Frontera Energy Corporation (TSX:FEC), a CA$2.02B small-cap, operates in the oil and gas industry which has seen a continued decline in oil prices since 2014. However, energy-sector analysts are forecasting for the entire industry, a strong double-digit growth of 28.31% in the upcoming year , and a massive growth of 93.63% 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. 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 Frontera Energy is a laggard or leader relative to its energy sector peers. See our latest analysis for Frontera Energy
What’s the catalyst for Frontera Energy’s sector growth?
Over the past couple of years, the energy sector delivered a disappointing 40% negative growth rate, driven by 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. However, recently the sector saw a reversal in the downturn, and in the past year, the industry turnaround delivered growth of over 50%, beating the Canadian market growth of 17.31%. Frontera Energy lags the pack with its earnings falling by more than half over the past year, which indicates the company has been growing at a slower pace than its energy peers. However, the future seems brighter, as analysts expect an industry-beating growth rate of 33.12% in the upcoming year. This future growth may make Frontera Energy a more expensive stock relative to its peers.
Is Frontera Energy and the sector relatively cheap?
The oil and gas industry is trading at a PE ratio of 19.56x, in-line with the Canadian stock market PE of 15.41x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a lower 6.50% compared to the market’s 10.86%, illustrative of the recent sector upheaval. Since Frontera Energy’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Frontera Energy’s value is to assume the stock should be relatively in-line with its industry.
Next Steps:Frontera Energy’s industry-beating future is a positive for investors. If Frontera Energy has been on your watchlist for a while, now may be the time to enter into the stock, if you like its growth prospects and are not highly concentrated in the energy industry. However, before you make a decision on the stock, I suggest you look at Frontera Energy’s fundamentals in order to build a holistic investment thesis.
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Historical Track Record: What has FEC’s performance been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Frontera Energy? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!