For investors in the oil sector, it is difficult to know whether to stick or twist. On the one hand, the outlook for oil companies is rather downbeat, with various industry experts warning that oil prices are unlikely to recover to anything like their 2014 level anytime soon. As such, it seems probable that profits will come under more pressure and that share prices could weaken in the short run.
However, there is also the argument that oil stocks represent a great long term buy. That’s precisely because the outlook for the sector seems challenging and, as such, there are keen valuations that investors looking many years down the line can take advantage of.
Furthermore, in the case of Genel (LSE: GENL), its investors must decide if its operating outlook is too uncertain to maintain a stake in the company. Certainly, Genel’s operations in Iraq/Kurdistan are hugely appealing and, were it not for conflict in the region, the company would undoubtedly be trading on a much higher valuation. And, just as the outlook for the oil price is uncertain, the political situation in Iraq is very volatile and fluid, with a quick and peaceful resolution seemingly unlikely.
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Despite this, though, Genel seems to be a stock worth taking a chance on. That’s because it trades on a price to earnings growth (PEG) ratio of just 0.3, which indicates that it offers growth at a very reasonable price. Furthermore, Genel’s price to book (P/B) ratio is just 0.6, which indicates that even if its net asset base is written down by 40%, it will still be relatively cheap.
In fact, it’s a similar situation for Nostrum (LSE: NOG). While it does not operate in areas with such a challenging political outlook, its future is also rather uncertain. Part of that is the fact that Nostrum posted a major fall in profit last year, and so investors are seemingly unsure about its ability to turn a falling bottom line into one that delivers growth. That’s even though Nostrum is expected to do so next year, following an anticipated further fall of 95% in its pretax profit (from £200m in 2014 to just £10m in the current year). As such, and while it remains a relatively high risk play, Nostrum’s PEG ratio of 0.1 and P/B ratio of 1.9 indicate that there is a sufficient margin of safety to accommodate such risks.
Meanwhile, the outlook for Roxi Petroleum (LSE: RXP) remains very uncertain, too. Its move to profitability in its most recent results was due to a reversal of a provision rather than a significant improvement in its trading. And, with the price of oil in its main market, Kazakhstan, falling well below the official oil price, even an increase in production capacity may not be enough to produce more sustainable profitability.
However, with it having a sound financial base, strong investor sentiment and a flagship asset (BNG) that has considerable long term potential, it appears to be worth buying on a P/B ratio of 2.1. Clearly, as with Genel and Nostrum, its shares are likely to remain volatile but, for long term investors, all three stocks appear to be worth taking a chance on.
