Polo Resources Limited (AIM:POL), a GBP£11.47M small-cap, operates in the oil and gas industry which has persevered through a prolonged oil price downturn since mid-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? Below, I will examine the sector growth prospects, and also determine whether POL is a laggard or leader relative to its energy sector peers. View our latest analysis for Polo Resources
What’s the catalyst for POL’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. Large energy businesses have slashed their growth expenditures by over 40% since the collapse, and reduced headcount by nearly half a million workers. Only now has the sector begun to emerge from its turmoil, and over the past year, the industry turnaround led to growth of over 50%, beating the UK market growth of 11.30%. POL 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 POL may be trading cheaper than its peers.
Is POL and the sector relatively cheap?
Oil and gas companies are typically trading at a PE of 14x, relatively similar to the rest of the UK stock market PE of 19x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a lower 5.74% compared to the market’s 12.78%, illustrative of the recent sector upheaval. Since POL’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge POL’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? POL has been an oil and gas industry laggard in the past year. If your initial investment thesis is around the growth prospects of POL, there are other oil and gas companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how POL fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If POL 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 POL’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Polo 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.