While the falling oil price has caused a decline in profitability forecasts across the energy sector, it has also meant that valuations in that space have become far more appealing. And, following Shells 47bn bid for BG, it would be of little surprise for there to be further sector consolidation moving forward. With that in mind, here are four stocks that offer good value and relatively bright futures, which makes them potential candidates for bid approaches.
Clearly, Tullow Oil (LSE: TLW) is a hugely volatile stock that. For example, in the last five years it has posted vast gains in its bottom line (notably 795% in 2011), but also considerable declines (for instance 73% in 2013). As such, it is not a company for the faint-hearted but, for a potential suitor, it offers a potent mix of relatively appealing assets and the prospect of stunning growth moving forward.
In fact, Tullows bottom line is forecast to rise by 92% next year, which given the outlook for the oil price would be an excellent result. And, with its shares having fallen by 60% in the last year, Tullow now has a price to earnings growth (PEG) ratio of just 0.2, thereby making it a real prospect for a bid.
Following a major write down in the value of its asset base, Premier Oil (LSE: PMO) slid into the red last year. Clearly, this is hugely disappointing for investors in the company and, as such, sentiment towards Premier Oil remains weak. In fact, Premier Oils share price has fallen by 50% in the last year and, despite this, it still trades on a forward price to earnings (P/E) ratio of 31.4.
Although this is rather rich, Premier Oil is expected to bounce back next year, with earnings growth of 114% being forecast. This means that its PEG ratio is just 0.1, which alongside its strong asset base, makes Premier Oil a very appealing bid target.
Unlike many companies that operate within the energy space, Petrofac (LSE: PFC) has thus far delivered relatively stable operating results. For example, it has increased its bottom line in four of the last five years, with it falling by a relatively small 11% last year. This relative stability could appeal to a potential suitor and, while Petrofacs profit is due to fall this year by 23%, it is forecast to bounce back next year with growth of 19%. As such, the companys medium term outlook remains strong.
And, with Petrofac having invested heavily in capital items in recent years, its balance sheet provides the ingredients necessary from which to generate strong growth moving forward. Certainly, its dividend yield of 3.9% appeals to investors, but it also highlights the companys financial strength, which makes it an attractive bid target.
Over the last five years, Wood Group (LSE: WG) has posted average gains in its bottom line of 16%. Thats an impressive rate of growth and, even though the oil price is now much lower, the companys earnings are still expected to fall by just 2% this year, and 3% next year. Thats a very appealing performance given the outlook for the wider sector and could be viewed as a major plus by rival firms.
In addition, Wood Group remains a very solid business which has a balance sheet that is not overleveraged. Furthermore, it has a yield of 3%, which is an indicator of its financial health, as well as its relatively appealing valuation. In fact, Wood Group trades on a P/E ratio of just 12.6, which makes its shares a steal at the present time for me.
Of course, Tullow, Wood Group, Petrofac and Premier Oil aren’t the only companies that could be ripe for takeover. However, finding the best stocks at the lowest prices can be challenging when work and other commitments get in the way.
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