While the resources industry has endured a challenging period in recent years, there may be cause for optimism. OPEC has cut production and may seek to do so for the duration of 2017. This could help Oil & Gas companies such as BP (LSE: BP) to increase their profitability. Meanwhile, the price of gold may rise if uncertainty builds and inflation moves higher. In such a scenario, gold miners such as Polymetal (LSE: POLY) could be worth owning for the long term.
A changing business
In the case of BP, a rising oil price is not the only potential catalyst which may push its share price higher. The company is undergoing a transitional period which could see it return to its former glory. It has now completed the payouts for the 2010 Deepwater Horizon oil spill, which should boost its cash flow and allow it to invest in growth projects.
Since the cost of investment in developing new assets within the oil industry is now lower than it was a few years ago, BP may be able to better position itself for long-term growth than it previously would have been able. This could lead to rising profitability and cash flow which could have a positive effect on its shareholder payouts.
Currently, BP yields just under 7%. If oil prices remain robust, its dividend payments appear to be sustainable, since they are forecast to be covered fully by earnings in 2018. And with its shares trading on a price-to-earnings growth (PEG) ratio of just 0.5, their capital growth prospects could bring retirement a step closer for long-term investors.
An opportune investment
Buying gold mining shares such as Polymetal could prove to be a shrewd move in the long run. It reported encouraging results on Wednesday which showed a rise in revenue of 10% and an increase in adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of 15%. Its financial performance was aided by an increase in the average realised prices of gold and silver. They increased by 8% and 11% respectively versus 2015, and more gains could lie ahead.
With Donald Trump promising higher spending and lower taxes, the US budget deficit and its debt levels are likely to increase over the coming years. This may lead to higher inflation, as well as greater uncertainty regarding the sustainability of the world’s largest economy. After all, a debt-to-GDP ratio in excess of 100% appears to be somewhat high. In such a scenario, gold could become an increasingly popular asset due to its qualities as a store of wealth and defensive characteristics.
With Polymetal trading on a PEG ratio of 1.1, it seems to offer excellent value for money given the outlook for gold. And with it raising its dividend payout ratio to 50% from 30% of earnings in Wednesday’s update, it could even become a more enticing income play in the long run.
