A ‘secret’ growth stock I’d buy alongside Premier Oil plc

This company could offer high growth prospects alongside Premier Oil plc (LON: PMO).

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The outlook for the oil and gas industry remains highly uncertain. Although the oil price has surged higher in recent months and now stands at $60 per barrel, many investors remain cautious about investing in the sector. That’s understandable given the volatility which has been present in recent years.

However, for investors who are perhaps less risk-averse, there could be a number of strong growth opportunities within the industry. One example is Premier Oil (LSE: PMO), which is expected to deliver improving profitability over the next couple of years. However, there is another company operating within the same sector which could also offer strong share price growth potential.

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Mixed performance

The company in question is production, development and exploration business Nostrum (LSE: NOG). It reported a somewhat mixed update on Tuesday which showed that while its third quarter was upbeat from a financial perspective, its operational performance was slightly disappointing. For example, it announced a delay to the GTU3 tie-in, while production continues to be behind its 2017 targets.

However, it has been able to complete a bond refinancing and implement its cost saving programme. Alongside improved oil prices, this means that it is on track to move from loss to profit in the current year. This in itself could stimulate investor sentiment and help to push its share price higher. But looking to next year, the company’s forecast rise in earnings of 148% could be the major catalyst behind its future share price performance. It trades on a price-to-earnings growth (PEG) ratio of just 0.1, which suggests that it offers a wide margin of safety for the long run.

Low valuation

Of course, Premier Oil also has investment potential at the present time. After three years of losses it is expected to move back into the black in 2017 with a pre-tax profit of £21m. Next year, that figure is forecast to rise to almost £139m as the company’s strategy of reducing costs and increasing production is set to have a positive impact on its bottom line. And with it trading on a forward price-to-earnings (P/E) ratio of just 5.3, it appears to have significant upside potential over the long run.

Uncertain outlook

Clearly, both Nostrum and Premier Oil are highly dependent on the performance of the oil price in future. While it has made strong gains in recent months, there is no guarantee that the trend will continue. Should supply increase or demand come under pressure, the price of oil could easily slip back to recent low levels.

However, with OPEC’s supply cut, exploration spend being under pressure across the industry and demand continuing to remain robust, the prospects for the industry remain relatively bright. As such, buying Nostrum and Premier Oil could be a sound move, with both stocks offering high risks but also significant potential rewards in the long run.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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 considered, so you should consider taking independent financial advice.

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