If you're hunting for a bargain it's hard to not stop and have a sniff around the energy sector at the moment given the pummelling oil and gas stocks have received over the past six months.
Consider this…
- The share price of Santos Ltd (ASX: STO) has collapsed just shy of 50% since mid-June 2014.
- Oil Search Limited's (ASX: OSH) share price has sunk 25%.
- and shareholders in Woodside Petroleum Limited (ASX: WPL) have watched on as their shares have dipped 14% compared with a fall of just 1.5% in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) over the same period.
These are major blue-chip stocks and it's very unusual to see such large stalwarts of the market experience such massive destruction in shareholder value in such a short space of time.
The time is nigh for long-term thinking
Investing (sadly perhaps) has to be done without a crystal ball. This means it's very tough to get your timing right and to not appear wrong for at least a short period of time after you decide to buy a stock. However, by taking a long-term approach, an investor can look through short-term price pressure and market concerns and focus instead on the long-term valuation of a company.
Looking far out it's hard to see the spot price of US$50 a barrel becoming the long-term future average. Indeed most oil market observers believe the medium-term oil price will settle at higher levels – it's just they don't know how high and nor do they know if it will head significantly lower first!
Another important factor about future value is that in the long-term all costs are variable which means these giants of the energy sector will adjust their cost bases to fit the average oil price. As the Managing Director of Santos stated recently in a report by the Australian Financial Review:
"As the oil price has risen costs have risen and the margins have been stable. We seem to make the same amount of money in a $50 world as in a $100 world. What happens on the down side is that the costs fall as well."
Investors who come up with a long-term valuation well north of current share prices and utilising conservative assumptions about the future average oil price, margins and expenses could find that the time to snap-up oil and gas stocks is sooner rather than later.
