Can anyone really afford NOT to be invested in at least some oil stocks?
Oil provides over 97% of the fuel required for the world's transportation needs including planes, trains, automobiles and shipping. This figure has changed very little in recent decades, despite the plethora of alternative energy sources that generate increased interest from producers and investors whenever there's an oil price spike.
And despite the worldwide recession and record high fuel prices -- both Chinese and Indian oil consumption still grew last year. The US Energy Information Administration predicts global demand for oil to increase from its current level of 84.5 million barrels per day to 99.5 million by 2015.
Peak oil peaks
This continued rise, and anticipated further steep rises, puts oil demand on a collision course with the planet's finite supply, hence "Peak Oil" theory; the point in time when the maximum rate of global extraction is reached, after which the rate of production enters terminal decline.
Peak oil theory itself seemed to peak in the summer of 2008 when the price of a barrel of oil reached $150. Today, it's hovering just over half that figure, despite hitting its high for 2009.
But the steep fall in the value of oil from August 2008 to the spring of this year didn't do anything to encourage the supply side of the equation. In fact, one analyst at Australian investment bank Macquarie expects peak oil supply to be hit this year after the global economic crisis and low prices during the first quarter of 2009 caused investment in production to be cut.
No oil exposure?
Yet it's surprising how many investors I talk to who have no exposure whatsoever to oil in any way in their portfolios, mainly on the basis that they find oil companies too difficult to value. This is a mistake in my opinion, albeit an understandable one.
Just how accurate these huge oil supply and demand predictions are is difficult for us mere mortals to decipher. So, too, are the financial reports by oil companies which (quite reasonably…) use myriad geological and industry-specific terminology to explain their operations. But the answer isn't to ignore them. It's far better to try and get to grips with the terms and to use all the knowledge you can possibly glean to arrive at what you perceive to be a fair value for the companies given all the known information.
Please discuss…
Then, to add a little "polish" to your own analysis -- take a deep breath and read the posts and/or post a question on the Fool's Oil & Gas – Companies discussion board. There are some exceptionally knowledgeable and insightful posters on there who will certainly respond favourably if you've made a reasonable effort. Alternatively, simply lurk n' learn.
There are two basic kinds of oil company focussing on exploration or production, or a mix thereof. Production companies can be valued by the oil they sell every year. Oil exploration companies, meanwhile, are valued by their oil in the ground. Clearly, the latter are a lot more complex. What the Fool's expert investors do is to try and identify companies where the potential reserves are far less than the confirmed ones. But of course, it isn't that simple.
Mix n' match
If you're already an oily investor and know what you're talking about, I'm guessing you won't have read this far. But for those still with us, I've found the "mix n' match" policy works best. By this, I mean reading what the experts are saying, then doing my own -- albeit far more amateur -- analysis to find what I perceive to be good value. This is particularly true of some of the smaller but much discussed explorers/producers such as Aminex (LSE: AEX), PetroLatina (LSE: PELE) and Nautical Petroleum (LSE: NPE) covered here recently. Alternatively, the big blue-chips like BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) offer less excitement but solid high-yielding vale.
Happy drilling.
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