Fitzroy River Corporation Limited (ASX:FZR), a AUDA$18.06M small-cap, is an oil and gas company operating in an industry which has seen an extended oil price slump since mid-2014. However, energy-sector analysts are forecasting for the entire industry, negative growth in the upcoming year , and a single-digit 7.36% growth over the next couple of years. This rate is below the growth rate of the Australian stock market as a whole. Is the oil and gas industry an attractive sector-play right now? Below, I will examine the sector growth prospects, as well as evaluate whether FZR is lagging or leading its competitors in the industry. View our latest analysis for Fitzroy River

What’s the catalyst for FZR’s sector growth?

The oil and gas sector has been negative 40% in the past five years, due to the oil price crash. Global oil and gas companies cut capital expenditures by about 40% during 2014 and 2016, and as part of this cost cutting initiative, some 400,000 workers were let go, with major projects cancelled or deferred. Only now has the sector begun to emerge from its turmoil, and over the past year, the industry turnaround led to growth of over 50%, beating the Australian market growth of 5.37%. FZR lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means FZR may be trading cheaper than its peers.

Is FZR and the sector relatively cheap?

The energy sector’s PE is currently hovering around 11x, lower than the rest of the Australian stock market PE of 17x. This means the industry, on average, is relatively undervalued compared to the wider market – a potential mispricing opportunity here! Though, the industry returned a similar 12.16% on equities compared to the market’s 11.92%, potentially illustrative of a turnaround. Since FZR’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge FZR’s value is to assume the stock should be relatively in-line with its industry.

What this means for you:

Are you a shareholder? FZR has been an oil and gas industry laggard in the past year. If your initial investment thesis is around the growth prospects of FZR, there are other oil and gas companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how FZR fits into your wider portfolio and the opportunity cost of holding onto the stock.