Oil and gas investments – a close look

One of the commodities in which investments are made on a large scale is referred to as oil and gas stocks. These are also called oil and gas investments, and combine to form one of the primary investment arenas because of their high rates of return and greater opportunities. But before making any oil and gas investments, there are some factors that must be considered.

Oil and gas investments are not very easy to handle. The very first step that investors should know is how an oil and gas stock in which they are planning to invest is valued. Sometimes they can be overvalued, and such stocks would be a huge threat to an investment portfolio. The most appropriate way to find the actual value of the stock is to find out the price earnings ratio. Evaluate the company’s current share price compared to the per-share earnings that the company releases on a regular basis.

A price earnings ratio of 20 is a good indicator of growth in this industry; remember, different industries and sectors have different standards and interpretations of their respective P/E ratios. This indicates that either the quantity of drilling land has been expanded, or increases in efficiency and productivity will be contributing to higher operating profit margins in the near future. But it is not the case that the price earnings ratio is always accurate, because sometimes the company does not report the results that investors had forecasted.

“Trust units” are another investment mechanism to consider in the oil and gas sector. In such an arrangement, oil and gas stocks are converted into trust units which are then held by investors who are looking for steady and regular returns. But there are some investors who seek to keep an oil and gas investment in the form of common stock for the benefit of their portfolios, for reasons related to tax or estate planning or other reasons. It is important for the potential oil and gas investor to carefully weigh the pros and cons of each respective investment method before moving forward.

Analysis of oil and gas stocks should take into consideration the balance of oil and the gas holdings in the underlying stock. Investments in those stocks which have a higher ratio of natural gas should be avoided if the investor wants to stay away from the wild volatility of this particular market. Look instead for stocks which have an even ratio of oil and natural gas production driving the share price. This does not necessarily mean that these oil and natural gas stocks are hyped or overvalued. However, an error in valuation caused by an overweight proportion of natural gas can lead to losses for investors if the market swings the wrong way. This can also be an advantage to those investors who already have investments in gas-heavy stocks, depending on the circumstances. They can make use of the opportunity and consider selling those stocks to realize positive gains.

It will also be beneficial for the potential oil and natural gas investor to know the inside story behind the oil and gas stock, how the company operates and how oil and gas stocks are regulated. This will ensure the security of their investments.

- By Chris Termeer

Chris Termeer

Chris Termeer is an oil and gas consultant, industry commentator and analyst. His book, Fundamentals of Investing in Oil and Gas provides a comprehensive overview of all aspects of the oil and gas industry, including exploration, drilling, production, storage, transportation and refining, to name but a few.

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