Oil and gas stocks make attractive investments with their high dividend yields and share buyback programs. It’s a sector that rewards shareholders. But oil and gas is a controversial and polarising industry.
On one hand, it has brought immense economic prosperity and lifted millions of people out of poverty. Indeed, it is the number one reason we’re living at a much higher standard of living and comfort than previous generations, but it’s also a major polluter. This makes oil and gas investing a contentious topic, and there are multiple dynamics to consider if you’re interested in buying shares in this space.
Oil and gas has fallen out of favor in recent years, with a global focus on reducing emissions and a transition to green alternatives. The pandemic and energy crisis have highlighted the need for change but also emphasized how important fossil fuels are, both now and in the future.
These finite commodities are two of the world’s most important energy sources, and contrary to popular belief, they’re here to stay.
There are many aspects to the oil and gas industry, and the companies involved are as complex and diverse as the landscape. Before we look at the key players and best oil stocks the industry has to offer, let’s look at how the industry is structured.
There’s a lot more to it than meets the eye.
Categorizing the Oil and Gas Industry
The oil and gas industry covers a spectrum of companies, organizations, and services. They can be categorized as follows:
Exploration and Production (E&P)
These are the companies that search for and extract oil and gas. Once extracted, it is usually sent to another company for refining and energy production.
These companies operate the pipeline, providing transportation, storage, and processing of oil and gas products. Examples include companies such as Enbridge Inc (NYSE: ENB) and Kinder Morgan Inc (NYSE: KMI) and natural gas processing companies such as Williams Companies Inc (NYSE: WMB).
Midstream companies often operate under long-term contracts with producers and downstream customers, providing a stable stream of income.
Furthermore, midstream companies own valuable infrastructure assets, such as pipelines and storage tanks, which can appreciate in value over time. Midstream companies may also benefit from the growing demand for natural gas, which is seen as a cleaner-burning fuel than coal or oil.
Refining companies process crude oil into refined products such as gasoline, diesel fuel, and jet fuel. This is a downstream operation.
Integrated Oil Companies
Integrated oil companies participate in all aspects of the petroleum value chain, from exploration and production of oil (upstream) to transportation, refining, and marketing of petroleum products (downstream).
Oilfield Services Companies
These companies service the oil and gas industry through formation analysis, drilling, well construction, and completion services.
National Oil Companies (NOCs)
These are state-owned companies that control most of the world's oil reserves. Examples include Saudi Aramco, China National Petroleum Corporation (CNPC), and Petrobras (NYSE: PBR).
Chemicals play a crucial role in ensuring the success of an oil recovery operation. They are used at various stages of the process to enhance oil production and recovery rates, reduce operational costs, and improve overall efficiency.
Companies like Halliburton (NYSE: HAL), Baker Hughes (NASDAQ: BKR), and Schlumberger (NYSE: SLB) specialize in developing and supplying chemicals for the oil and gas industry, as do some international (IOC) and national (NOC) oil companies with their own chemical operations.
There are also companies that use oil and gas as feedstocks to produce chemicals such as plastics and fertilizers.
These entities advocate for the interests of the oil and gas sector and provide networking and advocacy opportunities. Examples include the American Petroleum Institute (API) and the International Association of Oil & Gas Producers (IOGP).
Renewable energy companies
As the world shifts towards renewable energy, many oil and gas companies are diversifying into renewable energy sources such as wind and solar. Examples include BP (NYSE: BP) and Shell (NYSE: SHEL).
The oil and gas industry experiences boom and bust cycles due to fluctuating commodity prices that are heavily influenced by macroeconomic factors out of the industry’s control.
Factors include balancing global supply and demand, geopolitical tensions, economic growth, weather, seasonal demand, and technological advancements.
A Shift to Renewables
In recent years, the negative impacts of the oil and gas industry on the environment have become more apparent, and public opinion has shifted towards cleaner and more sustainable energy sources. Governments around the world are implementing policies aimed at reducing greenhouse gas emissions and promoting renewable energy.
Achieving climate goals will require a significant reduction in global greenhouse gas emissions, and the oil and gas industry needs to play a major role in this transition.
It aims to do this by investing in renewable energy technologies, such as solar and wind power and developing new technologies to reduce greenhouse gas emissions from oil and gas production.
Many oil and gas companies have already started to invest in renewable energy and have set targets to reduce their carbon footprint. Some companies are also investing in decarbonization.
