The old adage ‘sell in May and just walk away’ has certainly been true in 2015. The FTSE 100 was standing at 6984 points at the end of May and today is trading at just 6270 points. That’s a fall of 714 points in less than three months and represents a fall of over 10% in value.
Clearly, the major reason for the index’s fall is concerns about the global growth outlook. China, for example, is experiencing a challenging transition from capital expenditure-led to consumer growth-led economy and, with its growth rate slowing, is demanding fewer natural resources. One effect of this has been a steady decline in demand for oil which, when combined with a glut of supply, has caused the oil price to post vast losses. And, in turn, oil companies have seen profits deteriorate in the last couple of years.
However, there is room for optimism among investors, since a number of oil stocks are set to turn around disappointing performance. For example, Soco (LSE: SIA) is forecast to turn around two years of declining profitability to post net profit growth of 131% in the current year, followed by further growth of 73% next year. This is likely to stimulate investor sentiment in the stock following its share price decline of 69% in the last year and, despite its excellent earnings outlook, Soco appears to be undervalued at the present time.
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For example, Soco trades on a price to earnings growth (PEG) ratio of just 0.2 and this indicates that it comes with a relatively wide margin of safety. Therefore, if it is able to meet its optimistic guidance, Soco’s share price could move upwards at a rapid rate.
The same, though, may not be true for Enquest (LSE: ENQ). It is expected to post a decline in earnings of 99% in the current year before making a loss in 2016. Certainly, it has benefited from successfully hedging the price of oil in recent months but, with it operating from the North Sea where costs tend to be higher than in other parts of the world, it seems probable that operating costs will exceed revenue over the medium term. As such, and even though production is due to rise over the short to medium term as a result of the Alma/Galia fields coming onstream, Enquest does not appear to have a clear catalyst to push its share price higher.
Similarly, North Sea operator Xcite Energy (LSE: XEL) has a very impressive asset base and, were it not for the savage oil price fall, would likely be a very enticing long term prospect. However, with costs becoming increasingly important in the minds of investors and profitability being more highly prized than ever, Xcite may struggle to persuade investors that it is a better buy than other exploration companies and producers which may have a more impressive outlook for the next couple of years.
And, with Xcite due to remain loss-making in the next two years and the oil sector being a ‘buyers’ market’ at the present time, a lack of a clear catalyst is likely to mean underperformance versus a stock such as Soco, which has strong forecasts and a great valuation. As a result, Soco appears to be the best buy of the three companies at the present time.
