Last Thursday, I was minding my own business while having a bit to eat when Dave wandered over to my table.
“Hey mate, when was the last time you put fuel in your car?”
To be honest, I’m probably the last bloke to ask because I’m a walkaholic.
But Dave’s a big swinger in the hard world of corporate finance plus he just bought a new car, so he’ was keen to find out.
Truth is, I couldn’t remember so I thumbed through my receipts….
And bugger me. It was nearly a month ago!
Not surprisingly, world demand for oil has plummeted since going into lock down. But preceding COVID-19, Russia and Saudi Arabia were already wagering economic hostility against the US by saturating world oil supplies.
Consequently, oil prices have tanked.
So the question follows…
Is now a good time to be buying oil stocks?
In Australia, there are only two oil stocks worth considering…Woodside Petroleum (WPL) and Oil Search (OSH).
Woodside is currently trading at around $22, down from a recent high of $35. Plus it has a big fat fully franked dividend yield of 6.5% which equates to 8.25% inside super. Not bad eh!
Similarly, Oil Search is trading at around $3, down from $7. It too has a very impressive dividend yield of 6.25% (approx. 8% inside super).
So whats the better buy? Woodside or Oil Search?
Proof versus Potential
One of the best (and hardest) lessons I learnt as a younger stockbroker is understanding the difference between ‘proof and potential’.
When you buy an asset based on ‘potential’, you’re taking a punt. But when you buy an asset based on ‘proof’, your buying proven performance. You’re making a qualified decision.
And if you’re wondering what ‘proof’ looks like, it’s any asset that’s making money (profit).
Sadly, most people invest in potential because there’s more perceived upside…even if it’s not making money.
BTW…’potential’ type stocks make up about sixty percent of the stock market. i.e. only 40% are making money, hence the reason a lot of people do their dough.
And don’t think I’m just talking about shares here either, I see it in property all the time. Especially land and house packages in new ‘boom’ areas as well as off-the-plan purchases.
So what does this mean for Woodside and Oil Search?
Prima facie, you’d think that after such a sharp fall, Woodside would be great value at these prices, but it’s not. It’s still expensive.
Oil Search on the other hand, is dirt cheap. But its balance sheet is not as strong (too much debt) as Woodside’s .
But here’s the biggest issue of all…
If oil prices remain this low for much longer, both these businesses face the prospect of having to shut down oil fields because of the cost of production. i.e. unprofitable
Therefore, an investment in either stock at the moment would just be a punt, despite their respective histories.
Proof will appear when you see planes in the sky and you’re complaining about fuel prices again.
Importantly, I’m not suggesting either business is about to disappear down a hole either. I just think there will be much better opportunities when this market corrects again.
But if you do want to take a punt, maybe slip a roast in the oven for Mother’s Day. That one has heaps more potential!
Have a great weekend and happy Mother’s Day!
Adam
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