One of the greatest investors of all time, Warren Buffett, has a well-quoted phrase “Be fearful when others are greedy and greedy when others are fearful”. In other words, when no one will touch a stock or a sector, that might be the time to buy.
Has this time now come for the oil & gas sector?
Last week oil drifted down to make new lows, and the outlook on the oil price has become even more pessimistic. Goldman Sachs and other market commentators are calling oil down to $30 a barrel, so it would seem that the market expects more pain in the sector.
Does that mean now is the best time to buy?
OPEC has driven the price down to new lows by keeping production relatively stable. However, that all may be about to change. OPEC members are beginning to put pressure on Saudi Arabia as many of the OPEC member economies are falling into troubled times. Venezuela’s economy in particular is going through a terrible time. The IMF released a report stating that Saudi Arabia’s cash reserves are in free-fall, and the country only has five years of financial assets remaining if they keep spending money at current rates. If they cut spending, they face social unrest from the citizens of the country who are used to high government spending. This leads onto the question whether they will cut their production in December.
How should you play the potential recovery?
In my opinion, the best way to play this ‘once in a decade opportunity’ is to buy shares of full cycle upstream companies. Companies such as Premier Oil, Tullow Oil and Ophir Energy look relatively stable and yet trade at levels that look insanely cheap. Any upswing in the oil price will immediately help the companies make a profit. Although Premier and Tullow in particular are heavily in debt, this pressure should ease considerably if the oil price rises again. The share prices of all three companies have been hammered in the last year and should be among the best returning investments should the oil price rise up to around $70.
The other option is to invest in larger producers such as Royal Dutch Shell and BP. Although the returns won’t be as good compared to smaller companies, Shell and BP offer a sense of security and both pay supersized dividends. The jury is still out on whether the dividends will survive the current oil price environment, but it seems that both companies have prioritised the dividend and won’t cut it.
Overall I believe, as do many others, that this may be one of the greatest opportunities in the market for many years. Investors now have a chance to buy stocks at all-time lows and wait for the uptick in the oil price — it is a cycle that has played out many times before and this may just be the bottom…
