High Peak Royalties Limited (ASX:HPR), a AU$6.59M small-cap, is an oil and gas company operating in an industry which has persevered through a continued decline in oil prices since mid-2014. However, energy-sector analysts are forecasting for the entire industry, negative growth 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 Australian 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 High Peak Royalties is a laggard or leader relative to its energy sector peers. View our latest analysis for High Peak Royalties
What’s the catalyst for High Peak Royalties’s sector growth?
Over the past couple of years, the energy sector delivered a disappointing 40% negative growth rate, driven by 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. Only now has the sector begun to emerge from its turmoil, and in the past year, the industry turnaround delivered growth of over 50%, beating the Australian market growth of 7.09%. High Peak Royalties 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 High Peak Royalties may be trading cheaper than its peers.
Is High Peak Royalties and the sector relatively cheap?
Oil and gas companies are typically trading at a PE of 10.92x, lower than the rest of the Australian stock market PE of 17.3x. This means the industry, on average, is relatively undervalued compared to the wider market – a potential mispricing opportunity here! Though, the industry returned a similar 11.19% on equities compared to the market’s 11.81%, potentially illustrative of a turnaround. Since High Peak Royalties’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge High Peak Royalties’s value is to assume the stock should be relatively in-line with its industry.
High Peak Royalties’s track record in earnings growth shows that it has been able to keep up with its peers. If the stock has been on your watchlist for a while, now may be the time to buy, if you are not already highly concentrated in the energy industry. However, before you make a decision on the stock, I suggest you look at High Peak Royalties’s fundamentals in order to build a holistic investment thesis.
- 1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- 2. Historical Track Record: What has HPR’s performance been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of High Peak Royalties? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
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.