Investing in oil stock – things to note about oil and gas stock investments

admin — Wed, 12 Aug 2009 03:43:36 +0000

One of the basic strategies of investing is the top down approach in which the investors decide the sector or index first before coming down to the stocks which they want to buy. Investing in oil stock requires knowledge of the oil and gas sector. This oil and gas sector is always coming up with new technologies thus making it a very complicated sector for a common investor to understand and then make informed decision. Having said that, it is imperative that the investors trying to do investing in oil stocks understand the basics of this sector and how these companies make money.

Understand the basics of oil and natural gas

In common man’s terms, oil and natural gas are organic substances present inside the earth surface. These substances are created by the remains of plans and animals in an extremely slow process which takes thousands of years. When these remains are exposed to certain conditions involving temperature and pressure ranges, these turn into natural gas and oil within the earth’s crust.

The crude oil is less dense than other material inside earth’s crust therefore, it starts to come up towards the surface but get stuck at non porous layers of rock. Due to this, an oils reservoir is created beneath the earth’s surface. In order to bring out this crude oil, the companies drill out a well through this non porous rock up to the point where the crude oil layer is present. Then the oil is pumped out through this well. In case the quantity of oil present in the reservoir is not enough to be pumped out, the well is termed as a ‘dry hole’.

There are two types of companies involved in this business. First one are exploration and production services companies (E&P) which focus on finding the reserves, drilling out the oil and the refining of oil into more useful products. Second ones are drilling and service companies which are used by E&P companies for using drill equipment and other services. These companies include companies like Grey Wolf Inc. or Nabors Industries Ltd.

There are various oil stocks which are hot today. Some of them include:

Weatherford International (NYSE:WFT)

Petro-Canada (NYSE:PCZ)

Suncor Energy (NYSE:SU)

Petrobras (NYSE:PBR)

Transocean (NYSE:RIG)

Diamond Offshore Drilling (NYSE:DO)

Frontline (FRO)

Marathon Oil (MRO)

The United States Oil Fund ETF (NYSE:USO) bottomed out, along with the price of crude back in February. Since then, plays on oil have proven to be among some of the most profitable investments. While making an investment into oil stocks, make sure that you understand the revenue models of the company. Investing in oils stock can be a risky business therefore you should do your research thoroughly before putting in your money in them.

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Investing in oil stock – things to note about oil and gas stock investments