Taking a look at the oil sector as a whole, from a fundamentals standpoint, investors should be having a field day out there, gobbling up all these fantastic companies at very cheap valuations.
That said, overly pessimistic sentiment seems to be prevailing, making such investments risky from the point of view that multiple contraction may be here to stay, meaning earnings growth may indeed be the only way out of this mess for the sector.
As we know, earnings aren’t growing in the oil and gas sector, partly due to the fact that many producers are deeply indebted, and partly due to low oil prices which have continued to persist (in Canada, the discount WCS receives relative to WTI and Brent is still substantial).
With the Energy Information Agency (EIA) recently revising its estimate for 2020 demand growth by approximately 25%, expectations are that global inventories will continue to rise led by U.S. oil production camping up further, and this view of a supply/demand relationship which is unfavourable to investors is likely to continue.
This bearish sentiment which has serious potential to last long-term makes picking the right oil stocks of utmost importance, if this is indeed the direction investors want to go.
I would recommend focusing on companies with stable/increasing cash flow that pay dividends, and have long-term projected dividend growth or stability. I view most cheap discounted oil plays as mostly cheap bonds with decent yields, which should provide steady income over time for shareholders.
I would aim for companies that pay a dividend in the 4%-7% range with strong balance sheets and take a long-term buy and hold strategy at this point in time.
Invest wisely, my friends.