Buying Oil Stocks - What You Need to Know
Last week oil $OIL prices fell by more than 30% in a single day. How do we buy oil stocks at a discount?
I always hear people saying that oil is a dead industry. Actually, people will still need oil for years to come. Unfortunately, we don't have a reliable energy source to replace oil. Renewables are still too expensive and inefficient. People for some reason don't like nuclear although it is the cleanest, safest and most efficient form of energy. It is true that there will be EV in the future but you look at the cheapest Tesla $TSLA , it costs $35 000, but you can buy an ICE vehicle for cheaper than that. Do you think people in developing countries are likely to switch to EV that fast? The demand for oil will still be here and especially the demand for natural gas $NATGAS . Natural gas is less polluting than oil and is seen as a better alternative.
The real reason why oil prices are so low is because of over supply. There's too much oil in the market right now. We know the rule: buy low, sell high.
In the future, oil prices may rise as inflation rises. With this recession, governments are printing a lot of money and in the future this will cause inflation. Higher inflation always means commodity prices will go up.
You need to understand the three types of oil companies:
1. Upstream - oil producers
2. Midstream - oil transporters
3. Midstream - oil refiners
If you're looking for safe investments then downstream is the best but if you're looking for higher margins, then you need to look at upstream.
I won't advise anyone investing in big oil as passive investors don't want to invest in them. They want more eco-friendly investments. That's why it is better to look at smaller oil companies. Another reason not to invest in big oil is because they are too big and it is harder for them to grow. But smaller oil companies are of course riskier.
You also need to know how much proved reserves these companies have and what it their break-even point. You don't want to invest in a company that will run out of oil in 5 years or one which needs oil prices at $100 to be profitable.
Oil companies also have derivatives that protect them from volatilities in oil prices. Make sure to understand that. You don't want a company with bad or too many derivatives as derivatives are liabilities.
Take your time with the oil companies. Nobody knows where will oil prices go in the coming weeks or months. You have enough time to do a thorough analysis of the oil industry to find the best investments.
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If you want to know more about Parsley Energy, one of the oil companies in my portfolio, here's the full analysis:
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