Should I buy UK shale oil and gas stocks?

Anna Sokolidou takes a close look at the future of the shale boom revolution.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

“Be greedy when others are fearful”. This is a view held by Warren Buffett, the renowned Oracle of Omaha. This involves buying companies whose intrinsic value is substantially above their share prices because they are on sale due to the markets’ irrationality and panic.

The intrinsic value of a business can be measured according to the future net cash flows it should generate in the future or according to its net profit history. But it is also common to estimate how much an enterprise is really worth by looking at its book value and comparing this figure to the company’s current share price.

An enterprising value investor might purchase an unprofitable company whose book value per share is considerably higher than its share price, especially if there are good recovery perspectives.

This seems to be the case with the offshore drilling sector now that the shale oil boom might go bust sooner or later. The largest oil companies from the FTSE index include BP (LSE:BP) and Royal Dutch Shell (LSE:RDSB). These giants consider shale oil to be one of the most important areas of their business activities. However, these companies are quite diversified and they also invest heavily in offshore drilling. I would like to explain why the latter is highly likely to recover, whereas the shale oil sector is rather risky.

Even though the US shale oil production hit new records in 2019, most oil producers reduced their exploration spending. This means that new oil would not be discovered, whereas old oil fields might plateau very soon. This is a view held by John Hess, an American shale pioneer. His company – Hess Corporation – is involved in exploring the Bakken, but he is going to use the income received from the shale to invest heavily in offshore drilling.

The number of bankruptcies among shale oil producers is rising heavily in the US. Moreover, the slowdown in the US manufacturing activity is partly attributed to decreasing business investments in the Permian.

Both Shell and BP are oil and gas producers with strong presence in the US. Not only is shale oil a key problem for local producers, in many cases gas cannot be sold at reasonable prices. Instead, some local producers have to pay for their gas to be taken because in many areas there is no access to appropriate infrastructure.

Even though BP and Shell might benefit from their smaller competitors’ difficulties, one has to consider the effect that this year’s US presidential election might have on US shale. If a Democrat wins the election, it is quite likely that many companies would lose their drilling permits on federal lands and new ones would not be given.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Anna Sokolidou does not own any shares of the companies mentioned in this article. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

10% dividend growth! 2 FTSE 100 stocks tipped to supercharge cash payouts

These FTSE 100 stocks have strong records of dividend growth. And they're expected to keep on delivering, as Royston Wild…

Read more »

Investing Articles

Down 17% in a month and yielding 7.39%! Is this FTSE 100 share a screaming buy for me?

When Harvey Jones bought Taylor Wimpey last year he thought this FTSE 100 share was a brilliant long-term buy-and-hold. Has…

Read more »

Investing Articles

Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

Is it realistic to put £20k in an ISA now and earn over half that amount every year in passive…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

If I could only keep 5 UK stocks from my portfolio I’d save these

Harvey Jones is running through his portfolio of top UK stocks to see which ones he couldn't bear to do…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

I’m aiming for a million buying unexciting shares!

By investing regularly in long-established, proven and even rather dull businesses, this writer plans to aim for a million. Here's…

Read more »

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »