3 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 44% and 68% 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” pileclick here for more

Consideration 3: Do you have  tunnel vision?

The fall in stock prices for many oil-related companies has gotten investors excited.

But as we pore over those companies, we may not want to be overly focused on the oil & gas sector alone. If we have tunnel vision, we may miss out on opportunities elsewhere.

For instance, tourism asset operator Straco Corporation Ltd (SGX: S85) has seen its shares nearly double since the start of 2014. This comes on the back of growing revenue and profits.

As investors, we want to find the best places to invest our money. This could be in oil and gas stocks which have fallen hard – or it could be stocks in other sectors that have not fallen.

Prior to Straco’s strong performance in 2014 and 2015, the company’s shares had been climbing over the past few years without suffering significant declines. You can see this in the chart below, which plots Straco’s share price from the start of 2010 to the start of 2014:

Straco share price 2010-2014
Source: S&P Capital IQ

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. Lastly, we may want to avoid tunnel vision – there could be great bargains lurking outside the realm of beaten-down oil & gas stocks.

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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.