When oil and gas prices rise, oil and gas stocks can make significant capital returns and provide attractive dividend income.
Oil & Gas Investments companies are the world’s largest corporations. A stock or company you have heard of is sometimes a good investment.
The oil industry has been subject to significant volatility during the past few years. This leaves -energy investors asking whether oil companies — including top oil companies — are right now smart investments. Let’s take a closer look to determine if oil stocks are worthy of long-term investments.
Are You Able To Invest Safely In Oil And Other Natural Resources?
The high demand for fossil fuels such as oil and natural gas is due to their low cost. They also offer a vast infrastructure advantage over clean fuel sources.
Investments in crude oil stocks have a higher risk than other sectors. This happens because the industry is subject to additional risk factors such as:
- Cyclicality:The oil & gas sector tends to be cyclical. This means that investors can expect to experience booms as well as busts.
- Volatility:Oil and natural gas production companies are subject to other forces beyond their control. The valuation of oil stock is heavily affected by the prices of oil. Low prices can cause the market to punish those stocks. Stock prices in the oil & gas sector also crashed after Russia and Saudi Arabia started an oil price battle in March 2020. It caused global oil prices around the world to plummet.
- Uncertainty:Exploration of oil and natural gas is risky. A company purchases rights to an area of exploration and conducts tests to determine if there are oil or gas reserves. If the deposits are discovered, the company drills testing wells to determine the quality. Then, the company connects the infrastructure to the production wells. It is possible much a lot of money on investments that don’t turn out because of the inherent uncertainty associated with exploration.
- Environment issues: Fossil fuels release greenhouse gases during transportation, combustion, and production. This contributes to climate Change. As a consequence, governments are pressing companies to decarbonize their operations. The oil demand will likely decrease over the coming decades.
- Safety Concerns:Petroleum products are both toxic and flammable. They travel for thousands to even hundreds of miles. Additionally, the complex machinery that extracts oil is very heavy. Combining these factors can have disastrous consequences.
Oil and gas is one sector that investors are most at risk. However, not all oil and gas companies will be as safe as others.
The Advantages of Investing In Oil-And-Gas
Oil and gas stocks can make significant capital gains when oil and gasoline prices rise. Oil companies generate more cash as crude oil prices rise. This gives them more money to drill new wells to increase their oil production, repay debt, repurchase stock, and pay dividends. All of this can help create shareholder value. Note that dividends in this sector are more than average due to the cash oil companies can generate during high times. This makes the sector attractive for investors seeking high payouts.
Oil and gas stocks can be smart investments, given their upside potential during periods when the economy is growing. The Motley Fool will not recommend trying to time the market. However, oil and natural gas investments made when the economy is going through a recession can prove to have been wise.