The energy sector continues to be a place which offers tremendous long term growth potential, with a growing world population and finite resources leading to the prospect of high levels of profitability for investors.
Clearly, the oil price decline has hit the industry extremely hard and has hurt the top and bottom lines of nearly all of its incumbents. However, valuations have also fallen and for investors considering buying shares in energy companies, the oil space remains a very appealing place to buy shares on a relative basis.
For example, Tullow Oil (LSE: TLW) is seeking to adapt its business model to a lower oil price environment through changes such as making cost savings. In fact, it is seeking to generate around $500m in cost savings over the next three years and, furthermore, is becoming increasingly disciplined with regard to its capital allocation. It is also seeking to increase its total production level and, encouragingly, plan for a return to higher price oil by building up a portfolio of higher margin oil prospects through highly focused exploration activities.
In terms of its valuation, Tullow Oil has huge appeal. It offers a very wide margin of safety, as demonstrated by its price to earnings growth (PEG) ratio of just 0.1. And, with a greater focus on producing strong cash flows from its West Africa projects, Tullow Oil appears to have the financial strength to see through the current dip in oil prices and emerge a more efficient and sound business for the long term.
Similarly, Amec Foster Wheeler (LSE: AMFW) also has huge investment appeal, with its integration progressing smoothly and being on-track to deliver $125m in cost savings. Its multi-market model provides diversity and is a key reason why net profit declined by just 8% last year while many oil-focused companies saw much larger slumps in their financial performance.
Looking ahead to next year, Amec Foster Wheeler is due to return to bottom line growth, thereby making its price to earnings (P/E) ratio of 11.1 seem good value for money. This, alongside a well-covered yield of 5.4%, makes it an excellent long term buy especially for investors seeking a relatively low-risk exposure to the oil industry.
Meanwhile, alkaline fuel cell producer AFC Energy (LSE: AFC) continues to make excellent progress with its 2015 Power-Up programme. Earlier this week it reached milestone ten of eleven when it successfully commenced temporary operation of an entire tier of eight fuel cell cartridges on its KORE system, where it achieved a maximum output of over 40kWe.
Looking ahead, milestone 11 is due to be reached before the end of the year and will involve testing an output of 240kWe. Should this be accomplished, AFC Energy can move forward with its strategic goal of developing several projects in the international power market in 2016 and beyond. As such, now could be an excellent time to buy a slice of the business which, while relatively risky, continues to have long term growth potential within the clean energy space.
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Peter Stephens owns shares of AFC Energy. The Motley Fool UK has recommended Tullow Oil. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
