Energy stocks are shares in companies who sell, distribute, or manufacture technology used to produce energy—and they’re often a bargain buy that can pay off in the long-term.
In the United States, we are in the middle of a massive energy boom. It is a global economic phenomenon of staggering proportions, and if you’re an investor of energy stocks, or want to be, you have a lot to gain.
It hasn’t always been this way, though. As recently as 2007, this country’s energy situation was dire. Domestic oil production hit a modern-day low. We were importing nearly two-thirds of our oil needs and sending hundreds of billions of dollars overseas every year. Legendary oil man T. Boone Pickens said at the time that if such energy dependence continued we would affect the greatest transfer of wealth in human history.
Then new technologies in horizontal drilling and hydraulic fracturing (fracking) saved the day. These technologies made it possible to get to previously irretrievable oil and gas trapped in the massive quantities of shale rock formations across the country. Now, the U.S. is the world’s largest producer of both oil and natural gas, and both are expected to surge even further in the years ahead.
[text_ad]
What are energy stocks worth to your portfolio?
To rewind a bit, energy stocks are shares in companies who sell, distribute, or manufacture technology used to produce energy, whether it’s fracking, or windmills. Some companies may be levered to the price of oil and gas, while others are not exposed to commodity prices, but instead collect a fee for the transport and storage of oil and gas.
Due to these differences, investing in the energy sector is not one size fits all.
More well-known, shall we say obvious, blue chip energy stocks like Chevron (CVX) or Exxon Mobil (XOM) are some of the world’s largest integrated oil majors. They’re fairly safe energy stock picks because they do everything from finding energy to delivering energy. This isn’t to say stock prices don’t dip, in fact big oil stocks can tank for a number of reasons—declining revenues, evaporating profits, fewer drilling sites, etc. But usually, it happens when oil prices fall. And like the tide, this is always changing.
But energy stocks, as mentioned above, aren’t just about oil. Niche energy stocks that might be suited for the value investing portion of your portfolio would be energy infrastructure companies because they’re often dirt cheap with high yields. You would think companies poised to take advantage of such explosive growth should be soaring. But they’ve had a rough time of it for several years due to the oil price crash between 2014 and 2016, which crushed the whole sector. Then there was a change in the tax laws, which made MLPs (Master Limited Partnerships) less advantageous, and rising interest rates held them down.
The good news about investing in energy stocks, is that unlike tech stocks—which are owned by every living and breathing investor, and therefore significantly overvalued—energy stocks are not widely owned, and therefore even the best ones are exceedingly undervalued.
Energy is the most neglected sector by far, where cheap energy stocks are abound. But eventually, these underpriced stocks will come back into favor. No sector is in the doghouse forever, especially one that has many companies with soaring earnings amid the U.S. energy boom. As long as you’re not looking for quick cash, investing in energy stocks now could reap rewards in the long-term.
Want to know more about energy stocks? Leave a comment below.
[text_ad]