I have already written about how falling commodity prices will affect oil companies, mining firms and small-cap oil stocks. But what of the gas companies and energy suppliers?
Well, falling oil prices have meant that the profits and share prices of businesses such as Shell and Petrofac are likely to fall. Similarly, tumbling iron ore prices will mean that the profitability and share prices of Rio Tinto and BHP Billiton are also likely to trend downwards.
Gas companies and energy suppliers have had an incredible run
If you look at the share price of gas supplier BG Group (LSE: BG), during the early 1990s it fell to 45p. In 2011 it peaked at 1564p. So from trough to peak we have seen an astonishing 30-fold increase. So you can see that, even though now it has fallen to 958p, that’s still hardly a contrarian buy.
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Natural gas is a commodity, just like oil, iron ore or copper. So its price has also been falling as the commodities supercycle ends. During the 1990s the price fell to $1 per mmBtu. Then in 2005 it peaked at $13 per mmBtu. Since then it has been trending downwards.
Now, with the share price so high and gas prices so low, the 2015 P/E ratio is a very expensive 37, with a dividend yield of 1.9%. We can see that BG Group has had an incredible run, but now is the time to take profits, as I expect the share price to just keep tumbling.
But this is a trend which is now ending
How about Centrica (LSE: CNA), owner of the British Gas brand? Well, the energy suppliers have also had an amazing run. During the 1990s people were rushing to buy tech, pharma and financial stocks. The energy suppliers were as unloved as they could be. So this was the time to invest in the energy suppliers, as these were strong contrarian buys.
During this time, Centrica’s share price fell to 54p. It peaked at 402p in 2013, but this was the end of the uptrend, and a downtrend has begun.
The picture is similar with SSE (LSE: SSE). Twenty years ago it fell to 245p. Today it stands at 1543p. That’s another incredible bull run. But I think that investors should get out while the going is good.
You see, high energy prices give these suppliers pricing power which means their profits rise, along with their share prices. As soon as energy prices fall, margins are squeezed, competition increases, and these businesses are nowhere near as profitable as they used to be. So this is the time to sell these companies, not buy.
