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Opportunities, Challenges, and Competitive Advantages When Investing in Oil & Gas

Jun 16, 2023

During this Solution Session, we speak with Michael Danov, President & CIO of SBP Management to hear insights on current challenges and opportunities, the impacts of ESG, and advice for firms looking to start investing in the oil & gas industry.  

Oil and gas have been under the limelight due to the rapid increase in energy prices since Russia's attack on Ukraine, fostering lower supply and increased competition from buyers. Even though investing in oil and gas remains below pre-COVID-19 levels, it's been on an upward trajectory, and there are still lucrative investment opportunities in the oil and gas markets.

Impacts of ESG on Investments in Oil and Gas

Environmental, social, and governance ("ESG") has been top of mind for the general investment industry. Unfortunately, Danov said replacing fossil fuels with alternative energy is not economically friendly for consumers and investors today. Alternative energy sources such as solar and wind farms are expensive to construct and have lengthy payout periods. Using ESG components can make oil and gas production more efficient, and clean coal technology is another viable investment. Fossil fuels will likely remain the primary energy source until alternative energy companies become cashflow positive and the products make financial sense for consumers.

Opportunities for Investing in Oil and Gas

Oil and gas production in the U.S. is far from meeting demand. Danov said the key to investing in oil and gas is to find public equities with exposure to specific regions or countries. For example, while the U.S. oil and gas market has little value, Latin America, the Middle East, Europe, and Asia will see better growth and return on capital.

Challenges Facing Oil and Gas Investors

The oil and gas market has always been challenging to invest in due to price volatility and supply disruptions. Danov suggested finding companies with the proper management is one of the most crucial and difficult components of investing in oil and gas, as many managers tend to over-leverage and overgrow. And further, he said to look for firms with C-level managers with 10-30% equity in the company; these managers have skin in the game and an incentive to be involved and grow the company with their investor base.

Operations are another component to check, as oil and gas companies must execute their jobs proficiently. Logistics can be challenging as well. For example, there are great oil and gas companies in Latin America, such as Argentina, Brazil, Mexico, and Columbia, but you'll need to consider the political risk, currency, and other factors to determine where you'll get the best return on investment.

How to Get Started Investing in the Oil and Gas Industry

When investing in oil and gas, it's important to have a team member, partner or founder experienced in the business's operational side. As a new investor, it's also crucial to become educated on the space and understand how the ecosystem works. The oil and gas markets are very cyclical, making it tough to find opportunities, so investing in these markets is not wise until you fully understand the business's operations. Commodities are always challenging to invest in, so it's critical to be patient, locate opportunities when companies are trading low, and find a comfortable monetary entry point to start.

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Elana Margulies-Snyderman

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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