Adding oil and gas exposure to your portfolio is an easy way to spread volatility and profit from the expected rising price for oil and gas over time. Even Warren Buffett owns oil and gas stocks through a stake in Exxon Mobil.
But with so many to choose from, how do you stack the odds in your favour and pick a winner? Here are three simple tips to push you in the right direction:
1. Identify companies that match your investment style
Oil and gas companies come in all shapes, sizes and risk levels, so it's important to match prospective companies to your personal investment style.
For example long-term investors who are looking for an established company with recognised earnings and continued growth would be drawn towards Santos Ltd (ASX: STO), whereas dividend investors may prefer the strong cashflows of Woodside Petroleum Limited (ASX: WPL).
Speculative growth investors looking for a bit more spice may be more suited towards the prospects of a company like Strike Energy Ltd (ASX: STX), while more risk averse growth investors may be more suited to an established mid-tier producer like Senex Energy Ltd (ASX: SXY).
2. Pick the company with the most reserves at the lowest price
Once you have narrowed down the options, compare each company's price per barrel of oil equivalent (boe) using the EV/2P ratio. This is a simple calculation made by dividing the company's enterprise value by its 2P (proved + probable) reserves.
On this basis Santos has an EV/2P ratio of around $13.60 per boe, whereas Beach Energy Limited (ASX: BPT) comes in at $20.40 per boe, suggesting Santos' pool of energy reserves can be bought more cheaply.
3. All else being equal, buy the lowest cost producer
As with all commodity producers if all else is equal buy the lowest cost producer. This includes capital expenditure requirements and operating costs involved in extracting and moving the oil and gas to the market.
Some companies will require significant investment in infrastructure like pipelines and storage tanks where none exist already. Others, like many of the companies operating in the Cooper Basin, are able to leverage existing infrastructure for a fee, which can lower capital requirements.
