A big development in the oil and gas industry could be just what the industry needs to bring investors back and help stocks finally find some momentum. Although supply cuts were extended in November and eventually helped oil prices climb to highs not seen since 2014, that just hasn’t been enough to attract investors.
The fear is that current oil prices are only being propped up by the cuts and will fall once we see those restrictions lifted, and that’s making many companies hesitant as to whether or not to spend capital.
However, Reuters recently reported that Saudi Arabia and Russia were looking at an agreement that could extend as long as 20 years. According to the article, Saudi Crown Prince Mohammed bin Salman told reporters that “We have agreement on the big picture, but not yet on the detail.”
A long-term deal would provide much more stability for the industry
If companies in oil and gas saw some long-term stability in price, that would likely result in more investment in the industry. Over the past few years, we’ve seen many oil and gas companies get involved in hedging activities just to secure a price of oil that would ensure operations remain profitable in uncertain times.
With a long-term agreement, that could keep the price of oil stable and companies would no longer have to worry about hedging contracts and could instead focus on production and on bringing down costs.
Many oil and gas stocks could become great buys
Enbridge Inc. (TSX: ENB)(NYSE: ENB) is one stock that could stand to benefit from a stronger, more stable price of oil. In the past year, the share price has dropped more than 25% as cancelled pipeline projects and an overall bearish outlook for the industry have outweighed any good news that has come as a result of rising oil prices.
The stock trades at a modest 1.4 times its book value and recently hit a new 52-week low. However, it’s not the only stock that has struggled. Cenovus Energy Inc. (TSX: CVE)(NYSE: CVE) has gone on a similar decline, although it has seen some rallies along the way. The stock is heavily undervalued and is trading at just 0.7 times book value, despite the company’s ability to post a profit in four of the last five quarters.
Baytex Energy Corp. (TSX: BTE)(NYSE: BTE) may have declined a little less in the past year, but that’s because the stock already took a beating over the last three years, losing more than 80% of its value during that time. Currently, the stock is trading at about half of its book value.
Bottom line
There are many bargains that investors can secure in the oil and gas industry today. If we see a long-term agreement reached that could provide the industry with some much-needed stability, then the stocks listed here could quickly take off.
However, until that happens, there’s still a significant amount of risk that the industry poses for investors today, and that’s ultimately what’s keeping stock prices down. Unfortunately, it doesn’t matter how well Enbridge and Cenovus might be performing as of late; the industry as a whole needs to find some stability.
