Drilling For Oil In The Stock Market

Oil analyst Daniel Yergin’s book The Prize has been described as “the canonical history of the oil industry.” As a value investor, the part I found most interesting was the section on the 1980s oil price slump, when many oil companies traded for less than the value of the untapped oil and gas they owned underground.

In Yergin’s words, both oil companies and outside investors eventually realized it was ‘cheaper to “explore for oil on the floor of the New York Stock Exchange”—that is, buy undervalued companies—than to explore under the topsoil of West Texas or in the seabed of the Gulf of Mexico.’ Once investors realized this, they bought up oil company shares, causing them to rise to a price that better reflected the value of the companies’ underlying assets. Since value investing is all about buying a company’s stock for less than its underlying value, this story was unsurprisingly appealing to me.

Despite their recent decline, oil companies’ shares have not fallen by as much as they did in the 1980s. However, they have fallen by enough that it’s worth comparing companies’ share prices to the value of their reserves...(Read More)