3 Key Factors to Oil and Gas Investing

Gas and oil investing begins with the investor determining what oil and gas stocks he ought to invest his hard earned cash into. Although some will focus on oil and gas stocks which yield a higher return on investment opportunities such as oil sands stocks and Canadian oil stocks, we feel that you should begin by reviewing the following key three factors:

1) Is the Oil Share Over valued?

This is probably the first question you should ask yourself as a large amount of oil stocks are more hype than actual value.
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A good indicator of the oil stocks value is the oil stocks price earnings ratio. If the price earnings ratio is greater than 20, we would suggest you additional investigate why the oil stocks and shares price earnings ratio is so higher. If it is due to an aggressive growth strategy including a recent land buy or a large drilling program which is to take place in the future, attempt to determine the impact these events will have within the oil stocks earnings. In a wide range of cases the future event’s impact on the oil stock will not be what the purchase community forsees.

2) Trust Unit versus Common Share

There are a substantial amount of oil and gas stocks which have converted to become trust units. The main purpose of these oil stocks becoming rely on units is to save and defer tax to unitholders. However , the particular distributions that these oil stocks (trust units) pay out require a significant amount of cash flow and therefore reduce the growth capability of the specific oil stock. Therefore if you are searching for an oil stock which will give you steady cash flow than an essential oil stock which is a trust unit is your choice. Whereas if you would like to hold a good oil stock in your portfolio which has a high growth potential you should steer clear of oil stocks which are trust devices. This is because normal public company gives usually do not pay out large dividends to shareholders as they prefer to reinvest their particular hard earned cash in their capital program. Coal and oil capital programs include purchasing land, mineral rights, drilling programs and so forth, all of which are more likely to generate shareholder value rather than just paying these funds out to unitholders.

3) Natural Gas vs Oil

Investors should be aware what percent of their oil and gas stocks interest is within natural gas versus oil. This is important as if you buy a natural gas focused oil and gas firm and the price of natural gas is at an all time high then this is probably not the time to buy. However this is probably a great time to consider selling depending on what product experts feel the price of natural gas is going to do in the years/months to come. The same applies to oil stocks, although it is our own feeling that the price of oil is a lot less volatile as it is doubtful the cost of oil will be reduced by 50%. Whereas the price of natural gas can easily be decreased by 50% in a given season. If you are planning on holding your gas and oil investment for an extended period of time after that do not fret too much about the product prices as they should increase with inflation over an extended period of time. If you are buying and selling oil and gas stocks for brief periods of time, then commodity prices turn out to be extremely important as you can make a significant come back in a short period of time.

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