Promising Energy Stocks for Your Portfolio

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some energy stocks to your portfolio, the PowerShares Dynamic Energy Exploration and Production ETF (NYSEMKT: PXE  ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The PowerShares ETF's expense ratio -- its annual fee -- is 0.65%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF has performed well, beating the world market over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why energy?
Energy is a defensive sector, as demand for it doesn't drop by a lot when economic times get tough. Interest in alternative energies is definitely growing, but we're still quite dependent on good ol' oil and gas. Thus, oil and gas exploration and production companies are worth considering -- and some of them have been getting involved in alternative energies, too.

More than a handful of energy companies had strong performances over the past year. Calumet Specialty Products Partners (NASDAQ: CLMT  ) surged 74%, producing not just fuel but also products such as waxes and asphalt. The company is buying a San Antonio refinery and its inventory from NuStar Energy (NYSE: NS  ) and has plans to build a gas-to-liquid facility in Pennsylvania, which could do well if natural gas prices stay low. The stock recently yielded a hefty 8% and is a limited partnership.

Major oil refiner Valero Energy (NYSE: VLO  ) , yielding 2.1%, is up 64% and is poised to profit from lower crude oil prices (because they mean lower input prices for refiners and thus higher profit margins). The company's fans like its solid fundamentals and growth prospects, but bears worry about possible fallout if fracking activities are reined in by regulations. Valero recently got permission to ship U.S. oil to a Canadian refinery, and has a new hydrocracking diesel production facility in operation.

Phillips 66 (NYSE: PSX  ) , the spun-off downstream business of ConocoPhillips (NYSE: COP  ) , is up more than 50% since its April debut. It's the nation's largest independent oil refiner. Bears worry about competition and tight profit margins, along with falling oil prices. Bulls see asset utilization improvements and expect continued profitable "crack spreads" for the near future. The company recently hiked its dividend by 25%, so that it now yields about 1.9%, and it's doubling its share-repurchasing plans. The company plans to form a master limited partnership for its transportation assets soon.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. Occidental Petroleum (NYSE: OXY  ) , for example, shed 16%. Its revenue and earnings have been growing briskly in recent years, but it might be challenged by a gradual decrease in demand for oil, in part due to more energy-efficient vehicles. It's also not as diversified as some peers. In the meantime, though, the company has been quite successful in the oil-rich Permian Basin, and some recent insider buying is auspicious. It recently yielded 2.8% and has been hiking its payout significantly in recent years.

The big picture
Demand for energy isn't going away any time soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

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