Sabine Royalty Trust (NYSE:SBR), a USD$662.63M small-cap, operates in the oil and gas industry which has seen an extended oil price slump since mid-2014. However, energy-sector analysts are forecasting for the entire industry, a strong double-digit growth of 10.78% 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 US stock market as a whole. Is the oil and gas industry an attractive sector-play right now? Below, I will examine the sector growth prospects, as well as evaluate whether Sabine Royalty Trust is lagging or leading its competitors in the industry. View our latest analysis for Sabine Royalty Trust
What’s the catalyst for Sabine Royalty Trust’s sector growth?
The oil and gas sector has been negative 40% in the past five years, due to the oil price crash. 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 previous year, the industry saw growth in the teens, beating the US market growth of 10.83%. Sabine Royalty Trust lags the pack with its lower growth rate of 12.41% over the past year, which indicates the company has been growing at a slower pace than its energy peers. As the company trails the rest of the industry in terms of growth, Sabine Royalty Trust may also be a cheaper stock relative to its peers.
Is Sabine Royalty Trust and the sector relatively cheap?
Oil and gas companies are typically trading at a PE of 15x, in-line with the US stock market PE of 20x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. Furthermore, the industry returned a similar 9.06% on equities compared to the market’s 10.47%, potentially illustrative of a turnaround. On the stock-level, Sabine Royalty Trust is trading at a higher PE ratio of 20x, making it more expensive than the average oil and gas stock. In terms of returns, Sabine Royalty Trust generated 807.97% in the past year, which is 798.91% over the oil and gas sector.
What this means for you:
Are you a shareholder? Sabine Royalty Trust has been an oil and gas industry laggard in the past year. In addition to this, the stock is trading at a PE above its peers, meaning it is more expensive on a relative earnings basis. This may indicate it is the right time to sell out of the stock, if your initial investment thesis is around the growth prospects of Sabine Royalty Trust, since there are other oil and gas companies that have delivered higher growth, and are possibly trading at a cheaper price as well.
Are you a potential investor? If Sabine Royalty Trust has been on your watchlist for a while, now may be the best time to enter into the stock. Its lagging growth rate compared to its oil and gas peers in the near term doesn’t build up its investment thesis, and in addition to this, it is also trading at a PE above these companies. If growth and mispricing are important aspects for your investment thesis, there may be better investments in the energy sector.
For a deeper dive into Sabine Royalty Trust’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.