The Basics of the Energy Sectorhttp://www.fool.com/investing/general/2012/09/20/the-basics-of-the-energy-sector.aspx Nicole Seghetti
September 20, 2012
This month at The Motley Fool we're committing ourselves to getting back to basics, culminating on September 25 with Worldwide Invest Better Day. With this in mind, my Foolish colleagues have armed you with information like our favorite investing books and the worst investment advice we've received. In a previous article, we reviewed stock diversification, a key fundamental of investing. We're looking at stock sectors one by one, focusing today on energy.
Energy sector 101
How the sector performs
Energy sector dynamics
Exploration or upstream companies include Transocean (NYSE: RIG ) , which primarily operates offshore drilling services for oil and gas wells across the globe. Along with other companies that operate upstream, this Swiss company is choosing to shed shallow water drilling rigs and make big bets on ultra-deepwater drilling. The most sizable profits -- and biggest potential losses -- occur upstream, so making the right bet can really pay off.
The back end of the process includes downstream companies that specialize in refining, like Valero Energy (NYSE: VLO ) . Valero avoids the costly and risky exploration piece of the process. By doing so, it reduces its potential for big returns on its investment, but also reduces its risk profile. Valero's current net profit margin is roughly 1%; however, its stock price is up nearly 54% year-to-date.
Advances in drilling techniques like hydraulic fracturing, or "fracking," has led to an increase in supply and lower prices for natural gas. It's also led to an increased need to transport natural gas. Midstream companies that transport oil and natural gas effectively collect a toll on whatever passes through their pipelines. Many midstream companies like Atlas Pipeline Partners (NYSE: APL ) , with its 9,000 miles of pipeline, are structured as master limited partnerships, or MLPs. MLPs offe