Energy Jargon, Demystified: "Upstream"

With all the recent buzz surrounding the energy sector, I thought I'd define a common piece of industry jargon: "upstream."

Many of us know that upstream is where salmon struggle to arrive in order to do their groove thang (cue wah-wah guitar). Investors may struggle to understand the meaning of the term, however, when applied to oil and gas stocks.

Upstream simply refers to the first link in the oil and gas value chain. That's the finding and production of hydrocarbons. This segment covers a great variety of firms, some of which stick to exploration and some of which prefer taking known resources into production. A majority of these companies participate in both exploration and production, and that's why they are also referred to as E&Ps. Oilmen love their acronyms, if you didn't already know.

In addition to these upstream "pure plays," you've also got your integrated firms like ExxonMobil (NYSE: XOM  ) , ConocoPhillips (NYSE: COP  ) , and PetroChina (NYSE: PTR  ) . These firms engage in activities up and down the chain, from the mud pump to the gas pump. Companies like this trade off some leverage to the highly profitable upstream for a more balanced asset portfolio. As we've seen this year, strong gasoline prices can go a long way toward offsetting production shortfalls or price weakness further upstream.

Whether you're looking for an all-weather stalwart like one of the integrated firms mentioned above, or an upstream pure play sure to benefit from the next spike in oil prices, it's well worth your time to consider adding some upstream exposure to your portfolio. Long-term returns in the space have been excellent, and they will continue to be strong, so long as hydrocarbons hold center stage in the global energy pageant.

Now that you have that down, check out what the midstream has in store.

Not sure where to search for upstream underdogs? Check out tags like Exploration and Independent Oil & Gas in Motley Fool CAPS.


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