Oil and gas companies offer a unique opportunity for investors. They are typically large, well-established companies with a long history of profitability. They also tend to be less volatile than other companies, making them a good choice for investors looking for stability. Here are seven reasons to consider investing in oil and gas companies:
Reasons to Invest in Oil & Gas Companies
1. Long History of Profitability
As the world increasingly turns to oil and gas to meet its energy needs, oil and gas companies have reaped benefits in terms of profitability.
The oil and gas industry has long been one of the most profitable industries in the world, with energy companies consistently ranking among the most lucrative companies. In fact, four oil & gas companies make the top 10 of the latest Fortune rankings of the most profitable companies in the world:
This profitability is due to a variety of factors, including high barriers to entry, limited competition, and rising global demand for energy.
With oil and gas prices remaining high, there is no reason to expect that these companies will not continue to be highly profitable in the years to come. So, investing your capital in these companies is a way to earn consistent returns over time.
2. Growth Potential
Despite its current profit levels, the energy industry is expected to experience continued growth in the years ahead. With traditional biomass, coal, and oil demand declining, the global power demand will rise by 1.8% per year to almost 50% by 2050.
This will significantly boost the demand for natural gas and liquefied natural gas (LNG). This continued growth of the energy industry bodes well for the profits of energy companies in the short and long term.
It is, however, advisable to consult an energy analyst or other professionals like energy lawyer Amir Handjani before investing in an oil company to ensure that you buy shares in a company with long-term growth potential and higher returns.
3. Low Volatility & Sharp Price Declines
One drawback of investing in many traditional stocks is that they tend to be very volatile. With their high exposure to the global economy, stocks rise and fall based on global economic conditions. This volatility can make your investments quite risky and unpredictable.
However, many oil and gas companies have much lower volatility than traditional stocks. This is because their exposure is limited to one country or region, making them less vulnerable to swings in the global economy.
This low volatility and sharp price decline means you can feel confident investing in oil and gas companies without worrying about sudden and drastic fluctuations in the market.
4. Limited Competition in Many Countries
Another way investing in oil and gas companies differs from other traditional stocks is that many companies have limited competition in several parts of the world. This means that energy companies can profit without competing with many other companies, lowering costs and increasing profits.
Many countries also have state-owned oil companies, which means there are other restrictions on who can operate there and how much they can charge.
For example, Saudi Arabia’s oil company Saudi Aramco is the largest in the world, and the government intends to make sure that it remains profitable. It is doubtful that other companies will be able to challenge Saudi Aramco for years to come, meaning that even if oil prices decline, profits will remain high.
5. Cash-Flow-Generating Assets
Another way that oil and gas companies differ from other companies is that they maintain significant assets of physical value that generate steady streams of revenue that can be used to shore up profits and maintain regular dividends.
These assets include oil, pipelines, gas, and other energy infrastructure that the company uses to generate profits.
For example, Chevron has investments that generate over $100 billion in annual cash flow. Some of the company’s key holdings include Eagle Ford shale in Texas, Kazakhstan’s Tengiz field, and the Gorgon field in Australia. These investments in major oil fields worldwide allow Chevron to generate profits without relying on volatile oil prices.
6. Good Dividend Payers
Many oil and gas companies also pay good dividends, making them a good income investment for investors looking for a steady cash flow.
For example, ExxonMobil, the largest publicly traded oil company, pays a dividend yield of just under 4%. This translates into a 4% premium to the rate of inflation, meaning that even if the share price declines, the company still makes a solid profit.
Conclusion
If you started this article looking for reasons to invest in oil & gas companies, the reasons above should help convince you that oil & gas companies are a good source of income and dividends.
But before you invest, you should ensure you understand how to buy oil and gas stocks properly to maximize your gains and minimize your losses.
