The FTSE's Largest Sector

We kick off our sector series with a look at oil & gas.

That's a pretty hefty weighting, and it reflects the importance to the world economy of the black slimy stuff. 

What's on offer?

So Oil & Gas seems an ideal place to kick off this sector series. Of course, we can't hope to analyse each and every company in one article, so these pieces are designed as a starting point for any research you might want to do, and to point out a few high level points to consider when evaluating them.

We've combined the largest companies from both the FSTE's main list and the Alternative Investment Market (AIM). As we can see, there is a lot of sector overlap, with the largest AIM companies being valued at hundreds of millions of pounds -- AIM is certainly not just for tiddlers.

The table below lists companies in order of market capitalisation, with a cut-off point of £100m. Price to earnings (P/E) ratios and dividend yields are historic, and almost all are based on annual results for the year ending December 2008. BP is the important exception, as it reported results on Tuesday for the year ending December 2009.

^{* Turnover figures are taken from published sources in sterling where available, with BP and Heritage Oil figures converted from US dollars at a rate of £1 = $1.60.}

The obvious thing to note, in addition to the very wide range of market cap and turnover figures, is that there is a clear split between the large dividend-paying oil and gas producers, and the smaller companies, which are predominantly explorers with little in the way of revenues or profits.

Big oil

Of the big three, BP and Royal Dutch Shell are, according to analysts' forecasts, sitting on quite low prospective P/Es and high dividend yields. 

For the year ending December 2010, forecasts put BP shares on a forward P/E of 9.3 and a dividend yield of 6% (which may, of course, change in light of the new results).  Similarly, Shell's share price suggests a forward P/E of around 8.7 and a dividend yield of 6.3%.

Both will have seen revenues and profits hit over the past year by falling oil prices, but are expected to grow profits again in 2010. Both also have strong blue-chip track records of paying dividends, and I think there are few better long-term investments around these days than investing in one of the two big oilies -- they should prove to be defensive if the economy limps along for a while longer, and will have good earnings potential once it gets growing again.

Medium and baby oil

When it comes to evaluating pretty much everything from Tullow Oil downwards, P/Es and yields won't tell you very much. Their primary focus is finding and then evaluating new oil fields. For the most part, any successful finds will be sold off to a larger company which specialises in production. The money raised is used to fund the evaluation of more new fields and so on. 

The London market is awash with oil explorers. There are a few dozen more valued at less than £100m that we haven't included in the table above, just to keep it manageable.

To assess any of these smaller companies, you'll need to dig deep into their respective assets. It's a specialist area of investing, but one which many Fools excel at on our superb oil and gas discussion board. We also recently began a series looking at the oil sector in more detail. 

Finally, it's also worth noting that there is a separate sector for oil equipment and services companies. That accounts for just 0.5% of the UK market so we'll be looking at that in a (much) later article in this series.

More from Alan Oscroft:

• Buy And Hold Is Best
• Why Investment Trusts Are Foolish
• Dissecting The UK Market

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> Alan owns shares in BP.