How to Invest in Energy Stocks | Investment Series

What Is the Energy Sector?

The energy industry is a category of equities that pertain to generating or providing energy. The energy sector or industry comprises firms engaged in the exploration and development of oil or gas deposits, oil and gas drilling, and refining. The energy business also comprises integrated power utility firms such as renewable energy and coal.

KEY TAKEAWAYS

The energy sector comprises firms that mainly operate in the business of generating or providing energy such as fossil fuels or renewables.

The energy industry has been a significant engine of industrial expansion during the last century, supplying fuel to power the rest of the economy.

Companies in the energy sector are categorised depending on how the energy is sourced such as non-renewables or fossil fuels and renewables such as solar.

Understanding the Energy Sector

​The energy sector is a wide and all-encompassing phrase that defines a complex and inter-related network of enterprises, directly and indirectly, engaged in the production and distribution of energy required to power the economy and assist the means of production and transportation.

The firms within the energy industry are active in many forms of energy. For the most part, energy firms are commonly classified depending on how the energy that they create is obtained and will often fall into one of two categories:

Non-renewable

• Petroleum products and oil
• Natural gas
• Gasoline
• Diesel fuel
• Heating oil
• Nuclear

Renewable

• Hydropower
• Biofuels such as ethanol
• Wind power
• Solar power

The energy business also includes secondary sources such as electricity.

Energy prices—along with the profits performance of energy producers—are mostly influenced by the supply and demand for international energy.

Oil and gas producers tend to fare well during times of increased oil and gas prices. However, energy corporations earn less as the price of energy commodities declines. Oil refiners, on the other hand, profit from the dropping cost of feedstock to create petroleum products like gasoline when crude oil prices decline. Furthermore, the energy business is subject to political developments, which historically have contributed to volatility—or huge fluctuations—in the price of oil.

Some of the major firms in the U.S. energy industry are Exxon Mobil (XOM) and Chevron (CVX), both of which are huge multinational integrated oil giants. In 2020, Peabody Energy (BTU) was America's biggest coal producer measured by tonnes of production.

The Infrastructure Investment and Jobs Act of 2021 will give assistance for segments of the energy industry. In particular, some of the $550 billion in spending will be directed to electric grid infrastructure and power lines, as well as growing sustainable energy.

Types of Energy Sector Companies

Below are some of the sorts of firms found in the energy sector. Each has a different role to play in providing energy to companies and consumers.

Oil and Gas Drilling and Production

These are the firms that drill, pump, and produce oil and natural gas. Production generally entails taking oil out of the earth.

Pipeline and Refining

Oil and natural gas must be transferred from the producing site to a refinery to be converted into a final product such as gasoline. Companies within this section of the energy industry are termed mid-stream providers.

Mining Companies

Coal firms might be considered as energy corporations because coal is used to power facilities, including nuclear.

Renewable Energy

Clean energy has gained momentum and investment dollars throughout the years and is set to be a significant element of the energy industry in the future. Examples of renewable energy include wind and solar.

Chemicals

Some firms specialize in refining oil and gas into specialized chemicals, while many major oil producers such as Exxon Mobil are integrated energy producers, meaning they create many forms of energy and oversee the whole process.

​Examples of Energy Sector Investments

Investors have several possibilities for investing opportunities in the energy business, including securities of energy firms, mutual funds, ETFs as well as the possibility to purchase the commodities.

Exchange-traded funds (ETFs) are a basket of assets, such as equities, that mirror an underlying index. Mutual funds, on the other hand, are a portfolio of stocks or assets that are picked and managed by a portfolio manager.

​There are a variety of energy-related ETFs that individual investors may obtain exposure to in the energy market. Investors may pick whatever component of the value chain they want exposure to with any number of funds. Below are a few examples of energy ETFs:

The Energy Select Industry SPDR ETF (XLE) is a broad-based ETF that gives exposure to energy firms throughout the sector. Oil companies like Exxon Mobil and Chevron are in the XLE as well as technology providers like Schlumberger (SLB) (SLB).

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) offers investors with exposure to oil and gas exploration businesses.

The Invesco Solar ETF (TAN) allows investors access to alternative energy investments.

In Conclusion

How investors choose to invest in the energy sector will largely rely on their tastes and particular beliefs about the growth and earnings potential of the individual firms. The energy sector is more wide and varied than only the oil and gas industry. Many investors think renewable and alternative energy sources will play a vital role in the future, particularly as the demand for electric automobiles continues to expand.

Happy Investing! 😉