There are only a handful of economists and analysts that foresaw the 50%+ plunge in the global oil price from over US$100 to below US$45. There are just as many opinions about what caused the fall as there are as to when it will all turn around, but the question many Australian investors are asking is: When should I buy Oil Search Limited (ASX: OSH), Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL)?
Oil Outlook
The majority of economists (which is not something you can always rely on) see the oil price consolidating in the current US$45 per barrel mark with a push back towards US$60-US$70 in late 2015 or early 2016 as the supply and demand dynamics change.
The problem is that oil inventories continue to build, especially in the US, and high-cost producers don't appear to be slowing production as quickly as assumed (sounds like the iron ore situation right?).
Big Winners
A 50% rise in the oil price back towards US$70 would be a massive win for the companies with low cost production already generating oil and gas (the gas price is generally linked to the oil price with some time lag).
In the eyes of analysts, the best bargains at the moment, assuming the oil price recovers, are Oil Search and Santos. Woodside appears to have less upside because it has had less downside so far.
Woodside's popularity as a yield stock is yet to wane, even though almost every analyst in the country is predicting a massive fall in the yield over the next 12 months as oil-linked contracts deliver vastly lower revenue.
Santos and Oil Search, meanwhile, have had their share prices smashed but offer different upside potential. Santos' large US dollar denominated debt means that a lower oil price and lower Australian dollar makes the company a risky proposition, while Oil Search's solid balance sheet and low-cost production makes it a more secure investment but its share price upside will be less dramatic.
Time To Buy?
It's not for the feint-hearted, but investing in Australia's largest oil and gas companies could produce massive long-term returns. The problem is that these companies have no control over the price of their sales and have few competitive advantages over their peers. This makes long-term outperformance unlikely to say the least.
