Do today's results make this resources stock a buy?


Engineering and contracting company to the oil and gas industry, Lamprell(LSE: LAM), has soared by 8% today after releasing full-year results that provide clues as to the company's future performance and whether it's worth buying ahead of an oil and gas sector peer such as BP(LSE: BP).

Lamprell's six months to 30 June have been tough. The difficulties facing the oil and gas industry in terms of low pricing have continued. This has caused Lamprell to record a loss from continuing operations of $4.4m. This was despite a high level of activity from contracts that were won up to two years ago. They boosted Lamprell's revenue from $351m in the first half of 2015 to $451m in the first half of 2016. However, a fall in gross margins from 11.6% to 6.1% means that Lamprell's bottom line is now a red one.

Looking ahead, Lamprell has turnaround potential. Its new CEO is likely to make significant changes to the business and there could be a relatively high degree of uncertainty in the near term. Added to this is the prospect of further weakness in the price of oil. Although oil has rebounded strongly in 2016 from its January lows of sub-$30 per barrel to reach up to $50 per barrel, there's no guarantee that this trend will continue.

Size, scale and stability

As a result, it makes sense to pick oil-exposed companies that offer size, scale and stability. Furthermore, companies that are set to increase their profitability through the most difficult period in the sector's recent history also have appeal, since they generally equate to lower risk for investors.

One such stock is BP. Its bottom line is due to increase by 141% in the next financial year. This, combined with its current price-to-earnings (P/E) ratio of 33.6, puts it on a price-to-earnings growth (PEG) ratio of just 0.2. This indicates that it offers growth at a reasonable price. In contrast, Lamprell is expected to record a fall in its earnings of 74% in the current year. Although Lamprell's forward P/E ratio of 10.3 has appeal, BP's superior outlook means that its shares could be set to outperform those of Lamprell.

Furthermore, BP has greater income appeal thanks to its yield of 6.9%. Its dividends are due to be fully covered by net profit next year, which means they could prove to be sustainable as long as the oil price fails to decline dramatically. Meanwhile, Lamprell currently pays no dividend as it seeks to turn its disappointing financial performance around.

BP has a sound asset base that has the potential to deliver growing profitability. It also has a relatively low cost curve that provides it with at least some competitive advantage. On both these counts, BP has greater appeal than Lamprell. Certainly, Lamprell has turnaround potential, but BP offers more growth, better value, lower risk and superior income prospects at the present time.

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Peter Stephens owns shares of BP. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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