2022 is the year of energy stocks. Where the S&P 500, AEX and other index funds are plummeting, energy ETFs and energy stocks are rising to new heights. Many investors expect this trend to continue this year. But is investing in energy stocks a good move? Below we look at pros and cons and important tips. In addition, we review 5 energy stocks with Value, for inspiration and entertainment.
Let's get started!
What is an Energy stock?
An Energy stock is a publicly-traded company that is involved in the extraction, processing, distribution, or sale of energy. Energy stocks are frequently characterized by high growth rates and high volatility. This means that the stock price can fluctuate wildly, but this also means that it can grow quickly if you invest in the right company at the right time.
The most common types of energy stocks are oil and gas companies, which extract oil from the ground and sell it on the market. Energy companies can be involved in extracting, processing, and distributing oil, gas and coal; developing renewable sources of energy like wind or solar power; or providing electricity to customers.
- Energy stocks can be a good investment in certain times because they are driven by the world's demand for energy, which is expected to grow over the next decade.
- The energy industry is here to stay. In developed nations, there will always be a need to fuel cars, light buildings, and keep food cold. As a result, energy company products will never lose customer acceptance.
- When energy prices rise, energy businesses can gain by receiving much more per barrel of oil, even if their costs remain roughly the same. This is an opportunity for them to increase dividends to investors or to invest for future growth. This is the biggest pro of energy stocks. If price increases rapidly, while fixed costs remain the same, then the share price will explode in several months.
- Because they're so volatile, they also tend to offer great returns when the market is doing well. If you can ride out the ups and downs, you'll get some incredible returns on your investment. Energy stocks are cyclical. It requires certain skills and knowledge to profit from them, because the risk is high.
- You need to have a solid understanding of macroeconomic trends before investing in this sector because it's very dependent on external factors such as weather patterns, natural disasters, and geopolitical events.
- There are many different types of energy companies out there and it can be difficult to determine which ones will perform well in any given year or even month.
- Despite the fact that oil is at the heart of the current commodity super-cycle, oil stocks are fundamentally cyclical. That means that oil investors will have to exit at some point in the future to secure their gains.
- Over the last decade, new green energy sources such as solar have gotten considerably less expensive. This reduces demand for coal and may begin to harm demand for oil, gas, and other traditional energy sectors, potentially compromising their long-term worth.
- Sometimes it takes longer than expected for an energy company's profits to start growing again after an economic recession ends (like during 2008-2009), which means they may not make as much money as hoped.
- Because they are cyclical, it is not a passive long-term investment like dividend stocks are.
How do we select the best Energy stocks
As indicated, all energy stocks are quite cyclical. Timing is of great importance. The best way to invest in energy stocks is from a macro perspective. You want to get in before the herd invests. This is how you realize phenomenal returns of x10 or even x50.
Within Happy Investors, our expertise lies in long-term investing in the best stocks. These are unique companies with sustainable competitive advantage. Additionally, we use factor analysis to discover Value stocks in the short term of 6 - 24 months. These Value stocks require a slightly more active trading method, for example by selling after X months. On the other hand, they do offer potentially (much) higher returns than the S&P 500, precisely because we use short-term undervaluation.
However, you find the best energy stocks by investing early. That's a skill in itself. We significantly outperform the market with our Value shares in 2022. But our partner Capitalist Exploits is a real expert in commodities and asymmetric investing. Because we are in a partnership, we are not allowed to share their recommendations, but from personal experience I can assure you that the average return of its energy stocks (as of 2016) is extremely interesting.
Click on the banner below to learn more about their research.
Energy stock 1. Arch Resources (ARCH)
Arch Resources is the world's leading supplier of premium High-Vol A metallurgical coal and a prominent US producer of metallurgical products for the global steel industry. Arch and its subsidiaries own and operate four big, modern metallurgical mines that continuously set industry standards for mine safety and environmental care.
The flagship Leer mine consistently scores among the lowest-cost metallurgical mines in the United States, producing a product quality that is recognised and sought-after globally.
Arch and its subsidiaries also run highly efficient, low-cost thermal mines in the Powder River Basin and Colorado. These mines produce highly cost-effective thermal coal for domestic and international power generation markets.
Arch Resources is a commodity company that operates in a cyclical market. Its revenue growth rates were significantly negative in 2020, but Arch Resources was able to turn around its operations and generate very appealing growth rates in 2021. This company may be among the best energy stocks by 2022. However, a major drawback is that coal stocks are anything but sustainable companies!
