Is it time to buy oil and gas companies?

With a gas shortage on the east coast, is it time to buy Woodside Petroleum Limited (ASX:WPL) and Senex Energy Ltd (ASX: SXY)?

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Readers will have seen the recent media coverage of the east coast gas crisis, which refers to a shortage of gas supply for the local market that has seen the prices paid by local manufacturers double or triple. Does this type of shortage indicate a red-hot opportunity to buy the likes of Woodside Petroleum Limited (ASX: WPL), and Santos Ltd (ASX: STO)?

Not necessarily. Supply and demand are a complex thing, especially at a local level where companies are competing with overseas customers for access to gas. As reported by Fairfax Media, McKinsey consultants have reported that the east coast of Australia in general is set to experience a major gas shortage by 2020.

While that would be good news for gas suppliers, it could also potentially cause major customers like Incitec Pivot Ltd (ASX: IPL) to close its plants at Phosphate Hill and Moranbah, if they become uneconomical. The ammonia industry is one of the biggest users of gas on the east coast, and a production halt would cause a significant reduction in demand.

Were that to happen, gas exporters would be reliant on the price set by overseas markets. While it is important to consider supply and demand, and multiple possible price outcomes, I feel that the better way to invest is to identify companies with strong reserves and a sound balance sheet, as this will give them options in both good times (e.g. if LNG prices rise) and tough times (if prices fall).

Woodside is one such company, although Senex Energy Ltd (ASX: SXY) is also shaping up as an interesting – albeit riskier – prospect following its gas sales agreement with Santos and the recent funds injection from a new significant investor.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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