Welcome to our lesson on Energy Companies. In this section, you’ll…
- Learn why the future looks bright for energy companies
- Find out why energy stocks perform well when inflation is heating up
- Add two blue-chip energy stocks to your portfolio
How Energy Stocks Can Heat Up Your Portfolio
Why energy stocks? Well, one big reason is that energy stocks often move independently of the larger stock market. Inflation, for instance, is a general enemy of the market, which doesn’t like rising prices. They raise the possibility of higher interest rates to put a lid on the economy…and on profits!
But often a key factor in a rising cost of living is higher energy prices. So the market may not like inflation, but energy companies may be making a mint…and rewarding investors with a healthy glow in that part of their portfolio.
This up-and-down nature of energy stocks is why they are called cyclical. When the economy heats up, the stocks do too. Factories churn through oil. People fly more, and airplanes use up more fuel. You get the drift.
Of course, when demand falls, oil prices fall, and generally so do the stock prices of companies in the sector. But in the longer-term, the growing world economy means that oil demand should continue rising.
Inflation is the rise in cost of goods and services. Inflation implies a dollar’s purchasing power today will be worth less than what a dollar can buy in the future.
Extra Upside to Energy Stocks
Beyond their cyclical nature, energy stocks have two other attractive features for investors:
We consume ever-larger quantities of their products – chiefly oil and gas. And that supply is limited. Sure, down the road alternative energy supplies like solar and wind power may kick in, but that day is still a long way off.
Strong on Tradition
Oil stocks have another thing going for them – they are one of the oldest of the “Old Economy” stocks. That means when the technology sector plunges, and investors run for shelter, they’ll often look to energy stocks to help keep their portfolio warm at night.
‘Cyclical Industry’ is a term describing an industry that is sensitive to market and business cycles, as well as price changes
Field Service – The Other Oil and Gas Companies
In addition to companies like Exxon Mobil, there is another key type of company in the energy sector …oil and gas field services companies. These companies are an integral part of the industry, and carry out a wide range of large-scale projects. Just think of what it takes to build, launch and operate an offshore oil rig for example.
Oil and gas service companies can be big – as big as the oil and gas companies themselves. The company we’re going to pick as our second energy stock is Halliburton Co., which has a market capitalization of around $41 billion.
OPEC, the Organization of Petroleum Exporting Countries, is dedicated to the stability and prosperity of the petroleum market.
Key Learning Points
- There are two broad categories of oil and gas stocks. The producers actually gather oil and gas, refine it, and sell it.
- Service companies provide engineering, consulting, and other assistance to help producers locate oil and gas, develop properties, and construct rigs and plants.
- Oil and gas stocks often move independently of the broader stock market.
- When the economy gets overheated, oil and gas consumption goes up, and take oil and gas stocks higher in price as well. Because oil and gas stocks can rise and fall in cycles with the economy, they are known as cyclical stocks.
- Beyond their cyclical nature, it’s likely there will be a general up-trend in oil and gas stocks. Demand for energy will rise as the population and industrialization of developing countries increases.