the medium term. With shares trading at a mere 7.8 times forecast earnings and a healthy dividend, I believe Petrofac is a significant bargain. Furthermore, unlike the rest of the oil & gas industry, the company has strong growth prospects, whether or not crude prices rebound quickly. At current prices, I believe Petrofac has the potential to double for investors over the medium term.

Coping with low prices

Premier Oil saw shares jump 97% last Monday after resuming trading following the reverse takeover of E.ON’s North Sea assets. Although the shares have now given up half of that increase, this remains an astute purchase and provides significant upside potential for long-term shareholders. This deal adds 15k barrels per day of production and will immediately improve cash flow. Management has reacted well to low crude prices by bringing operation costs per barrel down to roughly $16 and cutting 2016 capex spending by 32% year-on-year. While net debt remains a worrying $2.4bn, only $670m is due before 2019. With cash and credit lines of $1.2bn available, the company is well-positioned to ride out several years of low crude prices.

Once crude prices rebound, and they inevitably will, Premier is in a very good spot. Management has sold off higher-cost assets and bought up better ones at bargain prices, increasing total production by nearly 20% this year. Shares are currently trading at a very cheap nine times forecast earnings. While share prices may remain flat until oil rebounds, I believe Premier is well-positioned to increase significantly in value once crude prices trend upwards.

The post Do Premier Oil Plc And Petrofac Limited Hold 100% Upside? appeared first on The Motley Fool UK.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

A canary in the coal mine?

Some may remember the origin of the canary in a coal mine. The metaphor originates from the times when miners used to carry caged canaries while at work. If there was any methane or carbon monoxide in the mine, the canary would die before the levels of the gas reached those hazardous to humans.

Now before I type any further, I should warn readers that it can be a dangerous, not to mention expensive, game to forecast the prospects of other companies based on the reports of others. However, in this case, I think it’s worth exploring further.

While sat at my trading desk on Monday, I read a trading update from Plexus Holdings (LSE: POS) a smaller player in the Oil & Gas Related Equipment and Services sector. Now, while this company may be small, it does have some market-leading technology in the Python Sub-sea wellhead and its POS-GRIP products. These are supported by much larger companies such as BG Group, Total and Maersk. It also has a licensing agreement with major Chinese oil and gas manufacturing company Yantai Jereh Oilfield Services Group Co. to help distribute and market its POS-GRIP products to the wider global market.

Management reported that since the year-end, and in light of the weakness in the oil price, there was an increasing number of projects that were either delayed, postponed or cancelled. Accordingly, management expected earnings to be very significantly below market expectations. As you may expect, the shares fell out of bed, and despite a small recovery yesterday they’re less than half the price that they closed at on Friday.

A sign of things to come?

As we can see from the chart below, the only share under review here to outperform the FTSE 100 is Petrofac (LSE: PFC), however over a three-year period it’s on par with Amec Foster Wheeler (LSE: AMFW), both underperforming by over 50%.

It probably won’t come as any surprise to find that both companies are among some of the cheapest (on a 12-month forecast P/E basis) on the market. Both trade on multiples between seven and eight times forecast earnings, compared to the FTSE 100 forecast of around 15 times expected earnings according to data from Stockopedia.

That says to me that the market is worried that (like we have seen at Plexus) expected earnings could be subject to downgrades going forward, which in this market would surely send the shares in the wrong direction.

However, the opposite would be true should these companies manage to maintain expectations. Let’s not forget that these are businesses with size and scale, and with a steady hand they should be able to navigate the downturn.

Add into the mix the 5%-plus dividend yield on offer from both companies and it’s simple to see the attraction, despite the pessimism in the sector currently.

The post Is There Trouble Ahead For Petrofac Limited & Amec Foster Wheeler plc Following A Warning From Minnow Plexus Holdings plc? appeared first on The Motley Fool UK.

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Dave Sullivan has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Oil services provider Petrofac has weathered the storm quite well lately and saw shares rise by 10% over the past year. Petrofac’s lack of diversification through its focus on National Oil Companies (NOCs) in the Middle East and Africa has proved to be a boon as crude prices have dropped. While other servicing companies have seen revenues shrink precipitously, Petrofac’s order book grew 14% year-on-year for the first half of 2015 as customers such as Saudi Arabia, Iraq and Kuwait continued to pump oil to protect market share.

Petrofac would do well to maintain this narrow onshore NOCs focus as its Laggan-Tormore project for Total off the Shetland Islands has racked up $400m in losses and was responsible for pushing the company into the red for the first half of 2015. With this project coming to a close, the company is doubling-down on the higher margin onshore engineering projects that accounted for two-thirds of revenue last year.

