The last few months have been challenging for oil and gas stocks. Fears surrounding the prospects for the world economy have caused investor sentiment to weaken, which has led to major falls in valuations across the industry.
For example, the Gulf Keystone Petroleum (LSE: GKP) stock price has moved over 25% lower in the last two months. With the potential for further volatility, could it be worth buying now alongside an industry peer which released a positive update on Tuesday? Or, are the risks still too high given the uncertainty surrounding the prospects for the industry?
Upbeat outlook
The company in question is oil and gas producer, developer and explorer Nostrum (LSE: NOG). It released an operational update for the nine months to 30 September 2018, with its average sales volumes during the period being 30,523 boepd (barrels of oil equivalent per day). This means that revenue for the first nine months of the year is expected to be $6m higher than in the previous year at $310m.
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The company has made encouraging progress with its operational activities. In the third quarter, it saw an increase in sales volumes due to the successful testing of Well 40. It has now been shut as the company waits for the extension of the exploration licence, while it is close to completing the next two production wells in the Biski reservoir. This is expected to boost production, while it is targeting commissioning of GTU3 to start in the final quarter of the year.
With Nostrum forecast to increase its bottom line by 120% next year and it having a price-to-earnings growth (PEG) ratio of 0.1, it seems to me to offer an enticing risk/reward ratio for the long term.
Growth potential
Gulf Keystone Petroleum’s share price performance has clearly been highly disappointing in recent months. The company is relatively small, and lacks the diversity of some of its larger peers. Given its exposure to a region which contains significant geopolitical risks, I think its share price could remain highly volatile – especially if the wider oil and gas industry experiences an uncertain future.
The company, though, appears to me to offer growth potential. It has been able to deliver relatively sound operational performance, and this is expected to translate into profit growth in the next financial year. Its bottom line is forecast to rise by 62%, which puts it on a PEG ratio of 0.1. This suggests that while risky, its return potential could also be high.
The oil price may come under further pressure in the coming months, and this could act as a drag on the GKP share price. However, with the prospect of supply reduction due to sanctions and geopolitical risks across a number of OPEC countries, the future for the oil price may be more robust than investors are pricing in. As such, and while potentially only of interest to less risk-averse investors, I believe the stock could deliver a recovery over the long term.