It should come as no surprise that the scenario at hand is highly fluid, and that the share price of Arch Resource will be highly unpredictable.
Energy stock 2. Exxon Mobil (XOM)
The ExxonMobil Corporation, sometimes known as XOM, is one of the most successful and well-known oil businesses in the world. Its principal activity is crude oil and natural gas exploration and production, as well as the manufacture, trade, and transportation of crude oil, natural gas, petroleum products, and petrochemicals.
It is involved in the upstream as well as the downstream aspects of the oil and gas industry, in addition to the chemical industry.
When considering Exxon, there are certain significant risks to consider that are difficult to measure. While it is unlikely that Exxon will go bankrupt any time soon, its long-term potential is less rosy. In the short term, however, Exxon may be among the best energy stocks because it contains a lot of Value. Whether this will continue into 2023 is, of course, entirely dependent on market developments.
ExxonMobil is putting its future on the line by relying on fossil fuels as governments work to reduce pollution. ExxonMobil still lacks a viable approach for preserving value during the energy transition.
ExxonMobil is involved in the highly competitive energy and petrochemical industries. It faces global competition from both commercial and state-owned enterprises. Of course, you can also invest in energy ETFs, such as a tracker for all oil and gas companies. By doing so, you reduce non-systematic risk from this sector.
Energy stock 3. Equinor ASA (EQNR)
Equinor ASA is an energy firm that explores, produces, transports, refines, and markets petroleum and petroleum-derived products, as well as other kinds of energy, in Norway and globally.
It operates through the following segments: Exploration & Production Norway; Exploration & Production International; Exploration & Production USA; Marketing, Midstream & Processing; Renewables; and Other.
The company also transports, processes, manufactures, markets, and trades in oil and gas commodities such as crude and condensate products, gas liquids, natural gas, and liquefied natural gas; markets and trades in electricity and emission rights; operates refineries, terminals and processing plants, and power plants; and develops low-carbon oil and gas solutions.
It also develops wind and carbon capture and storage projects and provides other sustainable energy.
Equinor's main risk is that global demand for oil and gas will reduce operating margins. The Norwegian Ministry of Petroleum and Energy manages the corporation as a state-owned enterprise.
However, the excellent assets it possesses are not sufficient on their own to ensure continued profitability. It is currently facing an unprecedented oil market that is expected to be volatile for a number of years to come.
Energy stock 4. Gran Tierra Energy (GTE)
Gran Tierra Energy Inc. is an energy firm established in Canada. The Company is primarily engaged in oil and gas exploration and production in Colombia and Ecuador.
Gran Tierra Energy has holdings in producing and prospective projects in Latin America, with a concentration on Colombia and Ecuador. Its portfolio of assets comprises onshore oil reserves and production in Colombia's Middle Magdalena Valley and Putumayo Basin.
Gran Tierra Energy has a large margin of error due to increasing oil prices and a well-laid-off debt position. Gran Tierra necessitates a high level of risk tolerance given Colombia's political uncertainty and substantial long-term debt burden.
Another concern for Gran Tierra is Colombian political upheaval, which has resulted in blockades and output restrictions for the driller in 2021. Although there has been some wiggle room between Colombian leaders and their constituents, we do not believe the country is out of the woods in terms of protests.
Energy stock 5. Falcon Minerals Corporation (FLMN)
Falcon Minerals Corp. is a minerals firm that has a significant weighting in the oil industry. The firm owns and purchases core-of-the-core oil and gas minerals with strong growth potential. It also has mineral, royalty, and overriding royalty interests in the Eagle Ford and Austin Chalk formations in Karnes, DeWitt, and Gonzales counties in Texas.
It generates revenue from royalty interests, mineral interests, non-participating royalty interests, and overriding royalty interests in North American oil and gas projects. Leading drillers in the business, including ConocoPhillips, BP, and EOG Resources, are responsible for the drilling operations.
Falcon Minerals pays out a large portion of its earnings and more than half of its cash flow, making it difficult to determine whether the company is reinvesting enough in its business to improve its status.
The dividend that Falcon Minerals pays out has been decreasing at a rate of 12% per year on average over the previous four years, which is not a very encouraging trend to behold.
It's never great to watch earnings and dividends shrink, but at least management has cut the payout rather than risking the company's health to keep it. Not the best dividend investment if you ask us.
Questions or comments about investing in energy stocks? Let us know in the comments below. You can also check the best eToro ETF’s to invest in diversified funds to reduce risks.