Investing In Oil: My Personal Take

Back in 1994 I picked up a book off the library shelf called “The Luftwaffe War Diaries”, since I was on an extended break between courses I decided to give it a shot. I ended up reading the book from cover to cover in less than 48 hours. I had struck a new well of passion, WW2 military history. Prior to that day, the total number of books I had ever read was probably less than 10. This explains why military terminology seeps through my posts every now and then.

Fast forward 14 years and here I am in the second half of 2008 watching indifferently as markets started the meltdown. At that time, our company contributed the equivalent of 5% of our salary to RRSP (Registered Retirement Savings Plan) without forcing us to match. It wasn’t my money, so why did I have to care? I did not have any investments, I bought my new house in 2008 and prior to that my excess cash was used towards my condo’s mortgage.

In the first half of 2009 our company was acquired; a new policy forced us to match the company contribution if we wanted to get it. Suddenly my money was on the line! I started finding myself caring more and more about the markets. During the early summer of 2009, I picked up the Globe and Mail business section and read an article about the oil and gas sector, and lo and behold, a new well of passion was struck!

At the time, I was looking to enter the market and take advantage of the fire sale. I was looking at companies in different sectors. I finally settled for the oil and gas companies because my personal interest intersected with the fundamentals of this sector.

Why Not Banks?

I opened my first trading account with 5000$; by July, the banks had rallied and they were no longer the bargain they were earlier.

Canadian banks are amongst the most secure investments you can have out there but I was not looking for security. I was looking for growth and the banks will never be able to offer the growth potential of a junior energy producer.  The energy sector was full of bargains with a lot of M&A activity.

Don’t get me wrong, I would consider holding banks in my DIY portfolio at a certain point. I also have exposure to the Canadian banking sector through my RRSP mutual funds.

Why Not Gold?

Let’s get this out of the way: I am not a gold bug. In fact, if you look at my portfolio you won’t find any gold stocks. There’s always a couple on my radar, but that’s it, they never got cheap enough for me to buy. I have nothing against gold, and it might be a good investment for the next 10 years. I might even pick up a junior gold miner at some point if the price is attractive.

I bought only a small amount of gold jewelry for my wife in our 5 years of marriage. I never got the point of buying it and storing it in the bank’s safe! Do people really need it?

If gold is a good hedge against fiat currencies, then oil is an even better hedge since to date it is one of the most important natural resources known to mankind. I can even get a decent yield from the dividend payers of the sector.

The only precious metal you’ll see in my portfolio is silver, and that is because it doubles as an industrial metal as well.

Why Not the Rest?

What I love about the energy sector is the ability to grow without taking away market share from someone else. I also don’t have to worry about the impact of my competitor’s upcoming product (take for example the smart-phone OEMs).

Growth is registered as reserves are proven and as production rises. In the zero sum game of supply and demand, it is looking like supply will be working hard to catch up to increasing demand in the next decade.

I spent a lot of time researching several stocks before I did my first purchase. I don’t invest in a company because it has a cool name or because it was recommended by an analyst. The problem with this approach is TIME. For the limited amount of time I have, I prefer to spend it all on 1 sector. After all, why bite more than I can chew.

Finally, oil is on the path of growth for the next decade. This perception is based on the fundamentals of this natural resource that I will examine in my next post.