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A Useful Investing Rule for the Troubled Oil and Gas Industry

When it comes to troubled industries, the oil and gas industry comes to mind. The carnage that the price of oil has suffered over the past 9 months has been nothing short of extraordinary.

Take a look at how oil prices have fallen:

2015-03-12 Brent Crude Oil Price

Source: Nasdaq

While we are not in control on where oil prices will go next, we can control our reaction to this carnage. And for that, we may look towards investing guru Peter Lynch for advice on troubled industries.

Peter Lynch’s golden rules

Lynch might be someone worth listening to on investing matters. After all, he led the U.S. based Fidelity Magellan Fund to phenomenal annual returns of 29% over 13 years (from 1977 to 1990).

Besides delivering great returns for his investors, Lynch has also been generous to the investing community. In his bestselling investment book Beating the Street, Lynch had offered his thoughts on the subject and listed down “25 Golden Rules to Investing”.

One of it – Golden Rule no. 13 — was particularly helpful for troubled industries:

“If you’re thinking about investing in a troubled industry, buy the companies with staying power. Also, wait for the industry to show signs of revival. Buggy whips and radio tubes were troubled industries that never came back.”

When it comes to oil and gas, it’s a fairly safe bet to say that the industry will still be around for years to come unless cars and planes that run on fossil fuels completely disappear from the face of the Earth over the next five to 10 years.

The question though, is when the industry would show “signs of revival.”

The calm before the storm

At the moment, it may be hard to spot signs of revival in the oil and gas industry.

Take rig builder Keppel Corporation Limited (SGX: BN4) for instance. In its last quarterly report, the rig-building giant reported a decrease in its net orderbook for its offshore and marine segment on a year-on-year basis.

You can see the progress of Keppel Corp’s net orderbook (the blue line), along with the firm’s revenue and net profit, in the chart below:

2015-01-26 Keppel Order Book

Source: Keppel Corporation’s Earnings Report, author’s calculations

With Brent Crude prices still hovering below US$60, it could be a while before the full impact of  the oil-price-decline plays out. As one of the leaders in the offshore and marine sector though, the odds may be with Keppel Corporation to have the “staying power” that Lynch talked about.

That said, we may still want to keep an eye on the amount of debt on Keppel Corp’s balance sheet – being a large player in an industry would have no use if a firm actually has shaky finances. On that note, the debt pile on Keppel Corp’s balance sheet has been rising over the past few years.

Keppel Chart - 2

Source: Keppel Corporation’s Earnings Report

Foolish takeaway

Investors who jump into companies in the oil and gas industry should do so with an understanding that their business may well suffer in the interim. Following that, their share prices may also remain volatile for a while.

The more cautious among us may want to follow Lynch’s lead to wait for signs of recovery. The fearless among us might instead not want to wait for a cheerful consensus before investing. Both aren’t perfect as they might not lead to the best entry prices – but again, there’s really no perfect way to approach this situation.

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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.