With $1bn in net debt remaining level through 2015, and $850m in cash, Petrofac’s balance sheet should reassure investors. The $20.9bn backlog in orders also means that revenue will continue to grow through 2016 and there should be no further debt added to the books. With the shares trading at 8 times expected earnings and a dividend forecast to yield 4.9% in 2016, I believe Petrofac is a bargain buy for investors going forward.

Take a look

At the opposite end of the spectrum from Petrofac, BP is beginning to look like a share that investors would do well to add to their watch lists. BP’s significant downstream refining operations provided $2.3bn in underlying profits during the latest reported quarter. While further charges from the Gulf of Mexico oil spill wiped out profits for most of 2015, the end to these payouts is looking increasingly near.

BP has rebalanced for sustained low oil prices quicker than rivals and 80% of current proposed projects will break even at crude prices under $60 per barrel. This $60 p/b target is necessary for the company to balance free cash flow and expenses by 2017, but a gearing ratio of 20% means the company has room to borrow if prices don’t rebound that quickly.

Meanwhile, BP’s dividend yield of 7.8% appears to be safe for the time being as refining profits and significantly reduced capex spending provide sufficient cash cover. The elephant in the room remains oil spill-related payouts. Once these are wound down, BP will be solidly profitable even with crude prices under $60 p/b. Shares are currently priced at 15 times 2016 earnings, so it’s not exactly a bargain bin pick-up. But with dividend yields nearing 8% I definitely have BP on my watch list.

The post Is Now The Time To Buy BP Plc and Petrofac Limited? appeared first on The Motley Fool UK.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Companies such as Petrofac Limited (LSE: PFC), Hunting (LSE: HTG) and John Wood Group (LSE: WG) have coped well during 2015. All still pay dividends, for example, although Hunting has reduced and rebased the payout by what City analysts predict will be around 60% for 2016. There has been a mixed performance from the companies’ share prices.

An ongoing contrarian opportunity

A year ago, I suggested that these firms might rebound during 2015. Since then the price of oil has slipped further. But total returns for investors buying these companies’ shares on the first trading day of January 2015, and holding them until now, look like this: 

That’s a respectable performance from Petrofac and John Wood Group with Hunting letting the side down. Stock pickers buying only Hunting would have been badly burnt, but those putting an equal sum into all three firms on 2 January 2015 would have seen an overall loss of 6.5% – perhaps a lesson in the advantages of diversification.

I did wonder whether Hunting’s poorer performance might be down to a higher debt load. However, the firm seems to carry a modest debt with net gearing around 12%, or expressed another way, net borrowings running at about 29% of annual revenue. Petrofac’s debt is far higher with net gearing at around 67%, while John Wood Group carries a similar level of debt to Hunting.

The underperformance at Hunting seems to come down to a much larger plunge in profits than the other two. In 2015, Hunting’s earnings collapsed by 90%, which compares to Petrofac’s 71% fall and John Wood Group’s 28% decline.

The outlook now

I’d argue that the oil service firms are more attractive now than they were a year ago. The price of oil has been on its knees for longer and we’ve seen how operations have adjusted in each business – they’re coping and the shares have settled. Now could be a good time to jump in to capture any upside potential that develops from an improving oil price, while harvesting a stream of dividends.

Petrofac updated the market on 15 December and the firm’s chief executive said: “We have taken steps to maintain our cost-effectiveness and sustain our strong competitive position, which gives us confidence that we can continue to deliver value for both our clients and our shareholders.”

On 3 November, Hunting said: “While the Group has reported a quarter-on-quarter reduction in trading, the majority of business units continue to generate free cash flows principally through a reduction in working capital, staffing levels and margin protection. The Group is also delaying certain of its capital investment programmes…”

John Wood Group reported progress on 10 December saying: “In what is expected to be a prolonged period of challenging market conditions we are benefiting from our flexible business model and are focused on managing utilisation, delivering overhead cost savings in excess of estimates at the half year and working with customers to develop efficient solutions. Our balance sheet and cash flow generation remain strong, supporting the delivery of strategic acquisitions and our previously stated intention to increase the dividend by a double-digit percentage in 2015.“

The timing seems right

With their strong balance sheets, ongoing cash generation and their ability to acquire distressed assets from others through the industry downturn, Petrofac, Hunting and John Wood Group look like decent contrarian investment opportunities right now.

The post Why Petrofac Limited, Hunting plc & John Wood Group PLC Are Attractive Right Now appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

For example, the price of gold may disappoint in 2016 due to the impact of rising interest rates. Historically, increasing US interest rates have been negatively correlated with the price of gold. That’s largely because non-interest bearing assets (such as gold) hold less appeal when interest rates are on the up. As such, and while 2015 saw the price of gold reach a five-year low, the precious metal could struggle to record positive gains this year.

Shrewd move?

Despite this, buying a slice of Randgold Resources (LSE: RRS) could prove to be a shrewd move. That’s because, with the company’s bottom line due to rise by 21% in the current financial year, Randgold trades on a price-to-earnings growth (PEG) ratio of only 1.3.

