Portugal-based Galp Energia's stock is rallying as oil prices have risen. After hitting lows in 2015 due to the fall in oil prices, Galp Energia has posted good 3rd quarter earnings. Revenue has risen by 11% Y-o-Y while profit has increased 55% Y-o-Y and 15% Q-o-Q. Production has crossed 100 kboe pd for the first time, and the increased production is reflected in the increased net profit. Downstream segment has also performed well, as disruptions arising from weather-related events in the Caribbean and Gulf of Mexico have affected supply and pushed up refining margins. Additionally, Galp Energia won a 20% stake in the BM-S8 block of the Caraca North reservoir in Brazil.
This bid was placed in partnership with Exxon and Statoil , and synergies are expected due to past experience with another block in the area which was also won with the same partners. While good performance in E&P as well as R&M have led to increased overall profits, the Gas & Power business has not performed well, with the gas trading business in particular down on a quarterly and yearly basis.
Galp Energia's valuation seems close to fair value, trading at a P/E ratio of 25x when compared to Royal Dutch Shell 's 25x and Total's 17x. The energy sector's industry average is about 23x. We estimate the fair value at $13. The stock is heavily dependent on oil and gas prices. Oil prices are expected to remain in the range of $50-$60.
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