Many investors are starting to sniff around the oil and gas sectors in the hope of bargains, as stock prices hit a decade low. Indeed, Santos Ltd (ASX: STO) is trading at its lowest price in more than 10 years.
Junior explorer Senex Energy Ltd (ASX: SXY) is on a par with the cheapest it's been in 10 years, at prices only matched back in 2007-2008. Woodside Petroleum Limited (ASX: WPL) isn't quite at a 10-year low, but it's only been cheaper on two occasions – early 2006 and mid-2011. Beach Energy Ltd (ASX: BPT) also trades at a 10-year low – and many other companies are in the same boat.
So it's no surprise investors are starting to wonder if there are bargains to be had in this area. Speaking from experience, my shares in Senex look an awful lot cheaper (emphasis on 'awful') today than they did when I picked them up at $0.60 each. The question of whether they represent value at today's prices, however, is far harder to answer, for several reasons.
Brent Crude oil is the cheapest it's been for the past decade, apart from a blip in mid-2008 after the GFC hit. With commodity prices at a 10-year low, it's no surprise that oil companies are also at a 10-year low.
Demand isn't materialising, with global demand for oil forecast to grow roughly 1% per annum in 2015 and 2016. In several economies, Australia included, demand for petrol is actually shrinking. Two of our largest petrol chains, owned by Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) have seen their volumes shrink in recent years as a result of more fuel-efficient cars and greater use of public transport.
Cash flows are under threat, meaning the flood of merger & acquisitions that might have been expected in the sector simply isn't materialising – because companies are worried they won't be able to afford it (or the debt required to conduct it) in the future. Woodside Petroleum is the only Australian company taking big steps in this regard.
No-one's sure of where the price will go, with many analysts predicting today's prices are here to stay, and many others predicting a return to US$70/barrel in calendar years 2016-2017. I also am in two minds, with the long-term historical average price of oil more on par with today's levels than those of US$100/barrel seen in recent years.
On the other hand, OPEC nations (the cartel responsible for much of the world's oil production) are missing out on billions of dollars of revenue literally every day as a result of lower prices. There is thus significant financial motivation (especially if national budgets come under threat) to work toward higher prices.
Perhaps the biggest takeaway of them all is that significant uncertainty still remains in the sector. Investors might like the idea of taking a punt in the sector on the hope of higher prices – I'm inclined to do the same myself – but there are a lot of risks associated with this strategy, particularly if prices stay lower for longer and company finances come under threat.
