In This Article:
Empyrean Energy Plc (AIM:EME), a UK£54.46M small-cap, operates in the oil and gas industry which has persevered through a prolonged oil price downturn since mid-2014. However, energy-sector analysts are forecasting for the entire industry, negative growth in the upcoming year , and a massive growth of 38.53% 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. Is the oil and gas industry an attractive sector-play right now? Today, I will analyse the industry outlook, and also determine whether Empyrean Energy is a laggard or leader relative to its energy sector peers. View our latest analysis for Empyrean Energy
What’s the catalyst for Empyrean Energy’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 past year, the industry turnaround delivered growth in the twenties, beating the UK market growth of 11.95%. Empyrean 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 Empyrean Energy may be trading cheaper than its peers.
Is Empyrean Energy and the sector relatively cheap?
Oil and gas companies are typically trading at a PE of 14.5x, in-line with the UK stock market PE of 17.27x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a lower 6.59% compared to the market’s 12.78%, illustrative of the recent sector upheaval. Since Empyrean Energy’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Empyrean Energy’s value is to assume the stock should be relatively in-line with its industry.
Next Steps:
Empyrean Energy has been an energy industry laggard in the past year. If Empyrean Energy has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although it delivered lower growth relative to its energy peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. However, before you make a decision on the stock, I suggest you look at Empyrean Energy’s fundamentals in order to build a holistic investment thesis.