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Why the Premier Oil share price could stay ahead of the FTSE 100

Recent months have been hugely positive for the oil and gas sector. A rising oil price has caused forecasts across the industry to improve, and this has helped to boost investor sentiment. One beneficiary of this has been Premier Oil (LSE: PMO), which is trading at a three-year high. It has been able to outperform the FTSE 100 in the last 12 months by around 114%, which provides evidence of just how strong its performance has been.

While the company has the potential to beat the FTSE 100 over the medium term, not all oil and gas shares have experienced capital growth in recent months. Reporting on Friday was a smaller stock that has endured a challenging period that has sent its valuation lower by 41% in the last year.

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Uncertain outlook

The company in question is Victoria Oil & Gas (LSE: VOG). It released a second quarter operations update which showed that it remains confident of a resolution with ENEO Cameroon regarding the grid power supply issue. Due to the non-renewal of the grid power gas sale agreement at the end of December 2017, the company’s GDC subsidiary’s gas consumption levels from its participating interest in the Logbaba Project were at similar levels in the second quarter as in the first quarter of the year.

During Q2, Victoria was able to commission one new thermal customer and one new retail power customer. It has also seen increasing interest in the retail power solutions being offered by its GDC subsidiary as a result of current power shortages in Douala. However, due to the suspension of the ENEO supply, its volumes declined to 320m cubic feet per day, which is down from 1,192m cubic feet per day in the second quarter of 2017.

Looking ahead, further uncertainty could be on the horizon for the business. As a result, it remains a relatively risky stock which could display further volatility.

Improving outlook

The prospects for Premier Oil, though, appear to be increasingly positive. Its recent investor update showed that it is making progress with the planned ramp-up of production, it being on target to deliver on its full-year production target. This is set to boost its free cash flow in the second half of the year, which could lead to a further deleveraging of the business. This could create a more sustainable company that is better able to overcome potential volatility in the oil price.

As well as rising production and a higher oil price, Premier Oil has been able to keep costs down. It is anticipating operating costs for the current year of between $17 and $18 per barrel, which could provide it with additional cash to invest in its exploration prospects.

With the stock trading on a forward price-to-earnings (P/E) ratio of around 5.5, it seems to offer an impressive growth outlook. The stock market does not yet appear to have warmed to its growth potential. And with the prospect of oil prices at least being maintained due to falling supply from countries such as Iran, the outlook for the stock appears to be relatively bright. As such, it could keep outperforming the FTSE 100.

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Peter Stephens has no position in any of the 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.

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