Petroleum stocks can provide significant capital gains through share price appreciation and attractive dividends income during high oil and natural gas prices.
Over the past few years, oil and gas have experienced high volatility. This has left energy investors questioning whether top companies’ oil and gas investments. Let’s look at oil and gas stocks to see if they are long-term investments worthy of a place in your portfolio.
Can you invest in oil or gas?
Because they are cheaper than other heating or transportation fuels, fossil fuels like oil and natural gasoline continue to be in high demand. They have an infrastructure advantage over new clean fuel sources like renewable electricity.
Oil stock investments can be riskier than other stock markets, however, because of several additional risks in the industry, such as:
• Cyclicality: Oil and gas tend to be cyclical which mean that investors will likely experience booms or busts.
• Volatility: Other factors are beyond the control of oil and gas companies. Oil and gas prices play a significant role in the valuation of oil stocks. These stocks are punished when oil prices fall. Stock prices in the oil-and-gas sector fell when Russia and Saudi Arabia launched an oil price war in March 2020. This caused global oil prices worldwide to plummet.
• Uncertainty: The future of oil and gas exploration is uncertain. The rights to an exploration block are purchased by a company. They then conduct tests to find oil and gas deposits. Once they are found, the company drills wells to test the quality of the deposits, then connects the infrastructure and drills production wells. All this before making any money. Investments that fail to pan out can lead to large losses due to the inherent uncertainty of exploration.
• Environmental issues: Fossil fuels contribute to climate change by emitting greenhouse gases during production, transport, and combustion. Governments are putting pressure on companies to reduce their carbon footprint, which will lead to a decrease in oil and gas demand over the next decade.
• Safety concerns: Both oil and gas are flammable and dangerous. The pipelines that transport them cover hundreds to thousands of miles. The machinery used to extract oil and gas is complex and heavy. These factors are combined and can lead to tragic results.
When you add it all, oil and gas are one of the riskiest sectors for investors. Some oil and gas companies may be safer than others.
The benefits of investing in oil & gas
Petroleum stocks can provide significant capital gains through share price appreciation and attractive income when there are high oil and natural gas prices. Oil companies are more likely to have a lot of cash as crude oil prices rise. This allows them to drill more wells to increase oil and gas production, repay their debts, and repurchase stock. All of these activities can add value to shareholders. Because of the cash oil companies have access to during times of high demand, dividends are often higher than the average. This makes this sector appealing to investors looking for high dividend yields.
Oil and gas stocks are smart investments because of their upside potential during times of economic growth. Although The Motley Fool doesn’t advocate timing the market, oil-and-gas investments made right as the economy is transitioning from recession to expansion can be smart moves.