2 reasons to buy oil and gas shares in 2016

Yesterday’s trading on the ASX which marked the first day of trade for calendar year 2016 saw the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) close down 0.5% despite trading higher for much of the morning.

The sell-off which began around lunchtime was sparked by a sudden 7% plunge in the Chinese market after weaker-than-expected manufacturing data was released.

Bucking the trend on the ASX was the energy sector which soared over 3% as investors bet that the sector had been oversold.

Amongst the gainers were:

  • Beach Energy Ltd (ASX: BPT) jumped 6.1% to 52 cents
  • Karoon Gas Australia Limited (ASX: KAR) leapt 5.4% to $1.87
  • Santos Ltd (ASX: STO) rallied 4.1% to $3.83
  • Woodside Petroleum Limited (ASX: WPL) climbed 3% to $29.58

With the energy sector one of the very worst performers in 2015, investors looking to position their portfolio for outperformance in 2016 may find some opportunities amongst beaten-down oil and gas companies.

Here are two reasons to be positive of the outlook for select oil and gas stocks…

  1. Exploration spending is on the decline. Reports show that globally many major oil producers are cutting spending and delaying projects. Ultimately this will lead to a reduction in the growth rate of production and potentially production declines.
  2. The near term outlook for the oil price remains weak. While this scenario suggests a catalyst for a rebound in leading stocks such as Woodside may be some time off, an ongoing weak oil price also sets the scene for the closure of high operating cost businesses which will ultimately improve the long-term economics for the surviving energy producers.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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