Petrel Resources Plc (AIM:PET), a GBP£2.12M small-cap, is an oil and gas company operating in an industry which has persevered through an extended oil price slump since 2014. However, energy-sector analysts are forecasting for the entire industry, negative growth in the upcoming year , and a whopping growth of 41.87% over the next couple of years. This rate is larger than the growth rate of the UK stock market as a whole. Should your portfolio be overweight in the oil and gas sector at the moment? In this article, I’ll take you through the energy sector growth expectations, as well as evaluate whether PET is lagging or leading its competitors in the industry. See our latest analysis for PET
What’s the catalyst for PET’s sector growth?
The oil price collapse triggered a wave of cost reduction among energy businesses as the sector as a whole faced negative growth over the past five years. Global oil and gas companies cut capital expenditures by about 40% during 2014 and 2016, and as part of this cost cutting initiative, some 400,000 workers were let go, with major projects cancelled or deferred. However, recently the sector saw a reversal in the downturn, and in the previous year, the industry saw growth of over 50%, beating the UK market growth of 11.30%. PET lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means PET may be trading cheaper than its peers.
Is PET and the sector relatively cheap?
The energy sector’s PE is currently hovering around 14x, in-line with the UK stock market PE of 19x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a lower 5.74% compared to the market’s 12.78%, illustrative of the recent sector upheaval. Since PET’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge PET’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? PET has been an oil and gas industry laggard in the past year. If your initial investment thesis is around the growth prospects of PET, there are other oil and gas companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how PET fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If PET has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its oil and gas peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at PET’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Petrel Resources’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other energy stocks instead? Use our free playform to see my list of over 300 other oil and gas companies trading on the market.