Investing in Oil & Gas
Content supplied by Breakaway Research
The Oil & Gas sector is a more specialist sector but offers a range of investments from large producers like Woodside and Santos through to mid tier producers like TAP Oil and ROC Oil and then to junior explorers. Companies in the sector also range from either oil or gas producers or both, gas distributors, oil and/or gas explorers and the newly developing coal bed methane gas explorers and producers.
Larger companies may focus their activities offshore with large scale projects in different parts of the world while smaller companies may concentrate on one specific basin where it believes opportunities may have been missed by earlier explorers.
A significant portion of the sector is leveraged to the oil price which is quoted in US dollars and is influenced by supply/demand fundamentals overlain with the policies of OPEC.
A major factor differentiating the Oil & Gas sector from the remaining resources sector is the risk and cost structure of the industry. Exploration drilling, particularly offshore, is expensive but discoveries can be brought on-stream relatively quickly and have a low operating cost structure. This contrasts with a major base metal discovery which could take 10 years from discovery to development and first production. Hence, share price leverage to exploration success is generally higher than other parts of the resources sector.
Like all investments, investors need to identify the specific reasons behind investments in the Oil & Gas sector. Typical examples are:
- A dividend yield investment in a larger diversified gas producer or utility distributing gas to customers.
- An investment in capital growth due to an expected increase in the oil price and/or new project developments in a mid tier producer.
- A higher risk investment in a newly emerging coal bed methane gas producer seeking to establish certifiable reserves.
- A higher risk investment in a junior explorer participating in a high risk- high return wild cat well
The oil and gas sector is an exciting sector but generally misses out on the media attention due to its specialist nature. Nevertheless, the larger oil and gas companies often form part of a diversified portfolio despite BHP Billiton itself having significant oil exposure.