Gulfsands Petroleum plc (AIM:GPX), a GBP£27.95M small-cap, is an oil and gas company operating in an industry which has seen a continued decline in oil prices since mid-2014. However, energy-sector analysts are forecasting for the entire industry, an extremely elevated growth of 55.74% in the upcoming year , and a whopping growth of 73.59% over the next couple of years. Not surprisingly, this rate is more than double the growth rate of the UK stock market as a whole. Should your portfolio be overweight in the oil and gas sector at the moment? Today, I will analyse the industry outlook, as well as evaluate whether Gulfsands Petroleum is lagging or leading its competitors in the industry. View our latest analysis for Gulfsands Petroleum
What’s the catalyst for Gulfsands Petroleum’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. 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 over the past year, the industry turnaround led to growth of over 100%, beating the UK market growth of 11.51%. Gulfsands Petroleum 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 Gulfsands Petroleum may be trading cheaper than its peers.
Is Gulfsands Petroleum and the sector relatively cheap?
The oil and gas industry is trading at a PE ratio of 24x, higher than the rest of the UK stock market PE of 18x. This illustrates a somewhat overpriced sector compared to the rest of the market. However, the industry returned a lower 5.74% compared to the market’s 12.77%, illustrative of the recent sector upheaval. Since Gulfsands Petroleum’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Gulfsands Petroleum’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Gulfsands Petroleum has been an oil and gas industry laggard in the past year. If your initial investment thesis is around the growth prospects of Gulfsands Petroleum, there are other oil and gas companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how Gulfsands Petroleum fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If Gulfsands Petroleum 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 Gulfsands Petroleum’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Gulfsands Petroleum’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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.