With all the negativity surrounding the oil & gas industry, most investors would make the mistake of overlooking the entire sector and its related parts. Despite the fact that crude oil prices have halved compared to last year’s price, there are still some potential gains to be realized from the stocks in this related sector.
InvestAsian believes that Yantai Jereh Oilfield Services Gp Co Ltd (SHE:002353), more commonly known as simply “Jereh”, is a strong buy for many reasons, both because of industry-wide trends and company-specific strengths.
Recap of the Global Oil & Gas Industry
Industry-wise, even though anything oil & gas related is looking pessimistic now, there will be a long term upward trend for the industry as a whole, according to analysis conducted by The Financial Times.
The analysis looked at the Oil & Gas Industry’s history, especially at how OPEC has tried to keep the prices at a controlled high at above $90 per barrel for the past few years.
However, crude oil prices were uncontrollable as shown by the plummet in the summer of 2014.
There were many factors that led to the drop of oil prices. In addition to the inevitable technological advances that improve the output of crude oil, factors that attributed to the excess supply included the incredible success in US shale oil production (leading it to become the world’s largest producer of oil), anxiety over the global economy slowdown, and a shift in strategy by the world’s second largest oil producer, Saudi Arabia.
Even though oil prices have tumbled by more than 50%, there is a light at the end of the tunnel. The longer-term price trend still seems to be upward especially with recent events in the some of the leading oil producing countries looking to cut supplies short. According to an analyst from Citigroup, the crude oil price should be on the rise and stay within the range of $60 to $80 per barrel in the near future.
The most recent plunge of crude oil prices was in December 2008 where prices were just $37 per barrel. In just under 6 months, the price nearly doubled back to $70 per barrel.
Yantai Jereh Oilfield Services Group Co., Ltd.
Yantai Jereh Oilfield Services Group Co., Ltd. is a China-based provider of oil field equipment and services. The Company’s operations can be put into three segments: oil field equipment maintenance, change and distribution of spare parts; manufacture of oil field equipment, as well as oil field engineering technical services and oil filed construction engineering services.
Doing business both in the domestic and overseas markets, the company’s financials have been affected by the sharp drop in the crude oil price resulting in a weaker performance this year compared to 2014.
This has brought the stock price down to half of what it used to be a year ago, at just 27 CNY per share.
With the company’s strong financial , ROI and ROA averaging 20% which are ahead of all its competitors, current ratio of close to 3, and the industry’s highest gross margin of 45%, Yantai Jereh is in a strong place to regain what it has lost and more when the oil prices recover.
The recent opening of the Hong Kong-Shanghai Stock Connect allows individual foreign investors to buy shares listed in mainland China for the first time. A brokerage account in Hong Kong is now more useful than ever, giving access to all companies on the Shenzhen Stock Exchange including Yantai Jereh.