I have been looking for dirt-cheap UK shares to buy for growth next year. There is one sector that I believe has enormous potential for the year ahead. This is where I am concentrating my efforts.
UK shares to buy
The sector I have been focusing on is Oil & Gas. This industry is currently facing considerable criticism for its role in the global climate crisis. However, while it is clearly under fire, it is also clear that the demand for oil & gas around the world is only rising.
This suggests that these companies will continue to profit for the foreseeable future. As such, I think there is an opportunity here for investors like myself to take advantage of in the market.
Even though the price of oil has come off recent highs, both of these businesses are still on track to report strong performances in 2021.
According to its latest trading update, Tullow’s free cash flow from operations will total $100m. As it has hedged the majority of its production for the next two years, profits and cash flow from operations are relatively predictable.
This cash generation should enable the group to start chipping away at its debt. This will improve the balance sheet and provide more capital for growth in the years ahead.
Meanwhile, Harbour Energy is seeing similar tailwinds. Thanks to higher oil prices, lower production costs, and lower capital spending requirements, the company has laid out plans to return $200m per annum to investors with dividends.
Management also believes that based on current oil prices, the company will be debt-free by 2025. As such, the corporation plans to search for acquisitions to help drive growth.
Put simply, these two oil producers are now back on track after two years of disruption. And based on their current earnings forecasts, both stocks appear cheap. Harbour is currently dealing at a forward price-to-earnings (P/E) multiple of 6.2. Tullow’s stock is selling at a forward P/E of 4.7.
Risks and challenges
Despite their attractive qualities, these companies are also exposed to some significant risks and challenges. The largest is the potential for another oil price crash. This could derail growth projections, even though both have hedging schedules in place.
Additional costs and challenges linked to climate change could also hit growth plans. This industry is particularly susceptible to new climate change rules and requirements. The carbon footprint of the oil & gas industry is a flashpoint for climate campaigners.
Still, despite these risks and challenges, I think both Harbour and Tullow look incredibly attractive as cheap UK shares to buy. That is why I would acquire both stocks for my portfolio today.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.