Have Investors Already Priced In Oil & Gas Growth For Ensco plc (NYSE:ESV)?

Ensco plc (NYSE:ESV), a USD$2.94B mid-cap, operates in the oil and gas industry which has seen a prolonged oil price downturn since mid-2014. However, energy-sector analysts are forecasting for the entire industry, an extremely elevated growth of 37.46% 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. An interesting question to explore is whether we can we benefit from entering into the oil and gas sector right now. Today, I will analyse the industry outlook, and also determine whether Ensco is a laggard or leader relative to its energy sector peers. See our latest analysis for Ensco

What’s the catalyst for Ensco's sector growth?

In the past five years, the oil and gas industry growth has been negative 40%, as a result of the oil price collapse. 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. However, recently the sector saw a reversal in the downturn, and over the past year, the industry turnaround led to growth of 3.17%, though still underperforming the wider US stock market. Ensco leads the pack with its impressive earnings growth of 96.07% over the past year. However, analysts are not expecting this industry-beating trend to continue, with future growth expected to be -270.61% compared to the wider energy sector growth hovering in the thirties next year. As a future industry laggard in growth, Ensco may be a cheaper stock relative to its peers.

Is Ensco and the sector relatively cheap?

The oil and gas industry is trading at a PE ratio of 22x, relatively similar to the rest of the US stock market PE of 20x. 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 6.21% compared to the market’s 10.45%, illustrative of the recent sector upheaval. Since Ensco’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Ensco’s value is to assume the stock should be relatively in-line with its industry.

What this means for you:

Are you a shareholder? Ensco is an oil and gas industry laggard in terms of its future growth outlook. If your initial investment thesis is around the growth prospects of Ensco, there are other oil and gas companies that are expected to deliver higher growth in the future, and perhaps trading at a discount to the industry average. Consider how Ensco fits into your wider portfolio and the opportunity cost of holding onto the stock.

Are you a potential investor? If Ensco has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth is expected to be lower than 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 Ensco’s future cash flows in order to assess whether the stock is trading at a reasonable price.

For a deeper dive into Ensco'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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.