Are Oil And Gas Stocks Looking Attractive Now?

The Business Times reported yesterday that many private equity firms are scouring the offshore and marine sector in the region for investing opportunities, indicating that some investors are turning optimistic about the sector.

But are oil and gas stocks really an attractive place for investors to fish now?

Some of the offshore and marine companies in Singapore have already seen their share prices partially recover from the lows set earlier this year. For instance, Sembcorp Marine Ltd (SGX: S51)Keppel Corporation Limited (SGX: BN4), and Ezion (SGX: 5ME) have seen their share prices climb by 10% to 90% over the past four months.

Looking at the big picture

The business environment for the global oil and gas industry does look calmer in recent months, especially after both OPEC and non-OPEC oil producers struck a deal to cut their production of oil which will kick in at the start of 2017.

This gives us more clarity on the supply side of the picture for the oil and gas industry.

However, a production cut does not tell us anything regarding the demand for oil and gas. If the world economy remains stable, the demand for oil might also be stable. But if any major economic crisis should flare up in the near future, the global demand for oil could be dampened drastically.

Moreover, the Federal Reserve in the US is thinking of implementing a slew of interest rate hikes in 2017. Many oil and gas companies in Singapore’s stock market are highly-leveraged and higher interest rates would not be good news.

Looking at the small picture

Singapore has seen bad debts surfacing from the offshore and marine sector. But, the banks here still seem happy to lend to the sector, albeit at more onerous terms. To the point, DBS Group Holdings Ltd (SGX: D05) even extended more credit to Swiber Holdings Ltd (SGX: BGK) earlier this year to help the embattled oil and gas company tide through the storm.

Swiber unfortunately still went under, but banks’ willingness to continue extending credit to offshore and marine companies shows that all is not lost within the sector.

Foolish Summary

In all, there are mixed signals coming from oil and gas stocks. Positive signals include the production cuts from oil producers. On the negative side, any future interest rate hikes are definitely going to further hurt highly leveraged oil and gas firms.

It is also important for investors to know that even if a sector might truly be turning around, not every company within that sector would be a great investment. It is important for investors to look at the merits/weaknesses of each individual company before making an investment.

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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 Stanley Lim owns shares in Keppel Corporation.