Oil Investment for Indians

In 2009, I invested a substantial amount in ONGC and Cairn, the only 2 oil production companies listed in Indian stock exchange. The oil price more than doubled but even after 2 years i made a measly 20-30% return. Not wanting to repeat my prior folly, I have embarked in a quest of how to gain in the event that Oil prices go up by 2017 (2 years from now)

1. Invest in India. No ways, I am not going to be at the whims and fancies of corrupt bureaucrats/ politicians , their fickle policies and administered price/subsidies

2. Invest in MCX commodity index. the lot size is 100 barrels and due to low margin requirements and leverage of Futures market, I could gain from an effective multi option/futures strategy. However they don’t have contracts with long term expiry and 90 days is too little a time for me. Also either party or the exchange could force a physical delivery or cancel the contract if they suspect speculative trading. WHAT AM I GOING TO DO WITH 100 Barrels, 12,000 Liter of crude oil?

3. CMX or the London commodity exchange. the lot size their is 1000 barrels. So it is an exposure of good $40,000/- USD per contract. Even after 10 years of experience, I don’t have that kind of gamble around money.

4. Hence I am left with the last option of opening and tdameritrade account and invest in blue chip oil companies that stand to gain tremendously with my opportunistic buy low and sell high strategy.

Couple of issues:

1. Account opening needs ITIN/SSN number which I don’t have. Also the account could get frozen and undergo tedious litigation if the documentation is not proper. I always fear the unknown beast.

2. If the Dollar loses its value, I stand to pay taxes on my US dollar gains but might not get any credit on my currency exchange losses. Also due to small sums and the generous dividends paid by the oil companies. I need to manage cash-flows and taxes on this multi year strategy.

3. I need to find a good instrument to back on. Look at the PE ratios and the not so significant difference between the 52 week high and today’s price. How can a commodity company whose unit sale price dipped by 60% without any offsetting increase in volume still command a double digit PE ratio? This is when the PE ratio is for last year and does not reflect the future profitability?

Name Last price Mkt cap 52wk high 52wk low EPS P/E
Royal Dutch Shell plc… 64.34 202.05B 88.13 62.11 5.09 12.64
Schlumberger Limited. 78.05 100.43B 118.76 76.73 5.32 14.66
Halliburton Company 38.54 32.66B 74.33 37.21 3.88 9.94
SEB Brent Crude Oil… 70.98 173.21 74.51
Baker Hughes Incorporate… 55.09 23.83B 75.64 47.51 2.96 18.61
BP plc (ADR) 36.05 109.61B 53.4825 34.88 2.98 12.11
Chevron Corporation 105.88 200.16B 135.1 100.15 10.86 9.75
Exxon Mobil Corporation 90.33 382.51B 104.76 86.19 7.95 11.36
Royal Dutch Shell plc… 62.93 202.05B 83.42 60.84 5.09 12.36

BTW do read this good report on US Oil industry

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2 thoughts on “Oil Investment for Indians

  1. Nice article. In Btw, i guess citi has reduced its target on crude oil to 50$ per barrel for next year.

    Further, there were various energy reports available in public domain (none from investment bankers for obvious reasons) from past two years, which had clearly shown the rise of shale gas in years to come and significantly fast ie.. What mango man missed is the relatively short span of time in which this impacted the oil prices.

    My take: With every change there is a loser and a gainer and loser tries to maintain status quo. In the near period, my guess is that there will be some so called (orchestrated) terrorist attacks on some oil / gas wells and suddenly there will be a glut, prices will spike suddenly. On a medium term basis unless US intervenes, marginal cost of production of shale gas is equivalent of $50 per barrel of oil and hence, significant variation in short term from this price is an opportunity to go long / short (don’t try with ONGC 🙂

    Like

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