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2 Key Points to Consider Before Investing in Oil and Gas Companies

Saying that the price of oil has fallen might be an understatement. Here’s how far the cost of one barrel of the fuel has sunk since 2014:

2016-01-04 Oil Price Crash
Source: Nasdaq

The oil crash has claimed more than a few victims in Singapore’s stock market.

As just two instances, shares of rig-builder Keppel Corporation Limited (SGX: BN4) and oil services provider Ezion  (SGX: 5ME) have dwindled by 42% and 67% in price, respectively, since the start of 2014.

Big opportunity?

The falling stock prices of many oil & gas companies might make them look like an opportunity for investors.

But when shopping, if we are undisciplined in our purchases, we may end up with things which we don’t need. Similarly, if we are undisciplined with our stock purchases, we may find ourselves with shares which do not fit into our investing portfolio.

As such, there may be a few things to consider before we dive into the oil & gas bargain bin.

Consideration 1: Your portfolio allocationclick here for more.

Consideration 2: Using the “too hard” pile

Warren Buffett is the chairman and chief executive of Berkshire Hathaway Inc and he has been so since 1965. Over the last five decades, Buffett has built an enviable track record of investing success, growing Berkshire’s book value per share by more than 19% annually.

But despite his success, you may be surprised to learn Buffett has a “too hard” pile when it comes to investing – he is keenly aware of what he knows and what he doesn’t know.

The investing ideas that he doesn’t understand end up in his “too hard” pile. And in another surprising nugget for some, tossing ideas into the “too hard” pile is also arguably the action Buffett makes the most when he invests.

So, if we do not have sufficient knowledge about the oil and gas sector, we may be better off avoiding it all together by invoking the “too hard” pile. After all, not all bargain bins are made for everyone.

If Buffett can have a “too hard” pile for himself, perhaps, so can we.

Foolish takeaway

Oil prices may be experiencing one of their worst 18-month stretches now. My U.S. colleague Bill Mann summarized this in his recent tweet below.

Given the historic decline we’ve seen in oil and the resultant carnage in oil-related stocks, it could be an investment opportunity if you are willing to wait it out.

However, not all stocks that fall may turn out to be opportunities. Some stocks fall and remain there. As always, we should do our homework before investing in any company.

Adding a few guidelines, like portfolio allocation, may help you avoid overcommitting to one sector alone. Meanwhile, if you find the oil and gas sector to be “too hard,” you may always opt out from investing in it entirely.

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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 owns shares in Berkshire Hathaway.