Power plays

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The energy sector is known for its cyclical nature, with the performance of companies often being tied to fluctuating commodity prices and shifts in demand. They need to balance these changes with high capital investments and long timeframes required to construct new and maintenance of existing projects. Those investing in energy stocks should expect annual performances to vary greatly, they are not well suited for those wanting gradual or consistent growth. 

These firms also operate in a strongly regulated environment, needing to comply with many governmental requirements in order to continue their services. These regulations mean that even though there is a focus on technical innovation to improve efficiencies, the implementation of new processes is not always rapid. Investors should be wary that the movements of stocks in this sector are often affected by factors far beyond the control of a single firm, such as geopolitical events, energy prices and regulatory changes. 

While these businesses do benefit from economies of scale, they can’t insulate themselves from all of these risk factors. With many of these firms having global operations, the impacts of exchange rates and dependence on partnerships should also be considered. As the sector includes oil, coal and gas stocks, the longer term pressure to reduce carbon emissions will have a major impact on the future of these companies. 

Enbridge ($ENB)

Enbridge is a major player in the North American energy infrastructure market. Their focus is transporting and distributing oil and natural gas to consumers, with US$2.39b of the total Q4 2023 earnings of US$4.10b coming from liquids pipelines. Characterised as the midstream, this business segment operates by collecting tolls, benefitting from long term contracts in a market with high entry barriers and offers relative stability compared to those more directly affected by commodity prices. This stock should interest investors seeking dividends as the company aims to payout between 60% and 70% of cash flows to shareholders. 

After acquiring three utilities firms in the U.S. in 2023, as well as additional export and storage facilities, Enbridge plans to grow further in the natural gas industry. By catering to local demand and having operations in Canada, the company is less exposed to the pause on permits for liquified natural gas exports by the U.S. regulator. However, investors should keep in mind the potential risk of similar actions in the future, which would negatively impact the share price. The company has entered the renewables market with offshore wind farms in Europe and other assets in the U.S., but they are a very small proportion of its current portfolio. 

Brookfield Renewable Corporation ($BEPC)

Brookfield Renewable is responsible for a portfolio of hydroelectric, solar, wind, energy storage solutions and other clean energy sources. Investors should note that this option is a bit different from the usual stock, as it offers exposure to the projects owned and operated by Brookfield Asset Management ($BAM) rather than a traditional energy business. Many of their competitors are not publicly listed. Their projects sell power to utilities, and corporate buyers, usually through inflation-linked contracts. Investors benefitted from a 5% increase in distributions in Q4 2023 and future growth in this measure is expected. 

Brookfield’s future depends on whether it can successfully execute on their backlog of projects, with management playing a major role in these deals. It is not the best choice for investors expecting rapid capital gains. They had around 33,000 megawatts of installed capacity at the end of 2023 and have around 155,000 megawatts in their pipeline of earlier stage assets. The share price has been affected by a downturn in clean energy stocks in 2023, with the sector seeing many deals overrun budgets, deadlines and experiencing financing difficulties. 

Chevron ($CVX)

Chevron is an integrated energy company, involved with all stages of industry across the globe. Upstream activities, such as exploration, extraction and production of oil and natural gas, account for the majority of earnings, at US$1.58b of the Q4 2023 total of US$2.25b. Downstream was responsible for US$1.14b during the same period, representing the tasks that bring the usable products to end users. The firm is responsible for a wider array of activities and trying to diversify its income sources, but investors should note that these are at earlier stages and there are many concerns about the viability of its carbon capture systems. 

In October 2023, the business acquired Hess Corporation for US$53b, which upgraded its existing portfolio of assets with shale gas in North Dakota and oil in Guyana. This move will only show up in next quarter’s balance sheet and is worth considering its size against the US$26b the company paid out shareholders in 2023. Chevron achieved an annual production record in 2023 and investors should keep in mind that it’s under constant pressure to secure new sources of supplies. The stock does suit investors looking for dividends, having a five year dividend growth rate higher than the S&P 500. 

Seeking new sources  

There are several ETF options for investors who want to invest in the energy sector generally, rather than looking for a specific stock. 

The Fidelity MSCI Energy ETF ($FENY) has a fee of 0.08% and could interest investors looking to capture the performances of large, medium and small-cap firms in the MSCI USA IMI Energy 25/50 Index. The Vanguard Energy ETF ($VDE) also tracks this index, but has a slightly higher fee of 0.10%. To gain exposure to energy firms in the S&P 500, investors could consider Energy Select Sector SPDR ($XLE), which had 23 holdings as of 21 March 2024 or its equal-weighted counterpart, the Invesco S&P 500® Equal Weight Energy ETF ($RSPG). 

Investors wanting to invest in companies that produce and distribute oil and gas from around the world could be well served by the Global Energy iShares ($IXC). Although around 60% of its holdings were listed in the U.S. as at 21 March 2024, many of these firms have global operations. It should also be noted that many large energy businesses are state-owned enterprises rather than listed companies. 

There are more specialised offerings for investors interested in the oil and gas industries. The Alerian MLP ETF ($AMLP) focuses on firms responsible for midstream activities, such as pipelines, storage facilities and processing plants in the U.S., while the Alerian Energy Infrastructure ETF ($ENFR) includes Canadian firms too. For investors concerned about the impact of any one firm’s performance, the SPDR® S&P® Oil & Gas Exploration & Production ETF ($XOP) provides equal-weighted exposure to the subsector.   

Investors looking for exposure to natural gas prices should look at the First Trust Natural Gas ETF ($FCG). While the main classification energy sector contains mostly oil and gas focused firms, there are other options available for investors who want to minimise their holdings in businesses producing fossil fuels. These include the Global Clean Energy Shares ($ICLN) and First Trust NASDAQ Clean Edge Green Energy Index Fund ($QCLN), which cover a range of renewables, while the Invesco Solar ETF ($TAN) and Global X Wind Energy ETF ($WNDY) are more concentrated investment products.