Market Analysis: Energy Sector

Hi guys!  We apologize for our recent absence.  We’ve been very busy with midterms and studying.  We’re back for good, and ready to go!

In our last post we talked about a new series How to Get Started Investing and we’re going to continue that!  Today I’d also like to announce another new series called Market Analysis.  We’re going to analyze each sector individually and introduce the large companies in the sector, how they make money, and some special features of each sector.

Our hope is that we’ll give young and new investors a better understanding of how the market works.  Trying to take the whole market as one large entity and learn the whole thing is very difficult, but splitting it into the sectors and learning each one individually will hopefully make it easier to understand!


The Energy Sector is where we’ll start out today, and we’ll move on from there!

The energy sector is grouped into the larger “basic materials” sector, but the majority of the companies in the basic materials sector are strict energy companies.  The basic materials sector also includes minerals and metals, gold, and industrial/agricultural chemicals, but we won’t be discussing those in today’s article!

From the start of the 21st century, an emphasis on finding alternative forms of power has been at the forefront of many peoples’ minds.  Regardless of political tendencies, oil and natural gas supplies will someday run out and we will need new ways to power our civilization.  The energy sector encompasses not only oil, natural gas, and coal but also the alternative sources of energy like wind, solar, and nuclear.  Essentially if a company produces electricity or an oil derivative (gas, diesel, kerosene) it can be filed into the energy sector.

The energy sector is a vital part of the world economy because it greatly impacts consumers and companies alike.  We can relate to the fluctuation in the energy sector.  The typical consumer is effected by this sector more regularly than any other sector.  Every time you fill up your gas tank, turn on your air conditioning, or light your stove you’re being impacted by the energy sector!

The Giants of the Energy Sector

Exxon

The largest companies in the energy sector are truly massive.  With market caps of over 100 billion dollars a piece, Exxon Mobile, GE Electric Company, and Chevron all are at the top of the food chain.  Each of these companies provide power to hundreds of millions of people around the world, and have etched out a worldwide name recognizable to most consumers.

How do energy companies make money?  Well essentially they buy some kind of commodity (oil, coal, metals) and they convert them into a usable source of energy.  For instance Exxon Mobile buys crude oil in different forms, sends it to their refineries, and creates gasoline or other oil derivatives that can be burnt to power cars or power turbines that create electricity.

Alternative power companies like Vestas (wind turbine company) buy industrial parts and metals and create wind turbines.  They sell them for a markup to local energy companies that have them constructed and then use natural wind power to create electricity and sell that power to their customers.

Energy Sector Special Features

The energy sector is subject to extreme volatility.  Political and cultural unrest in a region with large energy sector assets can cause large swings in oil and natural gas prices.  This in turn effects the profits and bottom-line of all energy companies.  This inherent volatility can make or lose an investor a great deal of money.  It’s all about playing your cards right.

Another interesting aspect of the energy sector is the high dividend yields.  In general the basic materials sector leads dividend yields.  The basic material sector, over the past 25 years, has posted an average dividend yield of approximately 5%.  The next closest sector, financial, posts an average dividend yield of 4.18%.  To compound on that, oil and gas specifically have an average dividend yield of almost 10%.  High dividends are always a plus for investors!

The last, possibly most influential, feature about the energy sector pertains specifically to the US oil market.  Recently, with the high oil prices of 2014, US based oil and gas companies have invested quite a lot of capital into shale and fracking technology in order to extract previously untouched resources right here in the US.  This greatly impacts our reliance on foreign oil to drive our ever growing economic machine.  As we produce more and more of our own oil, we can lower prices and see less fluctuation in gas prices.

Overall the Energy Sector is one of the most influential group of companies in our ever changing market.  We are impacted everyday by their products and services.  Look for big things to come out of US shale and fracking companies and be prepared for revolutionary new ideas and forms of energy in the future!

I hope you’ve found this useful!  If you have any questions or comments, feel free to leave them below (we love hearing from you guys), or email me personally at David.Coleman@Collegeinvestr.com.  Thanks for reading!

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