Oil remains one of the most traded assets by investors worldwide both directly through its futures and CFDs and indirectly through various class of ETFs. But there is also the possibility of positioning yourself in it through the different companies that are dedicated to this business for investing in the oil sector.
The undisputed leader is Exxon Mobil (XOM) with more than $ 400 billion of market capitalization followed by Chevron (CVX). But before turning to them, you have to take into account some key variables when analyzing them.
In addition to its size in the market, the evolution of its sales and its net results are important data that cannot be overlooked. If the figures for the last twelve months (or “trailing”) as of September 30, 2013 are taken into account, both US companies experience a contraction in their sales volume, a fact that is not verified in the rest of the companies in the sector, except for the few exceptions and if this is the case for a much lower value.
In general, a company in the rest of the world offers sales growth capacity to the investor that should be reflected in its valuation. But for that you would have to compare two exactly the same in terms of profitability but precisely Exxon Mobil and Chevron together with BP are the ones with the highest relative profitability with an average ROE of 19%.
Despite having more ROE, the evolution of its sales revenue is decisive, so its valuation ratios taking into account earnings such as Price-to-Earnings (1250x and 1030x) are below a simple sample average (of 13x). It also doesn’t help much that they don’t pay better dividends than the average (330%).
But for those looking to diversify their portfolio to avoid the risks of positioning themselves in a single company in the sector, the almost obligatory alternative is the Energy Select Sector SPDR (XLE) ETF, which represents approximately 1020% of the S&P 500 index.
With an average volume of 1080 million shares and a market capitalization of about $ 8.2 billion, it is the most liquid option in the oil and gas industry. Among the main companies that make up its portfolio are: Exxon Mobil Chevron Schlumberger Occidental Petroleum ConocoPhillips Pioneer Natural Resources EOG Resources Halliburton among others.
Its average dividend return is 172% although it must be borne in mind that the United States government withholds 30% of the income tax outlay if it has investments in that country.
- To trade Chevron stocks and CFDs on the SaxoTrader platform use the ticker (CVX: xnys)
- To trade Exxon Mobil stocks and CFDs on the SaxoTrader platform use the ticker (XOM: xnys)
- To trade the ETF and CFDs of the Energy Select Sector SPDR on the SaxoTrader platform use the ticker (XLE: arcx)
Is it Profitable to Invest in Oil or other Raw Materials?
For most people it is not profitable to operate with oil or other raw materials, since, as with currencies, it is very difficult to estimate when oil and other raw materials are expensive or cheap.
It is very important to invest in something that can be estimated if it is expensive or cheap (not high or low) in some way. We do not need to achieve perfection in valuations, because nobody achieves it, but we must be able to say if what we are thinking of buying or selling seems to us to be expensive or cheap, and why.
Doing this with oil and raw materials is very, very difficult. That is, we can spend hours and hours talking about oil, the geopolitical situation, etc., but that same speech would be worth us with oil at 100, 200 or 300 dollars, for example. And the same happens with the rest of raw materials.
Investing with prudence and guarantees of success does not consist in guessing if something is going to rise or fall in the coming months, but in estimating whether it is expensive or cheap, without knowing whether it will rise or fall in the coming months. And this is much easier to do with stocks than with oil, or any other raw material.
With the advantage, in favor of the shares, that solid companies pay dividends on a regular basis, and this facilitates both the valuation of companies and the profit in long terms.
Neither oil nor raw materials pay rents, so the only benefit is the one obtained by being skillful in buying and selling, and almost nobody is so skillful in buying and selling as to obtain a good profitability throughout their lives. Although everyone who tries it will have enough successes, but not enough to make it worthwhile to use this way of investing their money.