The energy sector is one of the largest and most diverse industry groups in the United States. With that diversity comes plenty of choices for investors, but the road most often traveled is oil stocks. However, simply deciding to invest in oil stocks does not end an investor’s journey. Rather, it is the start as investors have an array of options for investing in crude oil stocks.
The Conservative Play
Conservative investors looking for exposure to the energy sector often find their way to integrated oil stocks. A key point that differentiates integrated oil producers from other oil companies is that integrated companies explore for and produce oil (upstream operations) as well as refine and market oil and gas (downstream operations). Additionally, integrated oil stocks are usually among the better dividend-payers in the energy sector.
Refining companies are those firms that are focused exclusively on downstream operations. That means refiners do not explore for or produce oil. While these companies are not producers, they are correlated to the price of crude in that high oil prices weigh on refining margins by leading to demand destruction. Additionally, U.S. refiners benefit when West Texas Intermediate futures trade at discounts to Brent futures, the global benchmark. That scenario comes with its own risks. "If a worldwide economic recession caused WTI prices to plunge, production would dry up and the U.S. price advantage would collapse," one analyst told Barron’s.
Independent Oil Companies
Independent oil producers do not have refining operations and are generally smaller than their integrated peers. That said, there are plenty of large-cap independent oil companies for investors to choose from. Some have been sound performers over time, though long-term investors should know many independent oil companies do not pay dividends that are comparable to their integrated rivals. Also worth noting is that some independent oil companies actually produce more natural gas than they do oil and that can weigh on their earnings if natural gas prices are low.
Oil Services Stocks
Oil services companies provide everything from onshore and offshore rigs, to cement for oil wells to drill bits and parts. These companies do not directly produce oil, but they very much are "oil stocks" because their products and services are essential to the production of crude. Investors should evaluate global economic trends before considering oil services stocks. "While the domestic oil field service companies have been hurt by too many competitors and more downtime, the overseas scenario is more promising. International operators have projected sharp increases in their capital expenditure budgets in the coming years, making oil service companies an attractive investment," according to Barclays.
Todd Shriber is a financial writer who started covering financial markets in 2000. He worked for three years with Bloomberg News and specializes in analysis of stocks, sectors and exchange-traded funds. Shriber has a Bachelor of Science in broadcast journalism from Texas Christian University.