With the resources sector seemingly in free fall in recent weeks, many investors are unsurprisingly lukewarm about buying shares in any company focused on that space. However, buying while prices are low could provide significant capital growth potential, provided the company in question has a sound long-term strategy and outlook.
One stock that appears to have both is Nostrum (LSE: NOG), which reported this week. Nostrum said it believes it will prosper whether oil prices rise or not, since it unveiled a range of measures that include means of preserving cash and also a new hedging agreement.
In fact, Nostrum has purchased a new hedge using the proceeds from the previous hedge, with a strike price of $49.16 covering almost all of the company’s exported liquids in 2016 and 2017. And with production forecast to be around 45,000 barrels of oil equivalent per day (boepd) in 2016, up to 60,000 boepd in 2017 and as much as 100,000 boepd in 2018, Nostrum’s medium-term profit outlook remains relatively upbeat.
With Nostrum forecast to increase its earnings per share (EPS) to as much as 33.7p in 2016, it trades on a forward price-to-earnings (P/E) ratio of just 8.9. This, alongside the potential stability provided by its hedge, indicates that now is a good time to buy a slice of the business for the long term.
Profits growth
Also releasing an encouraging update this week was Acacia Mining (LSE: ACA), with the gold mining company stating that production volume rose by 2% in 2015 and that further increases are expected in 2016. In fact, Acacia expects gold production to reach 780,000 ounces in 2016, up from just over 730,000 ounces in 2015. With cost savings to come through as a result of reductions made at the Bulyanhulu project, Acacia’s profitability is set to rise from £26m in 2015 to £109m in 2016 on a pre-tax basis.
Such strong profit growth puts the company’s shares on a price-to-earnings-growth (PEG) ratio of 0.1, which indicates that capital gains could lie ahead. And with the price of gold being supported by the flight of investors to perceived safer assets, the prospects for Acacia in 2016 and beyond are encouraging.
Wait and see
Meanwhile, Genel Energy (LSE: GENL) released a disappointing update this week. The northern Iraq/Kurdistan-focused oil producer missed production targets for 2015 and warned that revenue and production for 2016 will decline dramatically due to falling oil prices. Of greater concern for investors though, is that Genel’s forecast revenue for 2016 is based on an oil price of $45 per barrel, which is much higher than the current sub-$30 per barrel price. As such, there’s scope for further downgrades if the oil price doesn’t rise in the coming months.
As well as the problems associated with a low oil price, Genel has continued challenges in receiving monies owed to it by the Kurdistan Regional Government (KRG). In fact, it’s owed $405m and there can be no guarantee that all the outstanding amount will be repaid.
On the plus side, Genel’s cost base remains highly competitive and it’s able to break even with oil priced at just $20 per barrel. And with a high quality asset base it continues to have significant long-term potential. However, with the prospect of a further downgrade to 2016 revenue resulting from a sustained low oil price, it may be best to watch, rather than buy, Genel at the present time.
