The resources sector is undoubtedly cheap at the present time, with a number of its constituents trading at vastly lower prices than they were a year ago. This creates an opportunity for bargain-hunters to pick up shares at distressed prices and, while their performance may be highly volatile, there is a good chance that capital gains will result over the long run.
Of course, cheap prices are not only available to private investors. Companies are also able to take advantage of them through M&A activity and, with a number of resource-focused stocks having posted huge share price falls in the last year, a number of them could become bid targets.
For example, Ophir Energy (LSE: OPHR) has seen its share price surge by almost 20% in the last week as it has become a possible bid target. Apparently a number of potential suitors are circling the business, which had previously seen its shares fall by over 40% since the turn of the year as investor sentiment weakened towards the entire sector.
Clearly, Ophir Energy’s low valuation is a key selling point, with it trading on a price to book value (P/B) ratio of only 0.5. This indicates that there is considerable upside, although the company’s financial performance is due to remain weak over the next two years. Despite revenue set to rise at least partly as a result of the purchase of Salamander Energy, Ophir’s bottom line is forecast to remain heavily in the red. With investors being rather nervous about the financial standing of resource-focused companies, it may therefore be prudent to look elsewhere even though there is the prospect of a bid for Ophir.
Petrofac (LSE: PFC) has remained profitable throughout the recent turbulence in the oil sector, with the support services company expected to increase its bottom line by 177% in the next financial year following two very disappointing years. This puts it on a forward price to earnings (P/E) ratio of just 8.6, which indicates that its shares offer a very wide margin of safety.
In addition, Petrofac offers a very enticing yield of 5% and, with dividends due to be covered 2.3 times next year, this provides evidence of the company’s financial strength. And, while shareholder payouts may be pegged back by an uncertain outlook, if trading conditions were to improve then Petrofac has sufficient headroom to increase them at a brisk pace, thereby making it a relatively appealing income play. Certainly, capital expenditure spend across the industry is coming under pressure but, with such a low valuation, potential problems appear to be adequately priced in.
Meanwhile, Rockhopper Exploration (LSE: RKH) has been in the news of late due to its £57m deal to purchase Falkland Oil & Gas. The deal seems to make sense for both companies since their interests are complementary and it also improves their financial outlook at a time when concerns are being raised by investors regarding the cash piles of a wide range of exploration companies.
Furthermore, it provides additional diversification for Rockhopper, with it now being a dominant force in the potentially lucrative Falklands Island region, as well as having interests in Europe, too. With Rockhopper trading on a P/B ratio of just 0.5 and it paying a premium of just 11% to Falkland Oil & Gas’ share price, it appears to offer good value for money and, while risky, could prove to be a sound long term buy.
