The energy sector is one of the most talked-about among investors, for a variety of reasons. It covers a wide range of industries from oil and gas to electricity. Experienced investor sentiment often paints a negative picture, but taking a deeper look at each of energy’s entities, there are a number of investment opportunities, both established and emerging, for any investor.
Breaking down the energy industry:
When people think of energy, oil is often the main industry that comes to mind. It has been the top global energy resource and while it isn’t the only source of energy, it is often considered the best place to start looking at investments. There are three types of businesses in oil:
- Oil and natural gas drilling (upstream):
Aside from the Canadian oil sands, getting oil and natural gas usually requires drilling and pumping the fuel from the ground.
- Pipelines and processing (midstream)
These companies move oil and natural gas in its raw state (crude oil) into more usable commodities (gasoline). Midstream companies are often structured as limited partnerships . They have long-term, fee-based contracts for use of pipelines and processing facilities.
- Chemicals and refining (downstream)
While some midstream companies own pipes and processing facilities, there are some companies that focus mainly on the processing side. Downstream companies are often distinguished by their throughput (how much oil and gas is being processed) and their margins.
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Integrated energy companies
Once these commodities have been processed, the next step is to sell it. Two key distinctions here are that you have companies focused on each step of production, but also integrated companies who handle the entire process. Scale and diversification are the main benefits to the integrated model (ie: when oil prices fall, the refining side can benefiting from low input costs, evening out performance).
Electricity and natural gas utilities
Like BC Hydro, these companies have a monopoly to produce and deliver electricity in a specific region in exchange for locking customer rates. There are also unregulated (independent) energy producers that sell electricity to utilities based on supply and demand or under contract. Utilities can even include the delivery of natural gas under a similar monopoly. Much like gas companies, there are large, diversified utilities that manage everything under one roof.
When researching electricity producers, investors should look to each company’s fuel source. Electricity has usually been generated by burning carbon-based fuels (coal, natural gas and oil) but is also generated by nuclear power, as well as solar, wind and water flowing through rivers.
Major energy trends:
The energy market is undergoing a transformation and an industrial shift that investors need to keep abreast of. Some of the key issues to monitor:
The shift toward cleaner fuel sources has had the biggest impact on the goal industry, but media stories are full of reports on the crossroads that oil and gas is facing as the commodity is facing obsolesce. This is still many years, if not decades away, but the early stages of the evolution are underway.
- Electric power generation
The swift growth of renewable power. It’s starting from a small base and growth won't be as robust as it is currently.
This shift to renewables isn’t just about carbon fuels it also involves consumption.
Rooftop solar power
As solar power power becomes slightly cheaper and more accessible, the trend of people generating their own energy from home is becoming more popular.
Volatility:
The oil and gas market especially sees a rollercoaster in share prices. Investors should keep track of this volatility and can monitor changes in gasoline and diesel prices, as they mirror those of crude oil, which is determined in the global market by the worldwide demand for and supply of crude oil.
Investment conclusion:
Thinking about the energy industry also means thinking about what happens after it is generated. Consumption is a major part of that, but also the fact that oil, natural gas, and gasoline are easy to store, while electricity is much harder.
Negative investor sentiment isn’t likely going to improve any time soon and there aren’t any exciting new companies waiting to emerge in oil and gas. Volatility is rife in this market and many investors are bullish on its future.
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