Entek Energy Limited (ASX:ETE), a AUDA$7.31M 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 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. Is the oil and gas industry an attractive sector-play right now? Today, I will analyse the industry outlook, as well as evaluate whether ETE is lagging or leading its competitors in the industry. View our latest analysis for Entek Energy
What’s the catalyst for ETE’s sector growth?
The oil and gas sector has been negative 40% in the past five years, due to the oil price crash. Although profitability is always a key metric, in the oil and gas industry, growth in production and reserves has often been more important. 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%. ETE 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 ETE may be trading cheaper than its peers.
Is ETE and the sector relatively cheap?
Oil and gas companies are typically trading at a PE of 11x, lower than the rest of the Australian stock market PE of 17x. This means the industry, on average, is relatively undervalued compared to the wider market – a potential mispricing opportunity here! Though, the industry returned a similar 12.16% on equities compared to the market’s 11.92%, potentially illustrative of a turnaround. Since ETE’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge ETE’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? ETE recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto ETE as part of your portfolio. However, if you’re relatively concentrated in oil and gas, you may want to value ETE based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If ETE has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the oil and gas industry. However, before you make a decision on the stock, I suggest you look at ETE’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 Entek 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.