Risks and Benefits of Investing in Big Oil for Energy Commodity Exposure - dummies

Risks and Benefits of Investing in Big Oil for Energy Commodity Exposure

By Amine Bouchentouf

Most oil companies have added non-petroleum energy sources to their product research mix, providing exposure to energy commodities of all kinds. These companies not only process crude oil into different products, but they also have vast petrochemicals businesses, as well as growing projects that involve natural gas and, increasingly, alternative energy sources.

To reflect this shift, for example, BP has changed its name from British Petroleum to Beyond Petroleum. The bottom line is that investing in these oil companies gives you exposure to other sorts of products in the energy industry as well.

Although companies involved in the petroleum and hydrocarbon business provide indispensable services to the global economy, the nature of the work involved carries large amounts of risk. One such risk is environmental risk, as the world clearly saw during BP’s oil spill in the Gulf of Mexico in 2010.

What started out as routine offshore drilling ended up as one of the costliest and most serious environmental disasters of the last decade. Thousands of wildlife species and hundreds of miles of coastline were affected. In addition to the environmental costs associated with such events — which are extremely high — the financial costs to the community, the company, shareholders, and investors are significant.

As an investor, it’s extremely difficult to fully hedge against such types of events. To mitigate any risk factors when such events occur, it’s critical that you monitor your commodity investments as frequently as possible. You should follow the markets and developments in your portfolio holdings at least daily. Doing so ensures that you’re in a position of rapid tactical response to limit and protect your downside as an investor.

Although revenues and earnings are important metrics to look at before investing in these companies, you also need to perform a thorough due diligence that considers other important factors to determine a company’s health.