Is Premier Oil PLC A Better Buy Than BG Group plc, Petrofac Limited And John Wood Group PLC?

Should you add Premier Oil PLC (LON: PMO) to your portfolio in favour of BG Group plc (LON: BG), Petrofac Limited (LON: PFC) and John Wood Group PLC (LON: WG)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Results released today by Premier Oil (LSE: PMO) were disappointing, with the diversified oil producer slipping into a loss-making position as a lower oil price hit its performance hard. In fact, Premier Oil reported a worse-than-expected £135m loss after recording impairments of around £211m on a number of its North Sea assets.

And, to make things worse for investors, Premier Oil has cancelled its dividend and also reduced its forecasts for capital expenditure in the current year as it seeks to reduce costs in a low oil price environment. While it spent £774m last year on capital items, this year it expects to spend just £594m, although this seems to be a sensible step for the business to take as it seeks to improve its balance sheet strength.

Despite the disappointing results, shares in Premier Oil have been largely flat throughout the day and, looking ahead, the company’s CEO, Tony Durrant, said that the company has the cash to buy new assets in the North Sea later this year. As such, Premier Oil could turn a challenging period into a positive one through buying underpriced assets for long term growth.

Sector Peers

Clearly, the problems that Premier Oil is facing are not unique and affect the entire sector. For example, BG (LSE: BG) is expected to report a 62% fall in earnings in the current year although, unlike Premier Oil, it remains a profitable business as its size, scale and highly appealing asset base are allowing it to better weather the challenging conditions currently being faced by the sector.

Even so, BG lacks appeal as an investment as a result of its sky-high price to earnings (P/E) ratio, with its shares currently trading on a rating of 33.1 when using the current year’s forecast earnings numbers. As such, it lacks appeal at its current share price and, with Premier Oil having a P/E ratio of 21.3 using 2015 forecast earnings figures, it seems to be a better buy than BG at the present time.

However, when it comes to value in the oil industry, the likes of Petrofac (LSE: PFC) and Wood Group (LSE: WG) offer much better prospects. That’s because, while their bottom lines are also due to decline this year, their valuations better represent their current outlooks. For example, Petrofac has a P/E ratio of just 9.8, while Wood Group’s rating is also appealing at 11.5. Both of these companies, therefore, offer significantly better value than Premier Oil and BG at the present time.

Looking Ahead

While the future for the oil industry is highly uncertain, as history tells us the best time to buy any shares is when ‘blood is running in the streets’. And, while there has been a relief rally in the oil price of late, it remains at a very low ebb and so, for long term investors, now could be a good time to buy a selection of oil industry stocks.

However, with their sky-high ratings, Premier Oil and BG do not appear to fit the bill, with them lacking a margin of safety. However, Wood Group and, in particular, Petrofac, both seem to offer considerable upside. Therefore, they could be worth buying right now, albeit with a large dose of volatility likely to lie ahead.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Petrofac. The Motley Fool UK owns shares of Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »