Toro Energy Limited (ASX:TOE): Is Energy An Attractive Sector Play?

Toro Energy Limited (ASX:TOE), a AU$60.24M 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, negative growth in the upcoming year , and an overall negative growth rate in the next couple of years. Unsuprisingly, this 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, and also determine whether Toro Energy is a laggard or leader relative to its energy sector peers. Check out our latest analysis for Toro Energy

What’s the catalyst for Toro Energy’s sector growth?

ASX:TOE Past Future Earnings Feb 16th 18
ASX:TOE Past Future Earnings Feb 16th 18
The oil price collapse triggered a wave of cost reduction among energy businesses as the sector as a whole faced negative growth over the past five years. 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. Only now has the sector begun to emerge from its turmoil, and in the previous year, the industry saw growth of over 50%, beating the Australian market growth of 7.59%. Toro Energy 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 Toro Energy may be trading cheaper than its peers.

Is Toro Energy and the sector relatively cheap?

ASX:TOE PE PEG Gauge Feb 16th 18
ASX:TOE PE PEG Gauge Feb 16th 18
Oil and gas companies are typically trading at a PE of 11x, below the broader Australian stock market PE of 17.33x. This illustrates a somewhat under-priced sector compared to the rest of the market. Though, the industry returned a similar 9.69% on equities compared to the market’s 11.33%, potentially illustrative of a turnaround. Since Toro Energy’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Toro Energy’s value is to assume the stock should be relatively in-line with its industry.

Next Steps:

Toro Energy has been an energy industry laggard in the past year. If Toro Energy has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although it delivered lower growth relative to its energy peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. However, before you make a decision on the stock, I suggest you look at Toro Energy’s fundamentals in order to build a holistic investment thesis.