As shareholders in Liquefied Natural Gas Limited (ASX: LNG) and Queensland Bauxite (ASX: QBL) are well aware, investing in the resources sector can change your life. By the same token shareholders in Atlas Iron Limited (ASX: AGO) and Regis Resources Limited (ASX: RRL) know all too well that sorting the trash from the treasure isn't easy.
That's why so many investors elect to hold established resources stocks included in the upper range of the S&P/ASX 200 (ASX: XJO) (INDEX:^AXJO). Rio Tinto Limited (ASX: RIO), Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO) are examples of commonly held blue chip resource companies. But do they deserve to be?
Rio Tinto, Australia's biggest iron ore miner, appears to trade cheap with a low P/E multiple of 8 and a forecast dividend yield of 3.7% fully franked. However with a forecast oversupply of the steelmaking ingredient and waning Chinese demand, the profitability of the commodity is slipping, and fast. Outside of iron ore, Rio has a strong Copper business and recovering Aluminium division, which could provide some upside surprises when it reports its half-yearly results in August. Given the risks of lower earnings, I won't be buying shares (at least) until then.
Woodside Petroleum is our country's largest independent oil and gas producer with its major projects off the coast of Western Australia. Upon its withdrawal from the giant Leviathan project off the coast of Israel, and Shell's decision to sell part of its holding back to the company, Woodside shareholders are expected to receive a nice dividend payment and modest increases in earnings per share over the coming 12 months.
Santos' faithful shareholders will be rewarded for their investment in coming years, as both the GLNG and PNG LNG project come online. Whilst I feel its current share price is justified, given its huge forecast production increases in 2015 and beyond, at over $14 per share it's not a bargain.
A better BUY than these 3
Santos, Rio and Woodside are great Australian blue-chip stocks with a reputation for taking on big projects. However at current prices, I don't believe any of them are a standout buy. Until half-yearly results are released later in the year, I'm adopting a wait-and-see approach for each and suggest you do too.
