Are Oil and Gas Companies a Good Buy?

The last few weeks haven't been very kind to oil and gas companies, especially Keppel and the two Sembcorp companies, with Sembcorp Industries reaching 2008 crash levels before rebounding on Friday as well as Sembcorp Marine before rumours that its parent, Sembcorp Industries would inject funds to save it or take over full control of it. With such low prices, are oil and gas companies a good buy at their current price levels.

(Image source: pixabay.com, lalabell68)

There is still an oversupply of oil and with Iranian oil coming to the market, the situation doesn't look set to improve for a while. Weak demand for oil coupled with excess oil reserves will further dampen the prospects of oil improving in the near future. So anyone investing in oil and gas companies should be prepared to hang on for a while before oil prices recover and hopefully see the fortunes of their companies improve along with it.

But, that said, oil has a history of boom and bust (just look at the chart below), just like the stock market and for the time being, our world is still largely dependent on oil for the production of energy for uses such as electricity, cars, etc. While this may change in the future, it will likely take quite some time before we are able to significantly reduce our reliance on oil and until then, there will be at least some demand for oil.

Oil price chart

So with that as a backdrop, investing in oil and gas companies may be a good idea for the long-term investor, given that he/she invests in a good company that is able to ride out the storm. For this, I would prefer to invest in the blue-chips instead of the small to medium-sized oil companies which are more likely to be swept away by this storm.

In this storm, I would prefer Keppel and Sembcorp Industries over Sembcorp Marine as they have a more diversified portfolio. For Keppel, this includes property (which currently makes up majority of its profits after the drop in oil and gas profits) and infrastructure while Sembcorp Industries has a huge utilities business (which makes up the majority of its net profit). These other businesses would help it to survive through the period of low oil prices. 

Looking at the net gearing ratio, Keppel and Sembcorp Industries are slight above half while Sembcorp Marine is around 0.63. However, it is good to note that part of Sembcorp Industries' equity is made up of perpetual securities, which would push up the ratio if this is counted as debt and not under equity. (I used AY2015 numbers for Keppel while for the two Sembcorp companies I used Q3'15 numbers)

I think that Keppel and Sembcorp Industries are better investments in this oil price downturn as they are more diversified than Sembcorp Marine as well as their lower net gearing ratio, but overall, these companies don't seem over leveraged and should be able to survive through the storm so being able to pick them up at a good price and hold on to them sounds like a good idea to me.

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