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Otto Energy Limited's (ASX:OEL) Profit Outlook

Simply Wall St

Otto Energy Limited's (ASX:OEL): Otto Energy Limited operates as an oil and gas exploration and production company in North America. The AU$23m market-cap posted a loss in its most recent financial year of -US$18.4m and a latest trailing-twelve-month loss of -US$16.6m shrinking the gap between loss and breakeven. Many investors are wondering the rate at which OEL will turn a profit, with the big question being “when will the company breakeven?” I’ve put together a brief outline of industry analyst expectations for OEL, its year of breakeven and its implied growth rate.

See our latest analysis for Otto Energy

OEL is bordering on breakeven, according to Oil and Gas analysts. They anticipate the company to incur a final loss in 2021, before generating positive profits of US$28m in 2022. OEL is therefore projected to breakeven around 2 years from today. What rate will OEL have to grow year-on-year in order to breakeven on this date? Using a line of best fit, I calculated an average annual growth rate of 85%, which is extremely buoyant. If this rate turns out to be too aggressive, OEL may become profitable much later than analysts predict.

ASX:OEL Past and Future Earnings April 25th 2020

Underlying developments driving OEL’s growth isn’t the focus of this broad overview, but, bear in mind that generally an energy business has lumpy cash flows which are contingent on the natural resource and stage at which the company is operating. So, a high growth rate is not out of the ordinary, particularly when a company is in a period of investment.

One thing I would like to bring into light with OEL is its relatively high level of debt. Generally, the rule of thumb is debt shouldn’t exceed 40% of your equity, which in OEL’s case is 54%. A higher level of debt requires more stringent capital management which increases the risk in investing in the loss-making company.

Next Steps:

This article is not intended to be a comprehensive analysis on OEL, so if you are interested in understanding the company at a deeper level, take a look at OEL’s company page on Simply Wall St. I’ve also put together a list of pertinent factors you should look at:

  1. Valuation: What is OEL worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether OEL is currently mispriced by the market.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Otto Energy’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.