In the last year, the Premier Oil (LSE: PMO) share price has risen by 64%, versus a fall of 7% for the FTSE 100. Clearly, that’s a significant outperformance of the index, coming at a time when the oil price has enjoyed a buoyant period.
Looking ahead, there could be risks to the oil and gas sector’s prospects, which may pose a threat to the company’s share price performance. Alongside another stock that’s also outperformed the FTSE 100 in the last year, and which released a positive update on Wednesday, could Premier Oil be worth buying for the long run?
Income potential
The second company in question is accident management, incident management and legal services specialist Redde (LSE: REDD). Its trading update stated that the positive start to the financial year, reported in September, has continued. Sales are up on the previous year, which reflects a rise in trading volumes. As a result, trading profits are ahead of the previous year, with the company optimistic about its future potential.
Its share price has risen by around 14% in the last year. Despite this rise, it continues to have a relatively high dividend yield. The income return in the current year is expected to be 6.7%, which suggests the stock could still offer value for money, even after its capital gains of recent months.
With Redde having a track record of growth, and what appears to be favourable operating conditions, the company could perform well in future. As such, it may be able to continue to outperform the FTSE 100 over the coming years.
Low valuation
While the Premier Oil share price may have experienced a strong performance in recent months, investors still seem to be relatively underwhelmed about its financial outlook. The company is expected to post a rise in earnings of 74% in the next financial year, as a result of higher oil prices and increased production. However, its shares trade on a forward price-to-earnings (P/E) ratio of around 5.5, at present. This suggests that they may offer a margin of safety.
Of course, oil shares are notoriously unpredictable. Just a few years ago, Premier Oil was in a difficult position, with high debts and a low oil price hurting its outlook. Now, free cash flow is improving, and debt levels are set to fall over the medium term.
Given the uncertain outlook for the world economy, a more challenging period for the oil price could be ahead. This could lead to less growth potential within the wider industry, while investor sentiment may also weaken to some degree. However, with the long-term prospects for the industry upbeat, due to forecasts of resilient demand and limited supply, the potential for Premier Oil to keep beating the FTSE 100 over the coming years may begin to improve.
