Even though there are certainly risks to be considered in the energy industry, those same risks have existed for decades and have not stopped the industry from creating hundreds of billions of dollars of value for their shareholders. Energy stocks have generally been outstanding investments for more than a century, and we think that this positive environment will persist for the foreseeable future. Over the long term, energy stocks should provide investors with continued strong returns, and it is an industry worth getting to know a little better.
Investor's Checklist: Energy
• The profitability of the energy sector is highly dependent on commodity prices. Commodity prices are cyclical, as are the sector's profits. It's better to buy when prices are at a cyclical low than when they're high and hitting the headlines.
• Even though the sector is largely cyclical, many energy companies keep
their bottom lines black during the troughs. Look for this characteristic
in your energy sector investments.
• OPEC is a highly beneficial force in the energy sector because it keeps com
modity prices above its costs. It is worth keeping tabs on the cartel's strength.
• Because of OPEC, we view exploration and production as a much more
attractive area than refining and marketing.
• Working in a commodity market, economies of scale are just about the
only way to achieve a competitive advantage. As such, bigger is generally
better because firms with greater heft tend to be more profitable.
• Keep an eye on reserves and reserve growth because these are the hard as
sets the company will mine for future revenue.
• Companies with strong balance sheets will weather cyclical lows better
than those burdened "with debt. Look for companies that don't need to
take on additional debt to invest in new projects while also paying divi
dends or repurchasing shares.
