I think Amerisur Resources (LSE: AMER) is a classic value investment. Over the past three years, the company has achieved steady growth, bucking broader oil industry trends.
However, despite its improving fundamentals, the share price has languished. But I think it’s only a matter of time before the market realises this mistake and Amerisur shares wake up.
Pushing ahead
Since 2014 Amerisur, like all its peers in the sector, has been hobbled by low oil prices. But this hasn’t deterred management. The company has continued to push ahead with its plans for growth. It’s made select acquisitions where it believes there’s value to be found, and opened a key oil transport pipeline, which has significantly increased the average profit margin on each barrel of oil produced and sold by the enterprise.
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City analysts believe Amerisur will report earnings per share (EPS) of $0.023 for 2018. That might not sound like much, but it indicates year-on-year earnings growth of 110%, and puts the stock on a forward P/E of just 8.5.
In my opinion, this low valuation seems to suggest that the market has given up on the business and leaves no room for positive surprises. In fact, after adjusting for the £29m (2.4p per share) of net cash on Amerisur’s balance sheet, the cash-adjusted P/E falls to just 8. This bargain basement valuation appears to give a wide margin of safety for investors, and any slight improvement in Amerisur’s fortunes could result in a substantial increase in the share price.
Double in value
Another oil stock I think is set to outperform in 2019 is Gulf Keystone Petroleum (LSE: GKP).
It’s an understatement to say that this company has a mixed history. The business was forced to conduct a major restructuring in 2015 as, drowning in debt, falling oil prices crippled the business. However, after the reorganisation, Gulf Keystone is now better positioned for growth than it has ever been. The balance sheet is flush with cash ($121m at the last count), and a focus on streamlining operations has helped improve profit margins.
City analysts believe the company is set to report EPS growth of 341% for 2018, indicating EPS of $0.27, and a P/E of 8.6. Further growth is expected in 2019. Analysts believe EPS could hit $0.40 by the end of the year, up 46% and giving a forward P/E of 5.9. Once again, I think this multiple is too conservative.
Considering that the rest of the oil sector is trading at a median forward P/E of 11, Gulf Keystone looks to be undervalued by around 50% compared to peers. If the company can hit City forecasts for 2019, and successfully put its mistakes behind it, I see no reason why the shares cannot double from current levels.
If Gulf Keystone outperforms expectations, then the shares could rise even further. With such a large margin of safety on offer, I think investors will most likely see a positive performance from this stock in 2019.
