The energy and resources sectors have endured a horrific year, with many of their constituents posting major share price falls. Of course, the key reason for this is a slump in the price of a wide range of commodities such as oil, and this has led many investors to consider whether the global energy mix is now set to change at a rapid rate.
In other words, while energy demand is forecast to rise in-line with an increasing world population and the industrialisation of the emerging world over the next few decades, the proportion generated by cleaner methods may be higher than previously thought. As a result, many investors are now seeing the glut in supply of a number of resources and concluding that growth is more likely to positive in cleaner, greener fuels in future years.
One company which has benefitted from this shift in investor sentiment is alkaline fuel cell producer AFC Energy (LSE: AFC). Its share price has risen by 220% since the turn of the year as it has gradually progressed through a number of its key milestones as it seeks to complete its 2015 Power Up programme.
Further positive news was released today, with AFC signing a Heads of Agreement with Dutco to jointly fund and develop a business plan for the large-scale deployment of AFC’s fuel cells across the Middle East. This could prove to be a strategically important region for the company and could contribute significantly to its plan for 1GW of fuel cell development by 2020.
Clearly, AFC is a relatively high risk business which lacks the size, scale and financial stability of large energy companies. However, it appears to offer high potential rewards and, with it turning a profit in its most recent half-year, appears to offer a more viable business opportunity than many equivalent-sized oil or mining exploration companies. As such, for less risk averse investors it could be a sound long term buy.
Of course, oil and other fossil fuels are still very likely to be in-demand in the coming years and the fall in their prices could be reversed. Moreover, the valuations on offer within the industry indicate that there are significant margins of safety on offer. However, there are also a number of resources companies which may struggle to post strong share price gains over the medium term.
One example is Ophir Energy (LSE: OPHR). It is expected to post a loss in the current year and, while its share price fall of 51% in the last year appears to price this in, 2016 is also due to be a disappointing year for the business. That’s because, although losses are due to narrow, Ophir is still expected to be in the red. This, alongside the loss of a major financial backer earlier this year and a disappointing recent drilling update, means that AFC could be a better buy.
Similarly, Vedanta (LSE: VED) is also enduring a challenging financial period, with pretax profit for 2016 expected to be less than a fifth of its 2011 level. Despite this, Vedanta’s share price appears to be rather highly valued, with the company trading on a forward price to earnings (P/E) ratio of 21.6. As such, and with a number of other oil and mining companies offering significantly lower ratings, Vedanta does not hold considerable appeal as a purchase at the present time.
