Four tips for energy investors

Nanjing Night Net

I’m on the record as saying I’m�0�2not convinced that our mining companies will be great investments�0�2 but I’m very aware that many investors take a different view.

It’s disagreement that makes a market, after all.

The energy sector has slightly different dynamics (read: it’s not as reliant on China or a run-up in prices), so I think it’s a safer sector for investors. Safer doesn’t mean entirely safe – the laws of supply and demand still apply, and no supplier has any significant pricing power – so here are four ways to help lower your investing risk:

Don’t forget the macro

When it comes to our energy companies, there are an awful lot of things to keep track of: How many wells is your oil company drilling? What does the debt picture look like? Where are its assets, who are its joint-venture partners, and on and on.

But this industry, perhaps more so than any other, is tremendously affected by forces outside of an individual company’s control. I’m not just talking about how oil stocks tank at the slightest hint of bad economic news, either. The continued growth of multi-national oil companies and shifting world energy policy will affect energy investments in the coming years. Savvy investors tune in and adjust accordingly.

Don’t forget the micro

Of course, let’s not downplay the significance that management has on our stocks. The macro view is important, but CEOs still make or break these companies. In fact, superior management is now more critical than ever. Environmental opposition and increasing regulations are turning out to be more than just a thorn in the side of fossil fuel producers.

We are entering the age of accountability when it comes to our energy production.

And those factors I mentioned earlier – the drilling results, resources reserves and cash (and debt) positions will impact each company’s ability to take advantage of those macro factors, so balancing both the big picture and the here-and-now is vital.

Think global

The energy market is an international one, with largely interchangeable commodities.

Give yourself the advantage of different vantage points. As well as this website, check out The Financial Times, Al Jazeera or BBC News, and think about how your investment fits into the world energy scene.

Outside of newspapers, there are many sources available online that can enhance your understanding of the industry, and your company’s role in the energy picture.

One readily available and often quite detailed resource is industry reports from the companies themselves. BP (NYSE: BP) and ExxonMobil (NYSE: XOM) both publish world energy outlooks.

Baker Hughes (NYSE: BHI) tracks global rig counts, and Schlumberger (NYSE: SLB) issues a human resources benchmark survey.

These reports are accessible, thorough, and greatly improve the context of our investments.

For industry news in 140 characters or fewer, you can also jump on Twitter and start following people in energy. Writers and industry professionals tweet relevant and interesting articles, charts, thoughts, and ideas that we are all now privy to (for better or worse) thanks to the Internet.

Stay informed

Energy companies are not like Coca-Cola. Perhaps there was a time when you could hold BHP for 20 years and not think about it, but those days are over. Revisit your investing thesis often, factor in the micro and the macro, and make your buy, sell, or hold decision again and again.

Bear in mind, I’m not talking about responding to erratic movements in the share price – far from it.

Investors should always keep tabs on the companies they invest in, and the industries in which those companies operate.

The energy space can change quickly – particularly with changes in oil prices, but also new supply and alternatives (such as the recent innovations in coal seam gas), which can change the supply and demand dynamics for an energy company’s product.

Foolish takeaway

It is easy to be overwhelmed by the sheer volume of information out there about energy, but if you start with the basics and build from there, it can actually be a lot of fun – and potentially quite rewarding.

Equally, there’s no harm in (and a lot to recommend) putting companies in the “too hard” basket if you don’t have the knowledge, time or interest in keeping up with latest developments. That’s where the real mistakes – regardless of industry – are made.

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Scott Phillips is a�0�2Motley Fool investment analyst. You can follow him on Twitter. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).

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