Fremont Petroleum Corporation Limited (ASX:FPL), a A$2.80M small-cap, operates in the oil and gas industry which has endured a prolonged oil price downturn since mid-2014. However, energy-sector analysts are forecasting for the entire industry, a fairly unexciting growth rate of 4.86% 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. Is the oil and gas industry an attractive sector-play right now? In this article, I’ll take you through the energy sector growth expectations, as well as evaluate whether Fremont Petroleum is lagging or leading its competitors in the industry. Check out our latest analysis for Fremont Petroleum
What’s the catalyst for Fremont Petroleum’s sector growth?
Much of the oil and gas industry has survived an especially tough few years with weak demand and low prices. 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 Australian market growth of 6.92%. Fremont 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 Fremont Petroleum may be trading cheaper than its peers.
Is Fremont Petroleum and the sector relatively cheap?
The oil and gas industry is trading at a PE ratio of 11.2x, lower than the rest of the Australian stock market PE of 17.9x. This illustrates a somewhat under-priced sector compared to the rest of the market. Though, the industry returned a similar 12.16% on equities compared to the market’s 11.86%, potentially illustrative of a turnaround. Since Fremont Petroleum’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Fremont Petroleum’s value is to assume the stock should be relatively in-line with its industry.
Next Steps:
Fremont Petroleum recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If the stock has been on your watchlist for a while, now may be the time to buy, if you like its ability to deliver growth and are not highly concentrated in the energy industry. However, before you make a decision on the stock, I suggest you look at Fremont Petroleum’s fundamentals in order to build a holistic investment thesis.