While some might suggest that investing in the oil industry is quite luck-based, there’s also no doubt that there are plenty of factors that simply must be analyzed before any such investment goes ahead.
Suffice to say, few of us have the experience or knowhow to do this. It’s one of the reasons why consultants in this industry are so highly-sought after; you only have to scan the portfolio of the Southlake Resources Group to see this.
Nevertheless, there are some basic areas that investors will mull over before bringing the experts in. Here, we take a look at some of these which are able to paint the picture on whether or not a chosen oil stock might be a viable opportunity.
How often is the company drilling wells?
One of the basic questions that can be asked at the start is just how many wells the company is drilling. It should go without saying that if they seem like a company who is quite reserved when it comes to drilling new wells, you should look to move onto a different opportunity.
The bread and butter of a successful oil company is one that is constantly seeking new opportunities to take advantage of. Even if they have hugely successful wells, science dictates that over time supply within these wells will decrease and subsequently, so will the stock value.
Therefore, take the time to read what the company is planning for the future. Of course, it can go much more detailed than this and as well as the number of wells, you’ll want to look at their past success rates with drilling and other issues such as the costs and their working interest.
What type of wells are they drilling?
As well as quantity, there’s a big point on quality here as well.
We spoke about success rate in the previous paragraph and if you find a company who is drilling development wells, there’s an increased chance that they are going to be successes. This is because development wells tend to be placed near existing, successful wells – meaning that the chance of success immediately increases.
If you see that the company is swaying more towards exploratory wells, there’s more risk involved as these are being drilled to effectively find completely new sources of oil. Of course, the caveat here is that there will be more potential reward with these wells – but that’s only if you can accept the potential failures as well.
How much oil is the company producing?
While one eye always has to be kept on the future, investors should also look to the amount of oil that a company is currently producing.
It will be possible to find figures relating to the average amount produced per day, as well as the total production, and these both should be showing a steady increase over time. If it’s obvious that the figures are dropping, it starts to look as though the company is running into corners and struggling to find any new wells that can produce.