Oil and gas companies on the stock market: buy or sell?
- Written by Laurentiu Rosoiu
After registering the shock given by the fall in oil prices in the second half of last year, are the oil companies for sale? Or rather... are they to be bought, in anticipation of a recovery in oil prices?
The oil price is yet on the second largest market depression in modern history of the market. Despite substantial increases in percentage terms (about 30%) against the mid-January values (the maximum of market fall), by the end of May 2015 the price of oil was still half the level as compared to the values registered in early 2012 - during which it registered the last maximum levels just before this corrective period.
In such a context - during which the low price of oil overlaps the figures and information indicating rather an increase in pressure on the production side and a continuation of lower demand trend - investors in the shares of companies in the field would have numerous reasons for the liquidation of exposures in this sector. But things are far from being so simple!
Investors are receiving a huge amount of conflicting information and certainties are few! The possibility that oil prices remain stuck at the level of USD 60 per barrel is not among them; many experts now argue that prerequisites are being built for a significant recovery in oil prices. And their reasoning is very right: as long as the price is maintained to low levels, or even fells further, the more players that fuelled the global boom will exit the market, thereby reducing demand. Simply the companies operating alternative fields and exploiting deposits that require higher operating costs (such as the depleted ones or some offshore sites) will no longer have the necessary incentive for oil extraction. At the same time, investments in exploration or exploitation of new fields are inhibited (the companies preferring to preserve capital) by the fact that profit margins are getting smaller.
The data released by the Baker Hughes (one of the largest providers of services to the global oil industry) show that we are already witnessing a phenomenon of ‘low tide’ for companies and investment in the sector: by the end of April 2015, the number of drilling wells in operation worldwide was 2,268, by 289 fewer than at the end of March 2015 and by 1,120 fewer than in April 2014 (when the number was 3,388). And if one adds over the figures showing that the largest decline is registered in the United States, the producer that lies at the root of the current crisis of oversupply (here, the number of drilling wells dropped from 1,110 in March to 976 in April, and by 859 fewer than in April 2014 when 1,835 wells were in drilling operations) - it is quite clear that a large part of the current surplus of oil will be gone.
The pressures will persist in the short term, however, because the current supply highly exceeds the demand, and major manufacturers show determination to fight for their market share. OPEC, for example, produced about 31.3 million barrels a day in April and will maintain the output, according to analysts surveyed by Bloomberg, to more than 30 million barrels per day; concomitantly, Iraq, the second largest producer in the cartel, wants to increase exports to a record of 3.75 million barrels per day in June.
It is a complicated context in which investors in oil companies’ shares are forced to move in search of maximum returns! Both buying and selling could be winning decisions; the difference can be made by timely preference and risk tolerance, but especially by the investors’ ability to identify players who have adapted to the new realities.