The Energy Sector
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The Energy sector is the Oil and Gas sector. Owning shares in energy stocks is the equivalent of having exposure to commodities.
What I like about the energy sector companies in the S&P 500 index, is the long history many of the companies have.
- Chevron was founded in San Ramon, CA in 1879.
- Marathon Oil was founded in Houston Texas in 1887.
- Oneok was founded in Tulsa, Oklahoma in 1906.
- Halliburton was founded in Houston in 1919.
- Occidental Petroleum was founded in Houston in 1920.
These are companies that have survived one or two World Wars. Marathon Oil was founded 20 years after the end of the Civil War.
They are companies that have achieved longevity unlike most companies we see today.
Chevron is 143 years old. How many of the high-flying tech stocks will be around 140 years from now?
What these companies embody is a true piece of American history.
If you have been following financial news you might have seen recent articles about Warren Buffet increasing his position in Occidental Petroleum.
He currently owns just over 15% of Occidental’s shares in his Berkshire Hathaway portfolio and is looking to increase his position to 20%.
Occidental Petroleum (OXY) is one of the 21 companies in the S & P 500 Energy sector.
The Energy sector is not one of the largest sectors by market capitalization at $3.3 trillion.
Of the eleven sectors in the economy it ranks 8th.
But over the last year the Energy sector has returned 51.98%. One of the few bright spots when every other sector is negative on a year-to-date basis.
Of the 21 companies in the sector I had the pleasure of working directly with 4 of them.
I won’t say which ones, only that I spent a lot of time in Houston and Oklahoma.
My primary responsibilities included meeting with investment committees and pension committees to construct fixed income portfolios for their pension assets.
And to discuss how the economic environment would impact the portfolios we managed.
I have to say that, as different as our backgrounds were, the energy clients were some of the most interesting people I have ever met. I say that in a most respectful way.
Almost everyone I worked with was male. And I think in the beginning there was some hesitancy about working with a woman from New York (originally from Berkeley).
That didn’t last long. They asked a lot of questions; I asked a lot of questions.
One of the best compliments I ever received was from a corporate attorney responsible for setting up the guidelines for a portfolio.
We had just discussed the use of futures and options contracts in their portfolio.
He said to me “Do you think the next time you’re in town you could come to our pension meeting and explain futures and options the way you just explained them to me?“
Then he said, “You don’t talk down; you explain everything clearly and I appreciate that”.
I felt accepted, it was a great feeling.
Now on to more important characteristics of the energy sector.
Energy stocks currently pay some of the highest dividends. It is not uncommon to earn 5-6%.
Before you get too excited remember that stock prices in the energy sector can be volatile.
In March of 2020 the price of oil was $32.00 a barrel.
By April the price had dropped to $18.38 a barrel.
Today we are seeing the price of oil top $100.00 a barrel and anyone who drives is hoping that prices come down.
The Energy sector is comprised of the following sub sectors:
- Oil and Gas Exploration and Production
- Oil and Gas Equipment and Services
- Integrated Oil and Gas
- Oil and Gas Equipment and Services
- Oil and Gas Storage and Transportation
- Oil and Gas Refining and Marketing
Although the Energy sector may be small in terms of the S&P 500, it has an outsized influence in our daily lives. Oil and Gas. Inflation. Prices at the pump.
I think everyone should have some exposure to the Energy sector. Commodities, like oil and gas, are an asset class. As an asset class that is not stocks or bonds, commodities help diversify risk in your portfolio.
This much has been clear as the Energy sector has outperformed every other sector in the market over the last 12 months.
Full disclosure : I own shares of Berkshire Hathaway B shares (BRK/B), Devon Energy (DVN), Occidental Petroleum (OXY), Kinder Morgan )KMI) and Exxon Mobil (XOM).
This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.
