The price of Brent Crude Oil fell overnight by 0.45% to US$66.56 a barrel. At that level the price is comfortably off of its lows but still remains well down from its highs.
One stock which has enjoyed solid gains since January when the oil price bottomed is Origin Energy Ltd (ASX: ORG). Investors lucky enough to pick the bottom in the shares have in fact enjoyed a gain from $10.28 to $13, or about 26%.
Those are fantastic gains to achieve in such a short space of time, however, for investors who didn't jump aboard back in January the question is: can they still expect gains from this point?
It's a tricky question given the inherent difficulties in forecasting the oil price, however, even at US$66.56 a barrel, the price of oil remains below what most analysts believe to be the margin cost of production. Based on this theory, it's reasonable to suspect that in the medium to longer term the price of oil will eventually settle at a level closer to US$80 per barrel.
News in the Australian Financial Review (AFR) that Woodside Petroleum Limited (ASX: WPL) is set to agree to a 20-year deal to purchase 850,000 tonnes of Liquefied Natural Gas (LNG) per annum from the US is also a reminder to oil and gas investors that the value of energy stocks such as Origin and Santos Ltd (ASX: STO) should be based more on the long-term cash flows of a business, not the near term highs and lows of a business.
Just as a company such as Woodside must take a long-term view when it enters a 20-year contract, and Origin likewise must take a long-term perspective when it commits to spending billions of dollars building a LNG plant, so too should investors take a long-term view about the valuation they place on a stock.