Furthermore, Randgold is expected to increase dividends per share by 16% in 2016. This signals that the company’s management has confidence in its long-term outlook, which could act as a positive catalyst on its valuation. And while Randgold offers a yield of just 1% at the present time, its payout ratio of only 27% indicates that brisk growth in shareholder payouts could be on the cards.

Similarly, oil support services company Lamprell (LSE: LAM) also appears to be very cheap at the present time. It has a price-to-earnings (P/E) ratio of 8.6 and even taking into account the current year’s forecast fall in net profit of 2%, Lamprell still offers significant scope for an upward rerating.

Of course, the falling oil price is causing many of Lamprell’s customers to defer or cancel capital expenditure. This trend is likely to continue since even a period of stabilisation or a rise in the price of oil is unlikely to cause a return to previous levels of exploration and development spend. That said, Lamprell recently reported that its strategy to improve efficiencies is on track. And with a new CEO set to take charge this year, investor sentiment in the stock could get a boost even if the oil and gas industry continues to struggle.

Convince me!

Meanwhile, shares in Lonmin (LSE: LMI) continue to disappoint and are down by 7% already in 2016 after their fall of 99.5% in 2015. Looking ahead, Lonmin’s near-term future appears to be relatively secure after its recent $400m rights issue, although the outlook for the wider platinum producers sector remains highly uncertain.

Clearly, Lonmin is very cheap at the present time. But investors appear to be highly unconvinced about its new strategy, as evidenced by a 71% take-up of its rights issue. As such, it may take time for investor sentiment to improve. And while Lonmin’s plan to cut costs and reduce capital expenditure in the face of low commodity prices is a sound one, the likes of Randgold and Lamprell appear to offer a superior risk/reward ratio over the long run.

The post Should You Buy Lonmin Plc, Randgold Resources Limited And Lamprell Plc? appeared first on The Motley Fool UK.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Indeed, the blue-chip index soared to over 7,000 points in April and May, only to crash to sub-6,000 points in September and December during the volatility that characterised the second half of the year.

Dogs of war

And along with this volatility there was no shortage of stock-specific bad news.

Shareholders in Tullow Oil (LSE: TLW) were heading for the exit on concerns about the steady decline of the price of oil and the mounting debt pile. As the chart shows, the shares have been punished and seem to be stuck in a never-ending downtrend.

Home Retail (LSE: HOME), most famous for the Argos chain of UK-based home and general merchandise stores, hasn’t been far behind either. Why? Investors fretted that the full-year results, which management made clear depended on a profitable Christmas trading period, may not have been enough to meet already-lowered market expectations.

Joining the others in the doghouse was Amec Foster Wheeler (LSE: AMFW), the international oil, gas and mining equipment services business. The shares had broadly tracked the benchmark for most of 2015. Then management updated the market with a less-than-optimistic trading update in November in addition to a 50% cut in the ordinary dividend going forward.

Will 2016 be a turning point?

Most investors who listen to their behavioural bias will quite possibly flock to these stocks – as every bargain hunter loves… well, a bargain. However, experience has taught me that trading can often get worse before it gets better.

By way of an example, Tullow is obviously heavily exposed to the oil price. Owing to the fact that my crystal ball is broken, I wouldn’t like to be the one to call a bottom to the price. I have read, and indeed written, about the possibility that it could go as low as $10 per barrel. However, once the current demand begins to outstrip supply we should see the price of the black stuff rise. This should see the stronger players in the sector snap up quality assets on the cheap, and emerge from the volatility in far better shape than they began.

This will be the case with Amec Foster Wheeler, though I suspect the companies that are served will need to see commodity prices stabilise first before allocating capital to new projects.

I believe that management has done the right thing by managing investors’ expectations, accelerating cost controls and cutting the ordinary dividend by 50%, and by exiting markets that don’t offer acceptable returns.

Even now with the dividend cut priced-in, the shares trade on a forward price-to-earnings ratio of just over 7 times earnings and are expected to yield over 5%. It looks to me as though the market is expecting things to get worse before they get better, but for me the shares are starting to become interesting.

Home Retail is an interesting one and despite its disappointing trading, it looks an attractive bid target. Indeed there have been reports that a bid may well be forthcoming with the shares hitting lows not seen since 2012.

Though one shouldn’t buy shares just on the hope of a takeover, they currently look cheap across a range of metrics: A sub-10 times forecast earnings, a price-to-book of 0.31 and a price-to-tangible-book value of less than one give you a decent margin of safety should a bid not come to pass.

The post Are 2015’s FTSE Dogs Tullow Oil plc, Home Retail Group plc And Amec Foster Wheeler plc Set to Become The Stars Of 2016? appeared first on The Motley Fool UK.

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Dave Sullivan has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.