Harvest Portfolios Group

Energy stocks are strong, how can long-term investors capture this positivity? | HPF

June 10, 2022

By Harvest ETFs

Retirement IncomeEnergy has been one of the few sectors with positive returns for investors in an otherwise rocky market. A huge resumption in demand going into 2022 indicated a rise in oil prices this year as early as January. The outbreak of war in Ukraine and subsequent Western sanctions targeting the Russian oil & gas industry has brought the price of crude oil and gas to near-historic highs, resulting in higher revenues and profits for traditional energy companies.

Supply is tight, demand is high, and oil & gas stocks are showing strength as a result. This can be attractive for investors, but choosing the right strategy is key.

The greatest advantage a retail investor has is their time horizon. So an investor who wants to participate in this energy bull market, but is still taking a long-term view, may consider energy investments built with the long-term in mind.

Large-Cap Energy’s Long-Term Advantage

In a high crude price environment like this, investors may be tempted to seek small-cap companies with higher beta to crude oil prices. These companies do see a significant margin expansion and stock price gains when oil prices skyrocket in the way they recently have.

However, oil & gas are commodities and are famously subject to boom-and-bust cycles. Higher beta companies may have higher returns when prices rise, but they also carry higher risk when prices drop. An ordinary investor without access to key data and tools that can model when today’s boom becomes tomorrow’s bust, could be left with undue risks.

The alternative to these high beta names is large-cap energy. These are companies with significant scale, market share, and diversified lines of business. Scale is important because in the oil & gas space it creates cost efficiencies which positively impact margins and allow companies to absorb price shocks better. Market share is key because it means these companies face less competitors in lean times.

Diversity is arguably the most crucial advantage because it means a company doesn’t live and die with the price of crude. Unlike those small cap names in areas like oil exploration, large cap energy companies are better positioned to survive a downturn in crude prices while still participating in an upswing.

Those three advantages mean large-cap energy companies are often better positioned for the long-term.

An ETF for Large-Cap Energy

The Harvest Energy Leaders Plus Income ETF (HPF:TSX) was built to capture the long-term advantages of large-cap energy companies. It invests in an equal weight portfolio of 20 energy issuers, chosen from the wider universe of ‘Energy Leaders’ as defined by strict financial metrics. Among other factors, every company in this universe must have at least $5bn in market capitalization and have operations and/or offices in at least two countries. This creates a universe of energy companies with scale and diversified lines of business.

Looking at the portfolio held by HPF, an ordinary investor would immediately recognize many of the names it holds. These are companies with global brand presence and histories of oil and gas production that—in some cases—stretch back into the 19th century. Many of them have demonstrated a history of continuity and performance across market cycles.

HPF adds another strategy to its energy portfolio as well: covered calls. Through Harvest ETFs’ active call option writing strategy, this ETF delivers monthly income to its unitholders in the form of a cash distribution. This adds another advantage for income-seeking investors. As well, in other sectors that have struggled so far in 2022 many investors are seeing that monthly income yield as a key component of overall annualized return. When energy markets turn down, that monthly income can offer some degree of downside protection as well.

As high oil prices and strong performance in energy stocks make this sector more attractive for investors, they may want to consider strategies that are designed to capture positivity from the energy sector over the long-term.

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