The resources sector remains one of my top picks at the moment, and that’s why I’m focusing on the investment potential of Royal Dutch Shell Plc (LON:RDSB) (RDSB.L), BHP Billiton plc (LON:BLT) (BLT.L), Tullow Oil plc (LON:TLW) (TLW.L), Glencore PLC (LON:GLEN) (GLEN.L) and Anglo American plc (LON:AAL) (AAL.L).
Shell is a company with a bright future in my view. It is forecast to increase free cash flow over the next few years, and this could lead to de-leveraging as well as a more sustainable dividend. With the BG assets being successfully integrated and the stock being in the process of disposing of a number of assets, I think it could emerge as a stronger business. Therefore, I think more upside could be ahead for Shell.
BHP Billiton has been able to improve its efficiency in recent years. Its asset spin-off has left a stronger and lower-cost business in my view which is better capable of generating relatively resilient levels of profitability. With a diverse set of operations, I think BHP Billiton could have a favourable risk to reward ratio. This could help it to outperform many of its industry peers in the long run.
Tullow Oil has adopted a successful strategy in my eyes. It has focused on increasing production, with the improved cash flow set to be used to reduce debt levels. This could provide for additional scope to invest in exploration interests over the medium term. In the long run this may lead to improved financial performance and a higher share price for Tullow Oil.
Glencore continues to have a bright future to my mind. The company has been able to reduce leverage at the same time as reshaping its business. It remains relatively diverse but also appears to be leaner and more efficient. This could lead to higher profitability and a higher valuation than its current PE of 12. With a focus on commodities used to develop more sustainable solutions in the 21st century, I think Glencore has a bright future.
Anglo American has streamlined its business in recent years. It has become a more efficient entity which is forecast to deliver improving profitability over the medium term. This could lead to a higher valuation as well as a more resilient business. With it continuing to have exposure to a wide range of commodities, it remains diverse. This boosts its risk to reward ratio in my opinion and could lead to a higher valuation for the Anglo American share price.