Young and Invested

You wake up, switch on the light, and get ready for work. You start-up your car, drive to work, and the first thing you do when you get into the office is turn on the computer. Unless you live your entire life in a tent perched in the middle of nowhere, you can’t escape using some Energy sector by-product. However, as exciting as the Energy sector is – let’s face it – it’s pretty complicated. Let’s take a peek into the Global Energy sector and try to understand what makes it turn.

The Industry

The easiest way to think about the Global Energy sector is by segmenting it into two main industries: Oil, Gas & Consumable Fuels and Energy Equipment & Services. Most people associate their daily interactions with the former – it includes the Essos, Sunocos, and Petro Canadas of the world. The Equipment & Services sector assists the Oil & Gas industry with exploration, but the process really starts at the top with the Oil and Gas Industry.

Oil & Gas Industry – The Integrated Process

The Integrated Process includes firms engaged in the exploration, production, delivery, refinement, and marketing of petroleum products to consumers. This process includes Upstream, Midstream, and Downstream processes. The Upstream process deals mostly with the exploration of hydrocarbons like oil and natural gas. Some companies like Devon Energy (NYSE:DVN), Targa Resources (NYSE: NGLS) and Anadarko Petroleum (NYSE:APC) search the globe for oil and gas reserves.   The Midstream process includes the processing, storage, and transportation of hydrocarbons. Some Canadian companies engaged in this process include TransCanada (TSE:TRP) and Enbridge (TSE:ENB). Finally, the Downstream process includes the refinement of oil and natural gas into usable petroleum products for sale to consumers. Companies involved in this process include Sunoco (NYSE:SUN) and Valero Energy (NYSE:VLO)

Energy Equipment & Services Industry

As previously mentioned, the Energy Equipment & Services firms assist oil and gas firms with exploring, drilling, and producing reserves, but generally don’t own oil and gas deposits directly. These firms are hired by pure upstream oil and gas producers and integrated firms like Exxon Mobil to assist in getting hydrocarbons out of the ground. There are two main types: Oil & Gas Drilling and Energy Equipment & Services. Oil & Gas drilling companies perform mainly one function: renting out their rigs to other companies to use for exploration. Oil & Gas Equipment & Services companies (a big one being Schlumberger) provide all the equipment, services, and expertise required for oil field exploration, development, and production. In short, firms within the encompassing Energy Equipment & Services Industry provide products and services to companies in every aspect of the energy cycle.

How Does It Affect Me?

Understanding the Oil & Gas Industry is not only important for individuals in Finance, but also to normal every day people. How? When you pay for a litre of Gas at the station, you are directly affected by the industry. Most people don’t realize this, but gas stations usually make more profit selling candy and refreshments than gas sold to drivers like you and me. The industry is very competitive, and any cost that may be cut will count towards the bottom line. In the next part of the series, we will discuss how Supply and Demand plays a factor in the industry, and what the key drivers of profitability are.

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Derrick Fung is a guest contributor on Young & Invested. He has experience in Sales & Trading at Merrill Lynch, and was previously a member of the Global Equities and Commodity Derivatives Group at BNP Paribas. He is a recent graduate of the BBA program at the University of Toronto. You can follow him on twitter at http://www.twitter.com/derrickfung