We look at whether investors can make money from the oil and gas sector.
Oil and gas companies are hard to ignore.
These powerful multinational giants are among the biggest companies in the world and generate billions of pounds in revenue.
They benefit from the world’s insatiable appetite for energy and have the potential to make bumper profits that can be shared with their investors.
But is it still possible to make money from them when there’s so much focus on cleaner forms of energy, as well as looming regulatory restrictions?
Here we take a look at this sector, outline its various pros and cons, and highlight potential ways for investors to get involved.
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Positives of the sector
Big tech companies may have stolen all the headlines but big energy has been the real winner over the past three years, according to Darius McDermott, managing director of FundCalibre.
“Russia’s invasion of Ukraine, instability in the Middle East and longer-term factors related to the energy transition have pushed energy prices higher,” he said. “This has created a strong environment for energy companies.”
UK-based BP, for example, announced record profits of $27.7 billion (£23 billion) in 2022 as energy prices soared.
As well as seeing stock prices rise on the back of the strong results, investors also stand to benefit from receiving a share of the profit in the form of dividends.
More broadly, established oil and gas companies usually have attractive characteristics that investors want to see.
These include sound balance sheets, strong cash flows and generally low debt. They are also closely scrutinised by a small army of financial analysts.
According to McDermott, the energy sector can still play several roles in a portfolio.
“It can help investors lean into economic growth, and it can provide a hedge against geopolitical disruption,” he said.
“However, it also comes with significant risks and is a tough sell from an ESG (environmental, social & governance) point of view.”
Downsides of the sector
According to a study by Deloitte, the energy landscape continues to be shaped by four factors:
- Geopolitical factors
- Macroeconomic variables
- Evolving policies and regulations
- The emergence of new technologies
“These disruptors can have a significant impact on demand and supply, and trade and investment within the crude oil and natural gas (O&G) industry,” it stated.
There are also other potential downsides. For example, the oil and gas sector is often the target of environmental campaigners, as we have seen in recent years.
However, Ben Yearsley, director of Fairview Investing, doesn’t believe this will have a significant impact and pointed out we would still be dependent on fossil fuels for decades.
“Public pronouncements and tax can impact share prices dramatically but if you can look through that then the positive is many companies are highly cash generative and throw off big dividends,” he said.
Jason Hollands, managing director of Bestinvest, is also relatively upbeat about the sector’s prospects, although he acknowledged the potential dangers.
“With the global drive to reduce carbon emissions and fossil fuels, a key long-term risk is that investors end up exposed to stranded assets such as redundant pipelines and refiners,” he said.
“However, it will take a very long time before the world phases out the use of oil and gas.”
Hollands believes companies have become more disciplined with their capital expenditure on new infrastructure since the UN Paris Agreement was signed in December 2015. This policy committed nations to substantially reduce carbon emissions to limit global warming.
“Most traditional energy companies have also been diversifying their businesses into new areas such as alternative energy and energy infrastructure,” he added.
“For example, through its Pulse division, BP operates a major network of electric vehicle charging points in the UK.”
Elsewhere, there are concerns that the high cash flows generated will draw the attention of cash-strapped governments, pointed out Darius McDermott at FundCalibre.
“In the UK, the Labour government has said it plans to raise just over £6 billion across the next parliament through increasing and extending the Energy Profits Levy,” he said.
“Originally a windfall tax on the profits of oil and gas companies, this will continue even though the supernormal profits from high oil and gas prices are now in the past.”
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How to get involved?
The first option is to invest directly in one of the oil majors, according to Ben Yearsley at Fairview Investing. This is easily achieved through a stockbroker.
“I’d probably buy the likes of BP and Shell directly,” he said. “You have energy funds that will have a broad spread of companies but what’s wrong with a few homegrown behemoths on pretty cheap valuations?”
Energy companies represent one of the biggest sectors on the UK stock market with a 12.5% weighting in the Footsie, according to Jason Hollands of Bestinvest.
“A bog-standard, low-cost index tracker fund like iShares Core FTSE 100 UCITS ETF will provide meaningful exposure to oil and gas giants, alongside other blue chip companies,” he said.
For those wanting more focused exposure to the sector, Hollands highlighted the Temple Bar Investment Trust, which currently has 16.5% invested in energy companies.
He also suggested the Guinness Global Energy fund.
“Alongside owning the big oil and gas giants, it also has exposure to oil and gas exploration companies, firms which provide equipment and services to the energy sector, storage and transportation companies and businesses involved in refining and marketing oil and gas,” he said.
FundCalibre’s Darius McDermott believes income funds could be a good, diversified way to play the oil and gas sector.
“For exposure, we recommend Artemis Income and Schroder Income,” he said.
Ready to invest but want to shield your returns from the taxman? Open a Stocks & Shares ISA with Hargreaves Lansdown now
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The information included in this article does not constitute regulated financial advice. You should seek independent, professional financial advice before making any investment decision.