Investing in Processing Natural Resources through Equity Markets
Although the futures markets offer the most direct gateway to the commodities markets, the equity markets enable you to invest in companies that specialize in the production, transformation, and distribution of natural resources.
The only drawback of the equity markets is that you have to take into account external factors — such as management competence, tax situation, debt levels, and profit margins — which have nothing to do with the underlying commodity. That said, investing in companies that process raw materials still allows you to profit from the commodities boom.
The size, structure, and scope of the publicly traded companies involved in commodities processing are varied. Here are some types of companies you’ll encounter:
Integrated Energy Companies: These companies, such as Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), are involved in all aspects of the energy industry, from the extraction of crude oil to the distribution of Liquefied Natural Gas (LNG). They give you broad exposure to the energy complex.
Diversified Mining Companies: A number of companies focus exclusively on mining metals and minerals. Some of these companies, such as Anglo-American PLC (NASDAQ: AAUK) and BHP Billiton (NYSE: BHP), have operations across the spectrum of the metals complex, mining metals that range from gold to zinc.
Electric Utilities: Utilities are an integral part of modern life because they provide one of life’s most essential necessities: electricity. They’re also a good investment because they have historically offered large dividends to shareholders.
Master Limited Partnerships (MLPs) invest in energy infrastructure, such as oil pipelines and natural gas storage facilities. They’re a publicly traded partnership, which means they offer the benefit of trading like a corporation on a public exchange, while offering the tax advantages of a private partnership. MLPs are required to transfer all cash flow back to shareholders, which makes them an attractive investment.