Bargain-hunting investors are understandably sniffing around for opportunities in the energy sector at the moment given the severe sell-off in oil stocks which has occurred over the past few months.
Three widely-owned companies which will be front and centre for many value-seeking investors are Santos Ltd (ASX: STO), Oil Search Limited (ASX: OSH) and Woodside Petroleum Limited (ASX: WPL). These three oil and gas giants have fallen 47%, 20% and 14% respectively in the past three months.
Likewise, the smaller, more leveraged oil plays will also be getting a working over by bargain hunters. AWE Limited (ASX: AWE), Horizon Oil Ltd (ASX: HZN), and Beach Energy Ltd (ASX: BPT) are down 30%, 54% and 38% respectively since mid-September.
While history may not repeat, it certainly can rhyme
Searching through the rubble after a severe decline can often lead to the discovery of great value however there are risks involved…
Cast your minds back to 1999 – do you remember what price a barrel of oil was selling for then? It was just US$10 a barrel!
Guess where it was less than 10 years later? Around US$150 a barrel with many pundits thinking it was on its way to US$200 a barrel!
Then, there was the onset of the GFC and guess how many dollars did you need in your pocket to snag a barrel? Less than US$35!
Post GFC it is of course easier to remember oil's trajectory. It rallied to well over US$100 a barrel and then recently it's sunk to a four-year low under US$60.
Talk about a roller-coaster
There really is no point listening to the experts. They don't know what will happen, they're just trying to make informed guesses like everyone else.
The last decade and a half should act as a reminder that the oil price can indeed go a lot lower than current levels– there is no rule that it can't!
While it's highly likely that at some point oil and gas stocks will reach a point where value emerges – that time may or may not have arrived – if you decide to invest in this sector be very careful that you're basing your investment case on a realistic oil price and not one that's well above the long-term average.
