At the risk of sounding like Webster’s Dictionary, the definition of energy stocks are stocks in a company whose business is the production or sale of energy. The energy sector refers to exploration, drilling, mining, refining and marketing, storage and transportation of oil, natural gas and coal. If this sector seems boring on paper, we assure you, it’s not. Energy stocks have surged and keep on climbing.
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Why should I invest in energy?
The energy sector is impressively massive, as it includes oil, gas, utilities, coal, and renewable energy. On the whole, it’s a $7 trillion market, and the companies that earn the most annual revenue of all companies that rake in money are, without doubt, energy companies.
The energy sector’s investment options don’t disappoint, as there are endless options for this type of investment. Furthermore, energy isn’t a “fad” like other types of investments; it’s always in demand and its use is expected to grow even more in the future.
As a whole, the energy sector has been under pressure for close to the past three years, but saw a bit of an uptick in the past year, and in the last month, in particular. “Multi-year highs” have been the words bandied about in the news recently regarding energy stocks.
Another positive is that the oil and gas industry is hiring again, more proof that you’d not be remiss to invest in energy.
Energy sector performance
If you’re an energy investor, educating yourself about supply and demand for energy is imperative. Oil and gas, in particular, do well when prices are high, but when they’re low, you’d better watch out, as your investments will likely take a hit.
To complicate energy performance (and these factors also contribute to gross volatility), this type of sector is uniquely affected by politics. Other types of industries aren’t as affected by general political events; for oil and gas, there’s tons of political baggage attached, which can affect overall market performance.
Factors that may affect energy sector stocks
According to Schwab.com, positive elements that exist for the energy sector now include:
- Increase in energy demand: The U.S. economy is growing, and developing nations will need the United States’ energy options.
- Monetary policy is more accommodating: Central banks in the developed world have an easing bias (a cushion from the blow of the last recession) which could help the energy sector.
On the contrary, negative elements for the energy sector at this time could be:
- New supply: Energy supply has increased, which means new competition for exploration and technology.
- Conservation: Conservation efforts and technology could affect the current energy sector.
- Restrictions: Pollution and other negative environmental effects could lead to cuts in the energy sector as a whole as we know it.
Examples of success
Take the largest publicly traded international energy company on the planet, Exxon Mobil Corporation, as an example of why the energy sector thrives. With a leading inventory of resources, it’s one of the largest refiners and marketers of petroleum products and its chemical company is one of the largest in the world.
Over the course of time, Exxon Mobil (NYSE:XOM) has averaged around 13% returns, and as recently as the mid-to-late 2000s, the price of oil soared to nearly $150 a barrel (until the financial crisis hit, of course).
Now, admittedly, 2017 wasn’t the best year for Exxon (the stock was actually one of the worst performers in the Dow) but it’s quietly making a recovery in 2019, and that focus shouldn’t shift for individuals looking to invest in a big name energy giant.
EOG Resources Inc. (NYSE:EOG) is also an excellent player in the energy field. EOG is well-known for its control of operating and capital costs while maximizing oil and natural gas reserve recoveries. According to its website, new wells are required to earn a minimum 30 percent rate of return at $40 oil and $2.50 natural gas.
In 2017, EOG’s drilling program earned an average rate of return of 63% calculated on the premium $40 oil price deck and 92% using 2017 realized prices. In 2018, the company is expected to grow oil by 18%.
How do I invest in energy?
The basics of investing in energy are the same as any other process you’d undertake to invest. Here are the basics, revisited, with the most particular attention paid to the research you’ll need to do on the company or companies you’re considering.
Again, research the company. In terms of the actual process to invest in energy stocks, you’ll need to do some research on the company you’re interested in investing in, which could be done thoroughly with the two companies listed above, Exxon Mobil or EOG Resources.
You can do this by browsing financial statements, checking basic price action and news, and using sentiment analysis from various sources. You should also determine what upcoming events lie ahead, so as not to get caught off-guard.
These could include earnings report dates, investor presentation days, etc. Generally, companies have one purpose and one purpose only – to make money for their investors.
Good companies to invest in are generally profitable, can maintain their profitability in good times and bad, and can grow their profits in the future.
Determine the amount to invest. Secondly, you’ll need to determine how much you wants to invest in a company’s stock. Buying a share of a company gives an investor part of the ownership of the company.
Generally speaking, you should only invest an amount you can afford to lose. Remember, stocks can be volatile. Shorting a stock, or profiting in case a stock falls, is generally a bad idea as it could potentially expose an investor to unlimited losses if stock spikes.
Determine your timeline. This includes when to exit if things go bad, as in when a stock falls below a certain level, or pain point. There are three timelines: day-trading, swing trading and buy-and-hold. These three are short-term, intermediate and long-term, respectively.
Decide on your broker. You’ll need to choose your broker next, and you can either call a brick and mortar broker, or an online broker.
Buy the stock. There are generally two types of ‘Buy’ orders, market order, and a limit order. A market order will execute the purchase at the present market price, while a limit order will only execute if the price falls at or below the limit price.
Although a limit price might give an investor a lower price of entry, there is no guarantee that the limit order will execute.
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