There has been a recent surge in articles focused on the energy industry specifically addressing the exceedingly low price of crude and natural gas and the sustainability of these low prices. There are few, if any, that feel that these low prices will remain over the long-term and forecasts only really differ in when the price of crude and natural gas will move higher and how high it will go. The over-arching theme that one can observe at the moment is that low oil prices are discouraging investment in future production, which will eventually lead to an energy deficit forcing prices dramatically higher for an undetermined period of time.
With all of this in mind, where are the soundest opportunities to profit from this predicted shift? Many have speculated that a pure bet using a crude oil focused ETF or, if one has the capital, a long-term purchase (12 month or more) of a crude future is the most profitable way to invest. Although there is some potential here, it is difficult to determine when this increase in prices may occur and thus, the risk reward ratio may not be justified given the volatility in these prices. Another investment might be focused on exploration and production companies as many are valued below their net asset value. This is certainly a valuable option, but offers certain challenges as one must be sure that when demand increases, the infrastructure is readily available to get the crude and gas to market. Additionally, those exploration and production companies that offer the most opportunity for reward (junior oil and gas companies) carry a certain degree of risk at the moment given their reliability on credit.
Finally, let us examine an investment in oil and gas service companies. When demand returns to sustainable levels and prices begin to push upwards, service companies will be among the first to see significant increases in revenue as for any activity to take place one must utilize any number of services. This increased demand will lead to both revenue increases and profit margin increases as exploration and production companies vie for service attention. Additionally, as referenced in the prior point, the required infrastructure will likely create a double win for service companies as large scale transportation projects are taken on to accommodate the rapid increases in production. Finally, with oil and gas service companies sitting at 10 year lows, they feature many of the unique low-value opportunities that investors hope to take advantage of in other, less strategic investments.
It is with this sentiment that we continue to monitor the oil and gas service sector with much optimism. Evidence suggests that higher oil prices will emerge in the next 6-18 months leading to a dramatic increase in production. This production will launch a wave of demand for oil and gas services that will be accompanied by infrastructure requirements generating additional demand. Finally, as the American economy emerges from this period of economic distress, it is entirely plausible that Americans will choose to save and invest more leading to an upswing in stock prices. In the end, it is believed that strong planning and strategy will yield strong rewards in the years ahead.
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