With the resources sector enduring a miserable start to 2016, it’s unsurprising that most investors are feeling pessimistic regarding its prospects for the medium-to-long term. After all, the glut of supply of commodities such as oil and iron ore is showing little sign of abating, with few producers cutting production and demand from China in particular showing scant sign of a major turnaround.
As such, things could realistically get worse in the coming weeks and months for resource-focused stocks such as BP (LSE: BP) and Cape (LSE: CIU) following their share price falls of 2% and 4%, respectively, since the turn of the year.
However looking a little further ahead, both companies have significant scope for upward reratings – especially since their financial performance is expected to show signs of life in the current year. For example, BP is due to report a rise in its bottom line of 6% in 2016 and yet trades on a very fair price-to-earnings (P/E) ratio of 14.8. Given its high quality asset base and relatively strong financial standing, it would be of little surprise for BP’s rating and profitability to move further upwards as the outlook for the oil price improves in the long run.
Similarly, Cape trades on a P/E ratio of just 8.8 and while its bottom line is expected to fall by 4% in the current year, this would represent a major improvement upon 2015’s expected performance. That’s because Cape is set to report a 12% decline in earnings for last year as a result of highly challenging trading conditions.
Strong income options
As well as the scope for upward reratings, both BP and Cape also offer strong income outlooks. In the case of the former, it presently yields 7.5%, although dividends may be cut since they’re expected to be higher than profit in 2016. Still, BP remains a top notch income stock for the long run. And with Cape yielding 6.3% from a dividend that’s covered 1.8 times by profit (and therefore less likely to be cut), it continues to be a relatively appealing, albeit volatile, income option.
While BP and Cape both have value and income appeal on their own, together they could represent an enticing partnership for investors seeking to gain exposure to the energy industry. That’s because they provide a degree of diversification and differentiation, with BP being a large cap oil and gas play that’s focused on production and Cape being an industrial services provider that focuses on maintaining assets in the energy and resources sector throughout their lifecycle.
Clearly, Cape is dependent upon the success and profitability of the resources sector, while BP depends on the oil price in the long run in order to grow its profitability. Therefore, neither stock is immune from further oil price falls, but with their shares outperforming the wider index and many of their sector peers already in 2016, now could prove to be an opportune moment to buy a slice of both of them.
