Photo Source: South China Morning Post
Rarely do black swan events happen. But when it does, the market is always unprepared for it.
Headline. Saudi Arabia Oil Attack. World’s biggest petroleum processing plant facing major disruption. Output cut by 50%.
The title goes on and on.
Yes. Crude prices reacted as it should be. Faced with a potential shortage, oil prices jumped 20% a single day. The law of supply and demand curve reacted as it should be. Lower supply higher price.
However, should investors be rushing into upstream listed Oil and Gas (O&G) companies the first thing tomorrow morning?
Is it worth it to take a gamble assuming that upstream companies’ earning will be well aided to achieve far better results with this sudden bombings?
What about downstream companies which are heavily reliant on petrol chemicals and fuel, crude derived fractionated products? Should we also pre-determined that no risk assessment and hedging measures have been done to cushioned any severe price fluctuations?
What about also shale oil supply, which would act as a price buffer? What about over in Asia, biodiesel companies would also potentially be able to sell their products easily with Brent crude prices at a high.
The O&G business sector is a niche and very cyclical segment. It also has a long supply chain stream. Yes, crude prices could dictate the upcoming performances of O&G companies. But it is not everything. Sometimes share prices usually do not co-relate well with trailing or forward Price to Earnings ratio.
A great company would be a company that is able to grow, regardless of good times and bad times. During bad times, growth and profits could be slower and lower, but companies are rarely in the red. Conversely, during fantastic times, great companies would ride on great outlook to progress and grow beyond average peer returns.
Nevertheless, there are always great companies in the O&G segments. What are the O&G companies that fit your bill of a great company?