Are you about investing in oil stocks but lack the know-how? If YES, here is a 10-step guide on how to invest in oil and gas stocks profitably with little money. The goal of every investor is to invest in stocks that will bring huge returns on their investments; and that is why people takeout time to study the stock market and various stocks to know how they are performing before committing their hard earned money to it. One of the coolest ways of making money is to invest in oil stocks that are doing pretty great in the stock market.
In recent time, buying oil stock is becoming riskier because of the rapid fall of global oil prices; it has fallen to the level of more than 40 percent since 2014. Despite the fall in oil prices, oil stocks still remain one of the most lucrative stocks to invest in simply because it has the capacity to bounce back like it has always done in time past. As a matter fact, the best time to invest in oil stocks is now; when the price of oil in the global market is on a decline.
Types of Oil and Gas Stocks to Invest in
Table of Content
- Integrated Oil Stocks
- Refining Stocks
- Independent Oil Company Stocks
- Oil Services Stocks
- 1. Pull Your Cash Together
- 2. Determine what kind of investor you are
- 3. Determine the investment method that is best for you
- 4. Conduct Your Research on Various Oil Companies Listed in the Stock Exchange
- 5. Study Various Oil Stocks in the Stock Market
- 6. Seek Expert’s Advice (Stock Broker)
- 7. Purchase Oil Stocks of Your Choice
- 8. Know When to Buy More Oil Stocks and When to Sell Some of Your Oil Stocks
- a. Location
- b. Assets
- c. Their growth trends
- d. Attractive valuation
- e. Cash flow problems
- f. Yield
- g. Payout ratio
Integrated Oil Stocks
Integrated oil stocks are generally reserved for investors who wish to be conservative in the market. One major point that differentiates integrated oil producers from other oil companies is that integrated companies explore for and produce oil (upstream operations) as well as refine and market oil and gas (downstream operations). Additionally, integrated oil stocks are usually among the better dividend-payers in the energy sector.
Refining stocks are the stocks of refining companies whose firms are focused exclusively on downstream operations. That means refiners do not explore for or produce oil but only refine produced oil. While these companies are not producers, they are correlated to the price of crude in that high oil prices weigh on refining margins by leading to demand destruction.
Independent Oil Company Stocks
Independent oil producers do not have refining operations and are generally smaller than their integrated partners. That said, there are plenty of large-cap independent oil companies that investors can choose from. Some have been sound performers over time, though long-term investors should know many independent oil companies do not pay dividends that are comparable to their integrated rivals. Also worth noting is that some independent oil companies actually produce more natural gas than they do oil and that can weigh on their earnings if natural gas prices are low.
Oil Services Stocks
Oil services companies provide a lot of services from onshore and offshore rigs, to cement for oil wells to drill bits and parts. These companies do not directly produce oil, but they very much are “oil stocks” because their products and services are essential to the production of crude. Investors should evaluate global economic trends before considering oil services stocks to see how they are performing.
There are no hard and fast rules about how you can successfully invest in oil stocks. If you are a rookie it will be to your best interest to consult a stock broker to guide you on how to invest. They know the right time and the right stock to buy that will yield you good returns on your investment. Now let us quickly consider some helpful tips that will guide you in investing in oil stocks;
How to Invest in Oil & Gas Stocks Profitably With Little Money
1. Pull Your Cash Together
If you are going into the trade of oil stocks and have little or no money at all, then you may be running round in circles. It is for this reason that it is imperative that you work out ways through which you will want to gather resources. One of the ways through which you can raise money to invest in oil stocks is through family and friends. There may be some family members and friends who believes in you and may want to support you.
Yet another way might be through saving. If you have a rich saving culture, then you may want to consider using your savings to buy oil stocks. Some experts have said that it is a good step to borrow money to invest. On the other hand, some experts have gone ahead to condemn it saying that it is best to invest with your own money.
2. Determine what kind of investor you are
Before you even start investing in oil and gas stocks, you have to determine the kind of investor you are. You should know if you want to invest in large stable companies with a long history and strong cash flow, or if you have the backbone to tolerate higher risk, and want to look for more leverage in the junior stocks, where a discovery could either give you a multiple return or lose most of your investment. Knowing this would help you make an investment decision.
3. Determine the investment method that is best for you
The next thing you have to find out is how you intend carrying out your investment. This means if you would want to use a stockbroker or if you want to do your own research and make the investment by yourself. If you would prefer to use a stockbroker, you can you have to contact a reputable one online and tell him or her what you need.
If you have decided to do the investment by yourself, then you have a lot of work cut out for you because you have to do a lot of research and make a lot of findings before you delve into the market.
4. Conduct Your Research on Various Oil Companies Listed in the Stock Exchange
After you might have been able to garner money, the next thing to do before committing your cash to THE buying of the oil stock, would be to conduct a research on the company or companies that you intend buying their stocks.. What does this entail, you may ask? It entails looking through the internet or via books to read up a lot that need to be read up about the various oils and whether they are listed in the stock market of your country.
You can start by checking out corporate presentations on the company website you intend to purchase their stocks. To dig in further, you can call the management of the company directly with any issues you may have (though the bigger the company the harder this is, and few energy companies have investor relations people).
Your next step would be to read the quarterly financial statements, the numbers and the notes provided by the company (the more you get into it, the more you will find that most good information is in the notes and the management discussion). Some of the things you need to find out for your research to be successful include;
- The first is to find out how many barrels of oil per day (bopd, or “boe” for natural gas – barrels of oil equivalent) the company is producing, and how quickly they grown production in each of the last 3 quarters. You can take your research further back if you wish to.
