Photo by Clinton Steeds

Before I go into the rationale behind my purchase, I will like to share some thoughts on the oil & Gas industry (from the investment context) and value investment in general. I had quite a fruitful discussion on the above topics in one forum thread and exchange of comments with a reader on my blog entry when I purchased SPC.

Oil & Gas Industry from an investment point of view

The first thing that came to mind when one discussed about the industry is crude oil price. As far as investment is concerned, unless one buys a crude oil index exchange traded fund (ETF) or equivalent, using crude oil price as an indicator is not so straight forward.

The meaning behind crude oil price

It is quite easy to miss the forest for the trees. Once the crude oil price surge, the immediate sentiment is that oil and gas industries must be making money but this is not so. Crude oil price is just a barometer for supply and demand. Whether emotional, speculative or real, it just signifies meeting point between them. And it is that simple.

Oil and gas activities can be divided roughly into 3 categories:

1. upstream (oil and gas exploration and production)
2. downstream (crude refining)
3. support (offshore support, rig manufactures etc)

When real or anticipated demand exceeds real or anticipated supply, oil price surges and vice versa. The movement of the supply and demand curve moves the crude price and had varying effect on players in the above 3 broad categories. Note that demand and supply curve (whether real or emotional) must move first before crude oil prices barge.

Upstream

Players in oil & gas exploration and production players are the first to benefit when price surge and first to suffer when price plunge (especially so when price plunges below production cost, i.e.

Profit = function (crude oil price) Read more…