With expanding natural gas production, commonly steep oil prices and bloating demand from overseas, energy stocks can seem like a natural go-to investment. And it’s a long-term play. The U.S. Energy Information Administration (EIA) forecasts strong growth in domestic crude oil production over the next decade.
Crude oil production has increased since 2008, reversing a decline that began in 1986. From 5.0 million barrels per day in 2008, U.S. crude oil production increased to 6.5 million barrels per day in 2012. The EIA thinks the outlook is so favorable that the U.S. could become a net exporter of liquid fuels in the near future.
Investing in Energy Stocks
You can tap into the energy sector in a number of ways. Mutual funds and exchange-traded funds offer many investment options. For investors who prefer to buy the company rather than the sector, there are four primary energy stock categories:
- Big Oil — Integrated oil and gas companies are top-of-mind energy stocks for many investors. These big, familiar names are the leaders in exploration and production, especially in oil.
- Natural gas production companies — As domestic production continues to expand, low natural gas prices can be problematic. Until natural gas prices rebound, producers are looking to trim expenses and lower debt in order to be more attractive to investors.
- Energy services companies — By primarily providing equipment to drillers, both onshore and in deep-water operations, these energy stocks can spread the field to find profitable opportunities.
- Energy infrastructure – These companies provide pipelines, storage and processing facilities to the industry and are typically formed as master limited partnerships (MLPs). That allows for capital appreciation, plus the payment of usually very generous dividends. Investors should make note of the tax implications of these investments, though.
Energy stocks are ripe for rip-offs
The Financial Industry Regulatory Authority (FINRA) has noted a continuing trend for investment scams involving energy stocks. The frauds seem to frequently target investors interested in alternative, renewable or waste energy products.
Many of these stock cons are actually Ponzi schemes, paying “returns” out of one pocket of investors to another. In one case cited by FINRA, the Securities and Exchange Commission alleged that promoters of a so-called “eco-friendly” energy investment lured 300 investors into a $30 million Ponzi scheme. Investors were promised returns ranging from 17 percent to “hundreds of percent” annually.
Whether the racket is a pitch for a cutting edge energy stock, or a share in the development of a drilling venture, most involve stocks that don’t meet the listing requirements of a major national exchange, such as the Nasdaq or the New York Stock Exchange.
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