Fisher Investments on Energy

2

WHAT MAKES ENERGY BURN

Key Drivers of the Energy Sector

N ot all economic sectors are created equal. Each has a set of economic, political, and sentiment factors, or drivers, making it unique to the broader economy. Properly understanding those drivers is a key to investing success in any sector, particularly the Energy sector.

Economic and stock market drivers evolve and change in relative importance over time—what’s vital in 2008 may not be in 2010 and beyond. Nevertheless, drivers discussed in this chapter are a good starting point for any Energy analysis, regardless of the investing environment.

Understanding high-level sector drivers is essential in any sector analysis. You can’t understand a company or its strategy without understanding what makes the industry tick (known as top-down analysis, which is covered more in depth in Chapter 7). Unless you’ve got a firm hold on fundamental drivers, it’s a near hopeless task to make portfolio allocation decisions about industries and sub-industries, let alone choose the right individual stocks. High-level sector drivers often have equal, if not greater, influence on individual stock performance than unique company-specific fundamentals. So accurately identifying drivers is a must. While by no means comprehensive, a list of important Energy drivers includes:

• Commodity prices

• Oil and gas production growth

• Finding and development costs

• Exploration and production capital expenditures

• Refining margins

• Share buybacks and mergers ...