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Exploring the Fundamentals of Energy Sector Stocks

Energy sector stocks are tied to companies that drive most of the industries nowadays.

Filip Dimkovski - Writer for Fortrade
By Filip Dimkovski
a man taking a selfie in front of a tv
Edited by Dragan Stevanovic

Published May 18, 2024.

a man in a hardhat using a laptop computer in front of an oil rig

The energy sector has played an important role in many industries. It powers manufacturing plants, fuels transportation networks and energy companies and can contribute to growth worldwide.

This sector reflects ongoing trends, offering insights into the pulse of global markets.

In this context, energy sector stocks not only are interesting trading instruments but also serve as good indicators of economic health. Below, we'll explore the basics of energy sector stocks including key sub-industries.

Note: The information in this blog is purely educational and should NOT be considered advice.

What Are Energy Sector Stocks?

Energy sector stocks are shares in companies that produce and distribute energy. This includes businesses in oil and gas, renewables like solar, wind, and hydroelectric power, as well as utilities.

Stock trading in the energy sector is influenced by various factors, including oil prices, regulatory changes, and technological advancements.

Energy Sector Sub-Industries

Oil and Gas

Companies in the oil and gas sub-industry explore, extract, produce, refine, and distribute oil and gas. Their activities range from drilling wells to selling gasoline, contributing to the global energy supply.

Examples include:

  • ExxonMobil (XOM)
  • Chevron (CVX)

Renewable Energy

These companies produce energy from renewable resources, such as solar, wind, hydroelectric, and biomass. These firms lead the transition to a more sustainable energy future.

Examples include:

  • NextEra Energy (NEE), the world’s largest producer of wind and solar energy
  • Vestas Wind Systems (VWDRY), a leading manufacturer of wind turbines

Solar Energy

Companies within this category specialize in solar energy, which includes manufacturing solar panels, providing solar power, and developing solar technology.

Examples include:

  • First Solar (FSLR), a solar technology company and a global provider of photovoltaic (PV) solar solutions.
  • SunPower (SPWR), a solar technology and energy services provider, operates mainly in the United States and Canada. 

Wind Energy

The wind energy sector comprises firms that manufacture wind turbines, generate wind energy, and develop wind power projects.

Examples include:

  • General Electric (GE)
  • Siemens Gamesa Renewable Energy (GCTAF)

Other Renewable Sources

Besides solar and wind energy, companies use other renewable sources for clean energy supply.

  • Biomass Energy: This involves converting organic materials into electricity or heat. An example of a company in this field is Enviva (EVA), which produces energy from organic materials.
  • Hydroelectric Energy: This type of energy is harnessed from the power of water, typically through dams or rivers. Brookfield Renewable Partners (BEP) is a company that specializes in generating electricity from water sources.
  • Geothermal Energy: This involves utilizing the Earth’s internal heat to provide electricity and heating. Ormat Technologies (ORA) is a company that focuses on harnessing energy from the earth’s heat.

Utilities

Utilities encompass a broad category of companies that deliver essential services for everyday life, including electricity, gas, and water.

Examples include:

  • Utilities: Companies like Consolidated Edison (ED) provide a mix of electricity, gas, and sometimes water services.

  • Electric Utilities: Duke Energy (DUK) is a leading electric power holding company in the US.

  • Natural Gas Utilities: The Southern Company (SO) is primarily known for its electric utility services but operates as a natural gas distributor.

Definitions and Key Terminology

Barrel of Oil Equivalent (BOE)

A unit of energy is based on the amount of energy released by burning one barrel of crude oil.

Suppose a company produces 500,000 cubic feet of natural gas in a day. Given that about 6,000 cubic feet of natural gas equals one BOE, we can calculate the daily production in BOE like this:

Daily production in BOE = Total production / 1 BOE in natural gas equivalent

We divide the total production (500,000 cubic feet) by the amount of natural gas equivalent to one BOE (6,000 cubic feet). So, the daily production in BOE would be 83.33 BOE/day.

Megawatt-Hour (MWh)

A measure of electricity production or consumption equal to one million watts expended for one hour.

A wind turbine, for example that generates 2 MW of power and operates for 10 hours would generate 20 MWh daily.  

Feed-in Tariff

A policy mechanism offering long-term contracts to renewable energy producers designed to accelerate investment in renewable energy technologies.

If a small hydroelectric power plant generates 500 MWh (500,000 kWh) of electricity each year and a Feed-in Tariff rate is $0.15 per kWh, we can calculate the annual income by multiplying the two:

Annual income = 500,000 kWh × $0.15/kWh = $75,000

General Overview of Energy Sector Stocks

Energy sector stocks are known for a more-or-less cyclical nature, with stock performance closely tied to:

  • Energy prices
  • Consumption patterns
  • Geopolitical events
  • Regulatory policies
  • Fluctuations in commodity prices

Unlike more consumer-driven sectors (such as clothing or household equipment), the energy sector is heavily influenced by global supply and demand dynamics, which makes it more volatile than other sectors.

Renewable Sources and Regulations

This sector is transitioning towards renewable energy sources, which affects investment and growth possibilities. The trend toward renewable energy sources such as wind, solar, and geothermal will continue over the next few years.

Government regulations regarding the environment and renewable energy already impact energy sector stocks. For example, policies for reducing carbon emissions benefit renewable energy companies but may create challenges for traditional oil and gas firms.

Subsidies and tax credits for solar, wind, and other renewable energy projects also boost potential profitability and attractiveness to investors.

Recent Historical Milestones

Events like oil spills, natural disasters, or geopolitical conflicts can drastically affect energy sector stocks. Let’s take a look at a few examples:

  • The 1973 Oil Crisis: The embargo by the Organization of Arab Petroleum Exporting Countries led to a quadrupling of oil prices, causing high volatility in energy sector stocks. 

  • The Deepwater Horizon Oil Spill in 2010: BP's Deepwater Horizon oil spill, one of the worst environmental disasters in U.S. history, resulted in significant financial, environmental, and regulatory impacts. 

  • Renewable Energy Surge Post-Paris Agreement: The global commitment to the Paris Agreement in 2015 triggered a surge in investments in renewable energy technologies, benefiting stocks related to solar, wind, and other renewables.

A Well-Oiled Machinery or Bottomless Pit?

Energy sector stocks branch out into many different sub-industries, each taking a large slice of the cake and driving other sectors and industries.

Though renewable energy is becoming the new standard, traditional energy companies are evolving and adapting to government policies and agreements.

However, before investing in any of the energy sector stocks, it's important to conduct proper research and due diligence. Despite their significance, these stocks have experienced high volatility more than once.

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