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

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.

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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.