The energy sector produces and supplies fuels and electricity for the economy that is global. It includes companies active in the activities being following
The exploration that is upstream production of oil, natural gas, and related liquids (such as natural gas liquids, or NGLs).
The midstream transportation, processing, and storage of gas and liquids.
The downstream refining, marketing, and distribution of petroleum products.
The mining and processing of coal, uranium, and bitumen (oil sands) used to generate electricity or make fuels being fluid.
The generation of electricity (generated by fossil fuels and cleaner sources like renewable energy) and the distribution of energy and gas that is normal resources.
This industry that is broad important to providing the economy with the energy it takes. It’s also an the one that is very important investors to know.
The power sector is a one that is challenging investors. Power prices can change in a heartbeat, which can have a massive effect on the sector as well as the economy that is worldwide. That became amply clear at the start of the pandemic that is COVID-19 of. The outbreak power down big portions of the economy that is global like air travel and commuting to exert effort, which torpedoed oil demand and pricing. This downturn weighed heavily on oil company stock costs, with some ending up worthless as several companies filed for bankruptcy.
Because of this effect commodity price volatility can have on the power sector, investors must keep risk that is downside mind. That means not allocating too much of their portfolio to 1 energy stock or the industry as a whole. Further, they should focus on companies unlikely to get out of business if industry conditions deteriorate significantly. The energy sector produces and supplies fuels and electricity.
Factors that increase an energy organization’s durability include:
Low production costs, or revenue that is stable minimal visibility to fluctuations in volumes or pricing (i.e., supported by regulated rates or long-term fixed-fee contracts). A balance that is strong, including a high investment-grade credit history, lots of liquidity (money on hand and borrowing capacity), and minimal near-term financial obligation maturities.
A dividend that is conservative ratio in comparison to its sub-sector peers.
Manageable capital spending programs financed primarily with post-dividend cash that is free and prudent use of debt.
Energy businesses with these characteristics are going to be in a better position to withstand the downturns that are inevitable. This means perhaps not only they’ll still be around when conditions improve, but also that they have actually more flexibility than their weaker peers to fully capture opportunities that can create value for their investors.
Energy stocks are important but risky
The power sector is key to the economy that is global it offers the fuel and power needed to drive trade and travel. Nonetheless, when the economy slows, which was the case during the height of the outbreak that is COVID-19 it may have an important impact on energy demand and prices, which weighs on stock prices. Because of that, investors should focus in the stocks of businesses that can easily survive a downturn, since that also sets them within the position that is better to thrive whenever market conditions improve.