Despite the inevitable increase to energy prices and the allure of oil as a speculative investment that absolutely "must" reach $150 at some point in the future (what with hurricanes, pipeline problems, the eventual and complete consumption, limited resource, et cetera, et cetera), investing in energy companies will almost certainly not be a wise investment for 2010.
Although these companies are able to turn oil into income and profit, there are some fundamental problems facing these companies for the rest of the year and well into 2011 as well.
For the reasons outlined below, investors would be wise to find alternatives to this sector when investing their money.
1.
Energy companies are facing weak domestic demand (primarily) and what will inevitably be weak foreign demand as financial crises cripples economies in the Euro Zone.
Like all companies, energy companies are able to increase profitability when demand for their product rises.
And, as demand wanes, they must reduce prices in order to attract those customers.
Even big companies like Halliburton have seen negative revenue growth over the past three years, which conveniently aligns with the economic recession, because demand has not been there.
2.
Energy companies will find that their industry is changing rapidly in the years to come.
With the latest push on green, alternative energy sources like wind, solar, fuel cell and so on, energy companies that provide traditional energy via oil will need to change their game in order to provide investors with the returns they have come to expect.
However, for some of these energy companies that have enjoy gains almost exclusively from oil related activities (such as exploration, drilling, etc.
) switching to these alternative energy sources becomes expensive if not impossible in some cases.
As companies either invest in research and development or go on buying sprees, expect dividends to disappear and, of course, their equity positions to take hits.
These are both items that no investor wants to see because it hurts the actual stock price.
3.
In the future, energy companies need to become more socially responsible.
Whether this means taking a greener approach to their operations and product, or instilling more favorable human rights policies, or paying higher taxes, the bottom line is that profitability will suffer.
Tobacco products firms have already been living in such a world and while they have weathered the storm, for the most part, their long-term growth appeal is only as good as their evolutionary plans.
With more attention given to their industry in the coming years, these companies can be expected to struggle in the mid- to long-term as well.
By taking a defensive approach to investing in energy companies, investors will likely save themselves from the potential disappointment that comes with weak demand, shifting business strategies and tighter oversight and scrutiny.