3 Resources Stocks I’m Avoiding: Gulf Keystone Petroleum Limited, Cairn Energy PLC And IGAS Energy PLC

These 3 resources stocks don’t appear to offer compelling risk/reward ratios: Gulf Keystone Petroleum Limited (LON: GKP), Cairn Energy PLC (LON: CNE) and IGAS Energy PLC (LON: IGAS).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With any investment, the risk/reward ratio has to be favourable in order to take the plunge and buy. If the risks outweigh the potential rewards then it’s always a good idea to sit back and wait for either a keener share price or a better opportunity elsewhere. With the resources industry being relatively risky at the present time, it’s clear that the possible reward on offer must be significant in order to tempt any investors to spend their hard-earned cash on a slice of an incumbent business.

While some resources companies fulfil that criteria, others don’t. Although they may prove to be excellent long-term investments, the timing may not be quite right at the moment. For example, northern Iraq/Kurdistan-focused oil producer Gulf Keystone Petroleum (LSE: GKP) has a superb asset base, with low cost of operations and has the potential to deliver excellent levels of profitability in the coming years.

However, Gulf Keystone’s location is a major risk for investors, since it operates within a region where political uncertainty is high. Undoubtedly, the company has done a stellar job of maintaining its production levels amidst difficult trading conditions, but the current valuation doesn’t appear to be sufficiently enticing to warrant purchase at the present time. And with Gulf Keystone also having a huge number of debtors, its price-to-book value (P/B) ratio of 0.6 continues to lack appeal.

Wait and see

Similarly, Cairn Energy (LSE: CNE) also has excellent long-term potential, with its drilling programme in Senegal yielding positive results so far. Furthermore, it remains fully-funded from existing resources and expects to take its North Sea developments through to free cash flow generation by 2017.

However, Cairn Energy is forecast to post a pre-tax loss of £180m in 2015 and a pre-tax loss of £82m in 2016. While this is to be expected for a company that’s still focused on exploration rather than production, investors are becoming increasingly nervous regarding the prospects for oil after its slump to around $30 per barrel. As such, it seems likely that investor sentiment towards profitable businesses will remain stronger than towards those that are using up cash. Therefore, due to a nervous market, Cairn Energy may be a stock to watch rather than buy at the present time.

Meanwhile, shares in oil and gas company IGAS (LSE: IGAS) have fallen by 10% already this year. It has come under scrutiny from the market due to it having a net debt position of £64m and widening losses that increased from £3.8m in the first half of last year to £19.3m in the current year.

Of course, writedowns and impairments contributed significantly to this increase in losses. But with investors already being nervous regarding the prospects for oil and gas companies, it may be prudent to invest in stocks that have a more stable financial footing. That’s despite IGAS having a P/B ratio of just 0.4, although with the price of oil having the potential to fall further, additional asset writedowns can’t be ruled out.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

10% dividend growth! 2 FTSE 100 stocks tipped to supercharge cash payouts

These FTSE 100 stocks have strong records of dividend growth. And they're expected to keep on delivering, as Royston Wild…

Read more »

Investing Articles

Down 17% in a month and yielding 7.39%! Is this FTSE 100 share a screaming buy for me?

When Harvey Jones bought Taylor Wimpey last year he thought this FTSE 100 share was a brilliant long-term buy-and-hold. Has…

Read more »

Investing Articles

Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

Is it realistic to put £20k in an ISA now and earn over half that amount every year in passive…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

If I could only keep 5 UK stocks from my portfolio I’d save these

Harvey Jones is running through his portfolio of top UK stocks to see which ones he couldn't bear to do…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

I’m aiming for a million buying unexciting shares!

By investing regularly in long-established, proven and even rather dull businesses, this writer plans to aim for a million. Here's…

Read more »

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »