Africa Oil Corp (TSX:AOI), a CADCA$684.93M small-cap, is an oil and gas company operating in an industry which has endured an extended oil price slump since 2014. However, energy-sector analysts are forecasting for the entire industry, a positive double-digit growth of 24.12% in the upcoming year , and a whopping triple-digit earnings growth over the next couple of years. Not surprisingly, this rate is more than double the growth rate of the Canadian stock market as a whole. An interesting question to explore is whether we can we benefit from entering into the oil and gas sector right now. Below, I will examine the sector growth prospects, as well as evaluate whether AOI is lagging or leading its competitors in the industry. See our latest analysis for AOI
What’s the catalyst for AOI’s sector growth?
The oil price collapse drove a negative 40% growth in the energy sector in the past five years. Although profitability is always a key metric, in the oil and gas industry, growth in production and reserves has often been more important. In the previous year, the industry endured negative growth of -0.30%, underperforming the Canadian market growth of 8.26%. AOI lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook doesn’t seem to be much better given that analysts are forecasting continued unprofitability going forward. This lack of growth means AOI may be trading cheaper than its peers.
Is AOI and the sector relatively cheap?
The oil and gas industry is trading at a PE ratio of 23x, higher than the rest of the Canadian stock market PE of 17x. This means the industry, on average, is relatively overvalued compared to the wider market. However, the industry returned a lower 6.96% compared to the market’s 9.62%, illustrative of the recent sector upheaval. Since AOI’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge AOI’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? AOI’s uncertain outlook is a negative for shareholders, with the prospect of negative earnings persisting into the future. If your view of the industry outlook has changed since you bought, now may be a good time to revisit your initial investment thesis. Also, if you’re relatively concentrated in energy, you may want to value AOI based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If AOI has been on your watchlist for a while, now may not be the time to enter into the stock given its negative future prospect. However, before you make a decision on the stock, I suggest you look at AOI’s future cash flows in order to assess whether the stock is trading at a reasonable price, as well as other important fundamentals such as the company’s financial health in order to build a holistic investment thesis.
For a deeper dive into Africa Oil’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.