Where’s The Value In The Oil & Gas Sector?

The oil industry has been in the spotlight of late with oil prices dominating headlines around the world.

Between July last year and January this year the price of crude fell dramatically from above around $100 dollars a barrel to below $45.

A handful of factors contributed to the falling price of oil. One of the main reasons could be an oversupply in the market. Recently, however, oil prices have rebounded as some of the major oil producers have announced cuts to their capital expenditure, whilst rig counts have dropped at a rapid pace.

This rise in oil prices has been mirrored by Singapore’s Oil and Gas Exploration and Production Companies. The 10 companies under this category have experienced average gains over the first month of this year of more than 2%.

The biggest gainer has been Alpha Energy Holdings Limited (SGX: 5TS). The acquirer of exploration and production projects has seen gains of over 10%.

The biggest players in the industry have also seen gains. KrisEnergy Limited (SGX: SK3), which is capitalised at S$644m and Rex International Holdings Limited (SGX: 5WH), which capitalised at just under S$500m both experienced growth of around 2%.

However a look at the fundamentals of the 10 oil and gas explorers highlights how much of a speculative investment they could be.

Of the 10 only two have made a profit and thus have a meaningful P/E ratio. These are Interra Resources Limited (SGX: 5GI) and Giken Sakata Limited (SGX: 542). Their P/E ratios of 39 and 45 suggest little value is to be had however.

The other key metric in the measure of value is the Price-to-Book ratio. Only the three smallest capitalised companies are priced below their book values. Alpha is priced 20% below its book value while Interra Resources is priced at 30% below.

Such a narrow margin of safety is unlikely to convince a value investor to take the plunge with these companies.

An investment in these companies could be seen as speculative investment on two counts – you are hoping that the companies first of all strike oil and that the price of oil rebounds to a level that is sustainable for them.

A value investor is likely to avoid these companies in search of something that they can consider to be more of a one way bet in the long run.

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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 Adam Kuo doesn’t own shares in any companies mentioned.