Pros and Cons of Investing in Oil and Gas Stocks
High dividend yields, share buybacks and a shareholder-friendly sector make oil and gas stocks an enticing prospect.
Energy stocks have long been considered an inflation trade as they’re providing a product society can’t do without, so they also offer a way to diversify your portfolio away from popular sectors such as retail, tech, and healthcare stocks.
Of course, it's not all as easy as that. The fluctuating oil price and cyclical nature of the industry mean oil and gas stocks are subject to volatility.
In recent years, ESG and the green energy transition have cast a shadow over the sector leading many institutional investors to pull funding and retail investors to retreat.
Less funding means less incentive for companies to invest in maintaining their equipment and assets. There’s also been a decrease in upstream investment, which eliminated billions of barrels of future production. And although gas and oil prices have risen since the lows of 2020, the companies have not significantly increased their spending on investment despite record profits.
Nevertheless, although much hinges on the dynamics of global supply and demand, industry analysts are confident that oil and gas are going to remain a necessary part of the green energy transition and therefore make a viable option for an investment portfolio.
Before investing in gas and oil stocks, take some time to consider the following risks, rewards and growth prospects for the industry.
Share Price Volatility
Capital Intensive Operations
Potential for Dividend Payment Cuts
High Potential Returns
Increasing Global Demand
Renewable Energy Transition
M&A: Consolidation or expansion
Factors to Consider When Investing in Oil and Gas Stocks
Any prospective investor should look at financial metrics (e.g., earnings, revenue, debt), production levels, reserves, and management quality before investing in gas and oil stocks.
Looking at the company's financial statements is a good place to start. If you have time, it’s also a good idea to listen to the most recent earnings call or read the transcript to get an idea of how the management team runs the business and how it’s faring in the current climate.
When it comes to oil and gas stocks, there are large-cap big-name stocks such as ExxonMobil (NYSE: XOM) or Shell, or there are small-cap E&P companies that are more speculative but could bring big rewards. In between, there are the midstream companies such as pipelines and oil services companies. Each offers a different level of risk, reward and growth prospects.
Large-cap Oil Companies
ExxonMobil (NYSE: XOM)
Chevron Corporation (NYSE: CVX)
Shell plc (NYSE: SHEL)
BP plc (NYSE: BP)
TotalEnergies (NYSE: TTE)
ConocoPhillips (NYSE: COP)
Callon Petroleum Company (NYSE: CPE)
Gulfport Energy Corporation (NYSE: GPOR)
Matador Resources Company (NYSE: MTDR)
SM Energy Company (NYSE: SM)
Comstock Resources, Inc. (NYSE: CRK)
Enterprise Products Partners L.P. (NYSE: EPD)
Kinder Morgan, Inc. (NYSE: KMI)
Energy Transfer LP (NYSE: ET)
Magellan Midstream Partners, L.P. (NYSE: MMP)
ONEOK, Inc. (NYSE: OKE)
MPLX LP (NYSE: MPLX)
Williams Companies Inc. (NYSE: WMB)
Plains All American Pipeline, L.P. (NYSE: PAA)
Enbridge Inc. (NYSE: ENB)
Cheniere Energy, Inc. (NYSE: LNG)
Oilfield Services Companies
Schlumberger Limited (NYSE: SLB)
Halliburton Company (NYSE: HAL)
Baker Hughes Company (NYSE: BKR)
NOV Inc (NYSE: NOV)
TechnipFMC plc (NYSE: FTI)
Weatherford International plc (NASDAQ: WFTIQ)
Helmerich & Payne Inc (NYSE: HP)
Nabors Industries Ltd (NYSE: NBR)
Patterson-UTI Energy Inc (NASDAQ: PTEN)
We hope that you found our guide to investing in oil and gas stocks both enjoyable and informative and that it has inspired some new investment ideas for you to explore. The challenge of finding high-quality oil and gas reserves makes investing in this sector an exciting opportunity. Focusing on exploration and production (E&P) stocks can be particularly rewarding, as they are directly involved in locating and extracting these valuable resources. Furthermore, investing in oil and gas midstream stocks is often attractive to investors seeking steady income streams, as they typically offer higher dividend yields than other sectors.
To further expand your knowledge and enhance your investment strategies, we recommend delving into one of our other informative investing guides. Topics include The Challenge of Finding High-Quality Oil and Gas Reserves, How to Find Investment Opportunities, How to Buy OTC Stocks, and How to Buy TSX Stocks. Happy investing!