The resources sector is rather like a casino at the moment, with the share prices of its constituents moving up and down in dramatic, wild swings. As such, it is understandable that many investors are put off investing in oil and gas, as well as mining, stocks.
Looking ahead, further volatility appears to be a near-certainty since the market is nervous regarding the outlook for the resources market. And, with China continuing to post a slowdown in its GDP growth rate and US interest rate rises on the horizon, it would be of little surprise for the prices of commodities such as oil, iron ore and coal to come under increasing pressure.
However, with global demand for energy forecast to rise by 30% in the next 20 years, demand for commodities is expected to remain high. Although renewables will be used more extensively than is the case today, fossil fuels are still expected to be dominant within the energy space by 2035. As such, investing now in good value resources companies while exploration spend and capital expenditure across the industry is falling seems to make sense.
One stock which is very cheap at the present time is Premier Oil (LSE: PMO). It trades on a price to book value (P/B) ratio of just 0.36, which indicates that it has a sufficiently wide margin of safety to merit investment despite the major challenges which it faces. Chief among these is a loss-making forecast for the current year, which would equate to back-to-back years of a red bottom line. And, while Premier Oil is expected to return to profit next year, there is a reasonable chance that guidance will be lowered if the oil price comes under continued pressure.
Furthermore, Premier Oil has exposure to the relatively high cost North Sea and, as such, it may fall further out of favour with investors as a lower sustainable cost becomes an even more important driver of returns in future years. Despite this, a low valuation still has appeal, although things could get worse before they get better for the company.
It’s a similar situation with Glencore (LSE: GLEN). It has endured a very challenging period of late, with doubts surrounding its financial standing causing its share price to come under extreme pressure and fall by 65% in the last year.
However, like Premier Oil, Glencore has a very low valuation which appears to sufficiently take into account its short term challenges. For example, it trades on a price to earnings growth (PEG) ratio of just 0.6 and, as such, appears to offer growth at a reasonable price. That’s despite its share price rising by 23% since the start of October as investor sentiment has picked up strongly in the wider resources sector.
Certainly, its outlook is likely to change depending on the prices of commodities but, for less risk averse investors who are not seeking a dividend in the short run, it could be a worthwhile, albeit volatile, purchase for the long term.
Meanwhile, Antofagasta (LSE: ANTO) appears to be performing relatively well despite a weaker copper price putting pressure on its financial performance. In fact, it is forecast to increase its bottom line by as much as 64% next year following a number of challenging years, and this great improvement in its performance has the potential to upgrade investor sentiment in the stock.
In addition, Antofagasta’s robust balance sheet and cash generative operations mean that it is relatively well-placed to cope with the current low in the copper price cycle. And, with the cash generated from the sale of its water business, it may be able to invest at a time when its peers are struggling to a greater degree, thereby placing it in a stronger position for when there is an improved outlook in the wider resources sector. As such, it appears to be a sound buy for the long term.
