Should You Invest In The Energy Sector And Baron Oil Plc (AIM:BOIL)?
Baron Oil Plc (AIM:BOIL), a GBP£3.79M small-cap, is an oil and gas company operating in an industry which has endured an extended oil price slump since 2014. However, energy-sector analysts are forecasting for the entire industry, negative growth in the upcoming year , and a massive growth of 41.87% over the next couple of years. This rate is larger than the growth rate of the UK stock market as a whole. Is now the right time to pick up some shares in oil and gas companies? Today, I will analyse the industry outlook, as well as evaluate whether BOIL is lagging or leading its competitors in the industry. See our latest analysis for BOIL
What’s the catalyst for BOIL’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. 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 of over 50%, beating the UK market growth of 11.30%. BOIL 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 BOIL may be trading cheaper than its peers.
Is BOIL and the sector relatively cheap?
The oil and gas industry is trading at a PE ratio of 14x, in-line with the UK stock market PE of 19x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a lower 5.74% compared to the market’s 12.78%, illustrative of the recent sector upheaval. Since BOIL’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge BOIL’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? BOIL has been an oil and gas industry laggard in the past year. If your initial investment thesis is around the growth prospects of BOIL, there are other oil and gas companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how BOIL fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If BOIL 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 BOIL’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Baron Oil’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.
