3 Good Reasons to Avoid Oil and Gas Shares

Oil prices have continued their fall in the past week. In the past year, oil prices have fallen by more than 50%. Following this decline, oil and gas companies such as rig builders Keppel Corporation Limited (SGX: BN4) and SembCorp Marine Ltd (SGX: S51) ended last week with their shares down 28% and 34% respectively since the start of 2014.

Meanwhile, smaller oil and gas companies have not been spared either; jack-up rig provider Ezion (SGX: 5ME) is a good example with its share price having slid by close to 39% in the same period.

Such declines in the prices of oil and gas companies may make it seem like it’s a good time to go dumpster-diving for bargains. But, here are three reasons why you may want to seek other investing opportunities beyond oil and gas shares:

1. “The best stock to buy may be the one you already own.”

It was investing maestro Peter Lynch who shared the timeless quote above. Although the quote can sound obvious, there may be more to it to understand beneath the surface.

At the Fool, we are lifetime students of investing. This spirit of learning extends to the companies we buy to hold; when we buy to hold, we will study a company over the long term.

This long period of ownership can provide an informational edge for the long term investor. As such, the best companies to buy may well be the ones in which we have already accumulated vast amounts of knowledge of – and that is, the shares which are already sitting in our portfolio.

Coming back to oil and gas shares, if we choose to buy shares in such companies having never owned them before, we should be able to justify why it represents a better opportunity than the companies that we already own. If not, it may be better to leave this industry alone.

2. What game are we playing?

Last Wednesday, my colleagues and I attended a talk by Professor Aswath Damodaran. As a well-respected voice in the finance community on the subject of valuation, the travelling professor had a few noteworthy lessons to share.

In the case of oil prices, there was one of particular interest: Know the game that you are playing.

If you are betting on a rebound in oil prices alone, you may be indulging in a pricing game or worse, making a speculative bet.

If you’re a Foolish investor, your interest is best served when you look for companies which have businesses that can perform well over the long term. If the company happens to be in the oil and gas industry, then it may be worth considering.

But ultimately, it is worth remembering that in Professor Damodaran’s view, it is a company’s future cash flows that gives a company its value. And this applies to oil and gas companies as well. As such, the direction of oil prices should matter way less.

3. Investing for the long term

In my opinion, investing for the long term is about finding the best companies that I can hold for a very, very long time. Such companies may come from the oil and gas industry, or they could be from other industries.

The bottom-line is that our focus should be first centered on companies that we are willing to hold for very long periods of time. This is important because time is the necessary ingredient which allows businesses to steadily strengthen over the years and fulfill their full potential.

The bargains that come our way should serve to assist us in our long-term investing goals (for me, the goal is finding the best companies), and not direct our next buying actions.

For investors who share this thought of mine, you might find that many oil and gas companies may not be worthy of our attention even if they look cheap based on the numbers alone.

Foolish takeaway

When looking at the investment bargains that come at our way – be it from the oil and gas industry or otherwise – it is my personal opinion that we should be steadfast in our insistence on only owning the best companies. To end, I would like to share one quote from Warren Buffett:

Fool on!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.