This comment originally appeared in the February 18, 2022 Weekly Update. I thought it would be easier to find if it was its own article.
When I got back into investing in 2018, I thought I would never buy shares of an oil come as the green revolution was underway and I’m very optimistic about renewable energy and electric vehicles. All I knew about oil companies was the price of oil had fallen from over USD$ 100 a barrel in 2013 to a range between USD $40 – $60 a barrel, a price that was profitable for most companies. Add in the push to electric vehicles and renewable energy sources, I saw oil companies as a dying industry. With the onset of the Covid-19 pandemic in 2020, oil briefly fell to under USD $20 a barrel. The oil industry was done, or so I thought.
Fast forward to February 2022 and it turns out the oil industry is still very much alive. Not only is it alive, but I’ve invested in a few oil & gas companies and I’m looking into one or two additional oil & gas related companies. What changed you ask. Well….
The push to renewable energy is in full swing, and I’ve invested in a few of these companies, but the world cannot go cold turkey from its dependence on oil and gas. Long term, the oil & gas industry is in decline. However, until a reliable alternative is found, there is still strong demand for this type of resource in everyday life. Just ask anyone who has to heat their home during a cold winter. I was aware of the necessity of oil for vehicles and heating but there are so many more applications for oil and natural gas.
Check out this interactive infographic from the International Association of Oil & Gas Producers to see how much we rely on this resource. Now, I agree climate change is happening and we should continue the move to renewable energy sources as soon as possible, but in the meantime the world still needs oil.
As an investment, companies in the oil and gas industry are looking more attractive. A year ago, the price of oil was just under USD $60 a barrel and now sits at over USD $90 a barrel. Cold snaps in various locations throughout the world have further increased demand for oil to heat homes. On the supply side, tensions in the Ukraine are causing fears of a restricted supply of oil from the world’s third largest exporter of oil. If Russia were to invade Ukraine, oil could top $100 a barrel for the first time since 2014. So much for lower gas prices.
With huge demands for oil and limited supplies, and an anticipated growth in the demand for oil for at least the next 10 years, oil and natural gas companies are raking in the cash. In previous years these energy companies would re-invest that cash into exploration, development and production projects. However, those in charge of fossil fuel energy companies aren’t blind to what is happening around them. They realize there is a growing move to renewable energy sources and in the long term there will be a decline in the demand for their product so there is not much profit to be made by investing in exploration and the development of new wells. Rather than plowing profits into drilling more wells, they are focused on more short-term projects that can provide a high return on investment. To increase shareholder value and continue to attract investors, they are returning a higher percentage of their money back to shareholders by way of increasing dividends, and/or using some of this money to buy back shares as a way of increasing investor’s earnings per share (the less shares, the more earnings per share). With a small investment in oil and gas companies, I’ve been able to capitalize on rising share prices, and receive a growing dividend. Together, these provide a solid total gain on the investment.
I’ll continue to invest in alternative energy resources and renewable energy products. However, this seems to be a great opportunity to take advantage of a product that is growing in demand and returning more and more cash to investors. If they are giving it away, I’m happy to receive it. 😊