Although now may not seem to be a good time to buy shares in oil-focused stocks, for long term investors it may be the perfect moment to do so. That’s because, while industry experts are predicting that the oil price will not recover to $100+ per barrel for a number of years, the truth is that its future direction is a known unknown. In fact, just a year or two ago, predictions were being made by many so-called experts, saying that oil could be at over $150 per barrel in a relatively short space of time.
However, the key thing for investors in oil-focused companies is that their valuations appear to not only reflect an oil price at the current level, but further falls, too. In other words, they offer a very wide margin of safety, which indicates that there is significant upside and limited downside. As such, the risk/reward ratios of a number of oil-focused stocks are hugely appealing at the present time.
For example, industrial services provider, Cape (LSE: CIU), trades on a price to earnings (P/E) ratio of just 9.3. That is exceptionally low – especially when you consider that its bottom line has grown rapidly in the last two years and, looking ahead, is expected to fall by just 2% over the next two years. As a result, there is a significant prospect of an upward rerating to Cape’s valuation and, with its shares currently offering a yield of 5.5% from a dividend that is covered twice by profit, it appears to be a great value and super income stock.
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Meanwhile, oil producer, Premier Oil (LSE: PMO), is a somewhat riskier investment than Cape. That’s because its financial performance is more closely linked to the price of oil and, looking ahead, further falls in the price of oil could lead to additional asset write downs. However, this situation appears to be fully priced in to Premier Oil’s share price, with the company having a price to earnings growth (PEG) ratio of just 1.3. This indicates that, while it is high risk, high returns could be on offer, too.
Similarly, Tullow Oil (LSE: TLW) remains unpopular among investors due to its $2bn pretax loss of last year. As such, its shares have fallen out of the FTSE 100 and slumped by 18% this year. However, they appear to be extremely attractively priced at the present time, with Tullow trading on a PEG ratio of just 0.4. This indicates that, while asset write downs could persist over the medium term, the market is pricing in further difficulties and, for long term investors, this makes Tullow very enticing on a risk/reward basis. In fact, it would be of little surprise if, based on its current valuation, Tullow Oil was approached by a larger peer for a potential takeover.
