The energy sector provides unique opportunities for individuals interested in value investing, especially with companies that operate under the oil and gas drilling category. To determine whether a company is appropriate to add as an alternative asset class within an investor’s portfolio, it is necessary to calculate certain ratios, such as the price-to-earnings ratio (P/E ratio).
Calculating P/E Ratio
The P/E ratio of a company or specific industry gives insight into the value of that company or industry by comparing its current share price to its per-share earnings. The P/E ratio is calculated by dividing the market value of a company's shares by its earnings per share (EPS). It is typically done using share price information from the previous four quarters. The P/E ratio can also be used as a projection tool by using expected estimates for the upcoming four quarters. Whether for current or future calculations, a high P/E ratio typically means that shareholders can expect growth on earnings that are higher than companies with lower P/E ratio metrics, but only when compared to companies within the same sector or industry.
Oil and Gas Drilling P/E Ratios
As of January 2015, the average P/E ratio for the oil and gas drilling sector is 25.4. The industry average includes the metrics of large-, mid- and small-cap companies including Canadian Energy Services (CEU) with a P/E ratio of 20.98, Hugoton Royalty Trust (HGT) with a P/E ratio of 7.54 and Pioneer Energy Services Corp (PES) with a P/E ratio of 38.84.
Within any industry, the P/E ratio is considered average when it is between 20 and 25, and as such, the oil and gas drilling sector falls in line with adequate P/E metrics. For investors seeking opportunities in value investing, the energy sector can provide opportunities within oil and gas drilling companies, but investors should be aware of relevant metrics, including the P/E ratio, before investing.