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Here’s why the Premier Oil share price could be set to double… again

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While the Premier Oil (LSE: PMO) share price may have doubled in the last year, the company continues to offer a relatively low valuation. Given its growth forecasts over the next couple of years, the stock could deliver impressive capital returns.

Of course, the wider energy sector remains extremely volatile, with risks being high. While the oil producer may be worth buying at the present time, one stock reporting results on Thursday could be one to avoid.

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Uncertain future

The company in question is provider of fabrication, engineering and contracting services to the oil and gas industry, Lamprell (LSE: LAM). The company released interim results, with a net loss of $21.9m reflecting low activity levels during the period. It’s expected to record a loss for the full year, with a further loss set to be delivered in the next financial year.

At a time when a number of oil and gas related companies are enjoying improving financial performance, continued losses could lead to weak investor sentiment. The company, though, is making progress in advancing its strategic aspirations, while its bid pipeline of $4.1bn could benefit from increased activity in both of its end markets of renewables and oil and gas.

However, with a number of oil and gas stocks delivering high levels of profitability, Lamprell may not be an obvious choice when it comes to gaining exposure to the sector. Certainly, a turnaround is possible over the coming years, but the risk/reward ratio that the company currently offers appears to be relatively unappealing.

Improving outlook

The prospects for Premier Oil look set to improve over the next few years. The company’s bottom line is expected to move into the black in the current year, with growth of 74% forecast for the next financial year. Much of this growth is due to a higher oil price, with recent fears regarding supply declines due to Hurricane Florence causing the price of black gold to rise further. And with demand forecast to remain stable during the course of 2019, the outlook for the oil price could improve.

As well as a higher oil price, Premier Oil’s financial prospects have been boosted by a disciplined approach to costs and capital expenditure. The company’s production is increasing, while its costs have fallen in recent years. This combination is expected to yield stronger cash flow, which could be used to reduce its balance sheet leverage over the medium term.

Even with lower debt, the company remains a relatively risky stock to buy. It is largely dependent upon the oil price when it comes to its financial performance. And while the oil price may move higher, it always has the potential to fall rapidly. With a forward price-to-earnings (P/E) ratio of 6, however, the stock appears to offer a wide margin of safety. As such, now could be the right time to buy it – even though it has doubled in price in the last year.

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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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