Are you considering investing in the oil and gas industry in 2021? We have put together a little insight on the industry, the price volatility and how the economy plays a role.
The O&G industry is dependent on the economy and due to COVID-19, it has felt the impact of decreased profits due to government shutdowns and restricted travel. Looking back, the average price per barrel for crude oil in 2019 was $56.99, and for 2020 it was $39.68. The lowest price per barrel of crude oil in 2020 was $11.26, while in 2019 the lowest price only hit $46.31. Looking at natural gas, we see that the average price per MMBtu for 2019 was $2.56 and for 2020 it was $2.03. The lowest price per MMBtu of natural gas in 2020 fell to $1.33 while in 2019 the lowest price only hit $1.75. Price fluctuations, due to a decrease in demand, has caused a significant decrease in revenue for exploration, production, oilfield service providers, and drilling companies.
Instead of looking at previous and current prices of O&G, another way of seeing the industry’s relationship with the economy is by looking at the Beta of the stock you are thinking of purchasing. Beta is a statistical measurement that compares the volatility of a stock against the volatility of the broader market, which is typically measured by a reference market index. Since the market is the benchmark, the market's beta is always one. When a stock has a beta greater than one, it means the stock is expected to increase by more than the market in up markets and decrease more than the market in down markets. Conversely, a stock with a beta lower than one is expected to rise less than the market when the market is moving up but fall less than the market when the market is moving down. You will see that O&G companies tend to have a higher Beta than other industries.
When COVID-19 occurred in 2020, the Crude Oil market took a nosedive from February to March of 2020, hitting the lowest price seen in years during April 2020. The market for O&G has slowly been recuperating as have many other industries that were also impacted by COVID-19.
What type of investment options are there if you don’t want to invest in a specific company? You have the option of investing in oil and energy mutual funds. These funds by nature are less risky than individual stocks and will also provide good exposure to the energy sector. If you are looking for an investment option that is more closely related to the price of the commodity, you can consider the option of investing in an O&G exchange-traded fund (ETF). The price of O&G ETF’s usually moves remarkably close to the actual price of crude oil or natural gas, making these a more volatile investment option. ETFs also do not give dividends like many of the individual stocks. If you are an investor who wants to take a more “hands-on” approach to oil and gas investing, consider an oil and gas direct participation program (DPP). DPP’s are designed for people to invest directly in oil and gas production and exploration. Investing in individual companies’ stock, mutual funds, ETF’s, and DPPs are just some of the options you could choose to start investing without having to invest hundreds of thousands of dollars with a lot of risk involved.
Although we, at ADKF, are not investment advisors, we will be ready as your chosen tax professionals to help you report any royalties, dividends, or stock gains/losses on your chosen Oil and Gas investments.