Toro Energy Limited (ASX:TOE), a AUDA$66.27M small-cap, operates in the oil and gas industry which has persevered through 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? Today, I will analyse the industry outlook, and also determine whether TOE is a laggard or leader relative to its energy sector peers. See our latest analysis for TOE
What’s the catalyst for TOE’s sector growth?
In the past five years, the oil and gas industry growth has been negative 40%, as a result of the oil price collapse. 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 Australian market growth of 5.37%. TOE 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 TOE may be trading cheaper than its peers.
Is TOE and the sector relatively cheap?
The oil and gas industry is trading at a PE ratio of 11x, below the broader 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 TOE’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge TOE’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? TOE has been an oil and gas industry laggard in the past year. If your initial investment thesis is around the growth prospects of TOE, there are other oil and gas companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how TOE fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If TOE 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 TOE’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Toro 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.