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If You’re Investing In Oil & Gas Stocks In This Way, Stop!

Nearly a year ago on 30 December 2015, I wrote and published an article titled 1 Crucial Investing Tip: Don’t Confuse Economics with Investing.

The gist of the article can be summed up in this sentence that appeared in the piece: “An economic trend and a stock’s performance can be miles apart. Bear this in mind when you invest.”

In the article, I also wrote about oil & gas-related stocks:

“One of the biggest macro stories of the year has been the drastic fall in the price of oil. It has caused many oil & gas stocks to fall in tandem. It’s easy to imagine that oil & gas stocks would start climbing again if the price of oil were to recover.

But, it can be a mistake to buy oil & gas stocks blindly in the hopes of hitching onto a rebound in oil prices. That’s because no one knows when – or even if – the price of oil will rebound.

But even if we assume that oil will surely bounce back up again in the future, there may be some oil & gas stocks that will have been destroyed, or become a pale shadow of their former selves, before any jump in the price of oil can happen.”

I followed on in my article by pointing out that trio of Vard Holdings Ltd (SGX: MS7), EMAS Offshore Ltd (SGX: UQ4), and Ezion (SGX: 5ME) looked risky because of their weak, debt-laden balance sheets.

Earlier today, I happened to observe how oil prices have changed since 30 December 2015. According to data from Bloomberg, the price of WTI Crude Oil was at US$36.60 back then. Today, it is 42.5% higher at US$52.16.

Now, here’s a table showing how the stock prices of Vard, EMAS Offshore, and Ezion have changed since 30 December 2015:

vard-emas-offshore-ezion-share-price-table
Source: S&P Global Market Intelligence

Notice the huge discrepancy between the trio’s stock price changes and the gains recorded by WTI Crude Oil over the same timeframe? Vard’s stock price is flat, but investors in EMAS Offshore and Ezion have been skinned.

The following table shows the revenues and profits of the trio of companies as of 30 December 2015 and today:

vard-emas-offshore-ezion-revenue-and-profit-table
Source: S&P Global Market Intelligence

It’s clear that their businesses have become significantly weaker since end-2015. And, this is a great example of what I wrote about in my earlier article, that “even if we assume that oil will surely bounce back up again in the future, there may be some oil & gas stocks that will have been destroyed, or become a pale shadow of their former selves, before any jump in the price of oil can happen.”

So, if you’re investing in oil & gas solely because you think the price of oil will climb, please stop! Study the business conditions of oil & gas stocks carefully. An economic trend and a stock’s performance can be miles apart. Bear this in mind when you invest.

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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 writer Chong Ser Jing doesn't own shares in any company mentioned.