The oil and gas industry is experienced in dealing with tough market conditions, but nobody could have predicted the confluence of events that have hit all businesses over the past year.

A severe and rapid crash in commodity prices due to oversupply combined with a simultaneous fall in demand as a result of lockdowns has smashed sentiment. And, longer term, there are those trends towards a greener future and less fossil fuels to consider.

But, given how badly these stocks were hit by Covid, and the fact that oil and gas prices have at least partially recovered, there could be some contrarian opportunities in this industry group.

The oil price has just passed $60 with some commentators such as Rystad Energy anticipating a recovery in 2021 demand. I’m as wary of forecasts as the next investor but I also think it’s important to be able to hear the mood music.

The fact is the oil and gas prices have rebounded from the 2020 lows:

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Source: Serica Energy Corporate Presentations

And yet some energy stocks seem to have underperformed base metals and the broader indexes in the second half of 2020 and into the new year.

What if we’ve passed ‘peak fear’ for oil and gas and prices continue to strengthen in 2021? While the longer term outlook is hardly a bed of roses given the committed shift to a cleaner energy mix, some stocks in the sector do look attractive on valuation grounds - especially those that have high quality management teams, solid cash generation, and proven profitable economics even at lower spot prices.

O&G stocks are risky as they are exposed to rising and falling commodity prices. They will never have the consistency of consumer defensive stocks, for example, and some might rule out the sector completely. It can be a low quality area of the market, with volatile profits and losses, and notable bankruptcy risks.

Taking the industry group and pruning the data of stocks that don’t have StockRanks confirms this impression. The below chart is from a sample of 106 oil and gas companies listed in the UK. Note how few winning styles there are.

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And again, with the RiskRatings, the warning signs are there that this is a particularly speculative part of the market. There isn’t a single Conservative stock in the set, and…

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