Erin Energy Corporation (AMEX:ERN), a USD$622.48M small-cap, is an oil and gas company operating in an industry which has seen a prolonged oil price downturn since mid-2014. However, energy-sector analysts are forecasting for the entire industry, a strong double-digit growth of 11.87% 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. Should your portfolio be overweight in the oil and gas sector at the moment? In this article, I’ll take you through the energy sector growth expectations, and also determine whether Erin Energy is a laggard or leader relative to its energy sector peers. View our latest analysis for Erin Energy
What’s the catalyst for Erin Energy’s sector growth?
Much of the oil and gas industry has survived an especially tough few years with weak demand and low prices. 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 in the previous year, the industry saw growth in the teens, beating the US market growth of 10.81%. Erin Energy 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 Erin Energy may be trading cheaper than its peers.
Is Erin Energy and the sector relatively cheap?
The energy sector’s PE is currently hovering around 15x, relatively similar to the rest of 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 9.13% on equities compared to the market’s 10.46%, potentially illustrative of a turnaround. Since Erin Energy’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Erin Energy’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Erin Energy recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto Erin Energy as part of your portfolio. However, if you’re relatively concentrated in oil and gas, you may want to value Erin Energy based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If Erin Energy has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the oil and gas industry. Before you make a decision on the stock, take a look at Erin Energy’s cash flows and assess whether the stock is trading at a fair price.
For a deeper dive into Erin Energy’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.