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

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

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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.

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 assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »