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Is The Oil And Gas Industry Turning Around Now?

The oil and gas industry deals with commodities, which means the industry works in cycles.

There are times when the oil and gas industry will be booming, just like there will be times – such as now  – when the industry becomes a “dirty” phrase amongst investors due to it being in the doldrums.

In an earlier article of mine, I discussed the characteristics of cyclical companies. In it, I wrote that there are times when investing in cyclicals can bring great benefits to investors. So, has a turnaround arrived for the oil and gas industry?

There have been better and better news coming out from the industry.

In late 2016, there was the landmark agreement by both OPEC and non-OPEC members to cut their level of oil production, as well as news about the Singapore government’s efforts to help the country’s oil and gas industry weather through the storm.

Then in early January this year, the government came out with even more measures to provide support to beleaguered companies in the oil and gas industry.

Recently, it was reported in the Financial Times that less than 174 new oil and gas discoveries were made in 2016, which is sharply below the average of 400 to 500 discoveries a year up until 2013. Many debt-heavy oil and gas companies are also facing the threats of bankruptcy or restructuring, potentially leading to a proper consolidation of the industry.

All of these point toward a lower supply of oil in the future, which leads to higher oil prices with all things being equal and thus, a brighter time for the oil & gas industry. If it really is the case, then a question needs to be asked: Which are the companies in Singapore’s stock market that may benefit from any future upswing in the industry?

One crucial characteristic of companies that belong to the group would be a strong balance sheet. The companies would need to at least be able to weather the current storm relatively unscathed. At the moment, oil and gas companies in Singapore’s stock market that have relatively strong balance sheets include Baker Technology Ltd (SGX: BTP)MTQ Corporation Limited (SGX: M05), and Keppel Corporation Limited (SGX: BN4).

But, the price of oil is just one of the many factors affecting the business of oil and gas companies. Moreover, the price of oil is a function of both the supply and demand of the commodity. Although we are seeing evidence of a lower supply of oil in the future, many are just assuming that demand would be relatively stable. But, things can change.

If you are planning to invest in the oil and gas sector, these are just a few areas you may want to think about before clicking that “Buy” button.

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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 and MTQ Corporation.