Mega Uranium Ltd (TSX:MGA), a CADCA$64.74M small-cap, is an oil and gas company operating in an industry which has seen a prolonged oil price downturn since 2014. However, energy-sector analysts are forecasting for the entire industry, negative growth in the upcoming year . Is the oil and gas industry an attractive sector-play right now? Today, I will analyse the industry outlook, and also determine whether MGA is a laggard or leader relative to its energy sector peers. Check out our latest analysis for Mega Uranium
What’s the catalyst for MGA’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 in the teens, though still underperforming the wider Canadian stock market. MGA 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 MGA may be trading cheaper than its peers.
Is MGA and the sector relatively cheap?
The energy sector’s PE is currently hovering around 16x, relatively similar to the rest of the Canadian stock market PE of 17x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a lower 6.77% compared to the market’s 9.06%, illustrative of the recent sector upheaval. Since MGA’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge MGA’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? MGA has been an oil and gas industry laggard in the past year. If your initial investment thesis is around the growth prospects of MGA, there are other oil and gas companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how MGA fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If MGA 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 MGA’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Mega Uranium’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.