ADX Energy Ltd (ASX:ADX), a AUDA$13.17M small-cap, operates in the oil and gas industry which has seen a prolonged oil price downturn since 2014. However, energy-sector analysts are forecasting for the entire industry, negative growth in the upcoming year , and a low 7.36% growth over the next couple of years. This rate is below the growth rate of the Australian 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 ADX is lagging or leading its competitors in the industry. See our latest analysis for ADX
What’s the catalyst for ADX’s sector growth?
Much of the oil and gas industry has survived an especially tough few years with weak demand and low prices. Although profitability is always a key metric, in the oil and gas industry, growth in production and reserves has often been more important. Only now has the sector begun to emerge from its turmoil, and in the past year, the industry turnaround delivered growth of over 50%, beating the Australian market growth of 5.37%. ADX 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 ADX may be trading cheaper than its peers.
Is ADX and the sector relatively cheap?
The oil and gas industry is trading at a PE ratio of 11x, lower than the rest of the Australian stock market PE of 17x. This illustrates a somewhat under-priced sector compared to the rest of the market. Though, the industry returned a similar 12.16% on equities compared to the market’s 11.92%, potentially illustrative of a turnaround. Since ADX’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge ADX’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? ADX has been an oil and gas industry laggard in the past year. If your initial investment thesis is around the growth prospects of ADX, there are other oil and gas companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how ADX fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If ADX 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 ADX’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into ADX Energy’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.