- You should also look into the net cash or net debt do they have. This industry uses a lot of debt, so if a company actually has net cash, they could grow more quickly because they have an entire untapped line of credit waiting to go drilling, and grow the business. No debt is always seen to mean no debt payments and flexibility in doing business.
- You should also look into their properties. Investors give North American assets a slight premium, unless the company is either growing very fast or has a management team that has built and sold an oil & gas company. Political risk shows up in the stock price.
- You also need to know how many wells the company will be drilling in the coming months. This will give you an idea of how fast they may grow. Companies usually say in their presentation how many wells they will drill property by property, but don’t often give an overall number in one slide.
- You need to look into their drilling costs and check if they have the cash to finance this drilling cost, and if they have the money or cash flow to do it. Most companies have a slide in their corporate presentation that shows their estimated cash flow for this year or next, along with their estimated capex, or capital expenditure which is their drilling budget.
- If the company is into drilling, you have to check if the wells higher risk exploration wells or lower risk development stage wells. Development wells are just filling in an already discovered oil field. It means these wells will almost certainly repeat the success of the discovery well; the oil or gas formation is large and drilling success is “repeatable”. The market loves certainty, and most companies go out of their way to crow about their “undeveloped land acreage” and “X year drilling inventory”; the number of wells they could drill on this development-stage land.
- If the company is doing exploration drilling, you need to find out what has been the company’s success rate in each of the last two years.
- You should look into the management of the company and find out what they have done in the past. Have they ever built and sold a producing energy company?
- If the company is operating in a foreign country, you should find out what kind of political connections they have. Who from that country is in management or on the board of directors?
- What is the break even cost, company wide, and in their main play, in terms of price per barrel?
- Look at the stocks of the company the management owns and find out how much it is. Also find out which people on management are the largest shareholders in the group, and how much hard cash – not stock options – the management has in the company.
- Look at their stock chart and find out if it is moving up or down. Ask management what the market is missing in terms of appreciating the company and stock.
5. Study Various Oil Stocks in the Stock Market
After you have conducted a general research to find out some indispensable details that can help you make a right move towards investing in stocks, then you may consider going a bit more specific as you study the various oil stocks in the market. Find out information like when it started, how many people turn to this daily, weekly, or monthly, and the level of profit that is being made there.
6. Seek Expert’s Advice (Stock Broker)
You already know by now that no man is an island. That is why you will need to sample the views of experts. Who are these experts? They are seasoned stock brokers who will be in the best position to take on your questions and making things clear on how so and so oil stock can be of immense benefit when you dabble into it. How can you find an expert, you just might ask? You will find an expert when you visit a stock brokering company. Conversely, there may be some stock brokers that can be available on the internet.
7. Purchase Oil Stocks of Your Choice
After you have been put through and are really satisfied with all your questions that have been supplied with, then the next thing to do is to go right ahead to purchase your oil stocks. Be sure to go through the appropriate means so that you do not get your fingers burnt.
Stock investing is filled with intricate strategies and approaches, yet some of the most successful investors have become very successful with it. If you have done proper due diligence, you would indeed make a good yielding investment. Note that the oil and gas company, though is volatile, but there is still money to be earned in its volatility.
8. Know When to Buy More Oil Stocks and When to Sell Some of Your Oil Stocks
Now that you have purchased your oil stocks, it is not time to sit and do nothing. You have to continue to be vigilant by reading always and putting your ears close to the ground so that you can know all that is going on, as well as know when to sell them your oil stocks off and when to buy another.
7 Things to Consider When Investing in Oil and Gas Stocks
If you want to be successful while investing in the stocks of oil and gas companies, you have to keep a few things in mind.
Depending on the specific sector you want to delve into, where the company is operating is sometimes as important as (if not more important than) who’s doing the drilling. It could mean the difference between drilling in the Bakken formation, which has fueled North Dakota’s oil boom for the past five years, and drilling one dry hole after another.
You should note whether a company is a fully integrated oil company with assets upstream, midstream, and downstream, or a small E&P company holding on to an exploration license. You should always take note of a company’s assets.
For upstream activity, this could mean leases or reserves. Midstream assets include storage and transportation facilities, trucks, pipelines, or even tankers to ship millions of barrels of crude oil. Downstream assets can include oil refineries, pipelines, trucks, or other means of transporting refined oil and gas products.
c. Their growth trends
You need to find out if the company managed to increase revenue in the previous year, and does it expect to meet future revenue and earnings during the next four quarters? You should equally look into their balance sheet to see if the company is being weighed down by a major debt load. A company with little to no debt and the ability to fund its drilling program going forward is a good sign for future performance.
d. Attractive valuation
What is the company’s price/earnings ratio? Is it under 10? Moreover, a company with a price/earnings to growth (PEG) ratio less than 1 could indicate that it’s currently undervalued.
e. Cash flow problems
You should find out what the company’s present and future funding needs, and if raising money dilute their stock.
Many oil and gas companies offer a secure annual dividend paid out to shareholders on a regular basis. When searching for a safe dividend, determine whether the company has increased, maintained, or even lowered its dividend during the past five years.
g. Payout ratio
This is the amount of earnings paid out in the dividend. A company with a high payout ratio may not provide a secure dividend to shareholders.
In addition to all these, you may also consider fraternizing with those who already have some oil stocks. This is so that you can share experiences and learn from one another about ways to increase your profit level at all times.