Jacka Resources Limited (ASX:JKA), a AU$1.84M small-cap, operates in the oil and gas industry which has endured 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. Is the oil and gas industry an attractive sector-play right now? Today, I will analyse the industry outlook, and also determine whether Jacka Resources is a laggard or leader relative to its energy sector peers. View our latest analysis for Jacka Resources

What’s the catalyst for Jacka Resources’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. 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 previous year, the industry saw growth of over 50%, beating the Australian market growth of 7.09%. Jacka Resources 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 Jacka Resources may be trading cheaper than its peers.

Is Jacka Resources and the sector relatively cheap?

Oil and gas companies are typically trading at a PE of 10.92x, below the broader Australian stock market PE of 17.24x. 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 11.83%, potentially illustrative of a turnaround. Since Jacka Resources’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Jacka Resources’s value is to assume the stock should be relatively in-line with its industry.

Next Steps:

Jacka Resources has been an energy industry laggard in the past year. If Jacka Resources 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 Jacka Resources’s fundamentals in order to build a holistic investment thesis.