With the oil price showing little sign of making strong gains, many investors may feel as though there is little reason to increase their exposure to the sector. After all, with it struggling to make any sustained rally from less than $50 per barrel, there seems to be more chance of a fall rather than rise in the oil price in the coming months.
In fact, it appears as though the market is in broad agreement with this viewpoint. Valuations across the sector have fallen dramatically and, in many cases, have already factored in further falls for the oil price. As a result, there are considerable margins of safety on offer which mean that if the oil price does fall, then the share price performance of such companies may be better than expected. Similarly, if the oil price either stabilises or increases, then their shares seem to have significant upside.
For example, oil services company Amec Foster Wheeler (LSE: AMFW) has seen its share price fall by 32% in the last year. And, while its bottom line declined by 8% last year and is expected to fall by a further 12% in the current year, the company’s net profit is due to return to growth next year. Certainly, it may only be 3% growth but, in the current oil sector environment, investors are likely to welcome such news and could demand a higher share price.
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Clearly, Amec Foster Wheeler’s valuation has taken a major hit and, looking ahead, its forward price to earnings (P/E) ratio of 10.5 indicates that its shares could move upwards at a rapid rate. Furthermore, with a dividend yield of 5.7% which is covered 1.7 times by profit, the company remains a very appealing income stock which could be a great choice for income-seeking investors.
Similarly, Exillon Energy’s (LSE: EXI) share price has tumbled by 29% since the turn of the year, although in the last month it has risen by 10%. This seems to be a rather excessive fall in its valuation, since Exillon Energy has remained profitable in each of the last three years and has, in fact, been able to increase net profit from £7.5m in 2012 to over £33m in 2014. That’s a rise of 4.4 times in just two years, which indicates that Exillon is performing exceptionally well as a business.
Furthermore, with earnings set to continue their rapid increase in the next two years, Exillon Energy’s share price could gain a boost from improving investor sentiment. And, with it having a forward P/E ratio of just 3.2, there is plenty of scope for this to happen.
Meanwhile, Gulf Keystone Petroleum (LSE: GKP) has also had a troubled recent past, with its share price falling by 59% since the turn of the year. This comes after a challenging 2014 which saw the company’s share price fall by 58% for the calendar year. Despite this, Gulf Keystone Petroleum still trades at a premium to net asset value, with its shares having a price to book value (P/B) ratio of 1.2. Although this is not a high level, a number of its resources peers are now trading at a discount to net asset value due to the uncertain outlook for the sector.
Looking ahead, Gulf Keystone Petroleum is expecting to receive regular payments for exported oil. Although this is clearly positive news, there is still a question mark over the amount already owed to the company by the Kurdistan Regional Government (KRG). And, while its shares may be cheap on an absolute basis, there seems to be better value, less risk and better financial performance available elsewhere.
