How to Invest in Gas and Oil: Stocks, Funds & More

Investing in the gas and oil sector presents various avenues for individuals seeking exposure to this foundational industry. This article explores how to engage with the gas and oil sector through financial markets, detailing direct share ownership, pooled investment vehicles, and more advanced instruments.

Investing in Energy Company Shares

Directly investing in energy company shares means purchasing small units of ownership. These shares represent a claim on the company’s assets and earnings, allowing investors to participate in its financial performance.

The industry’s value chain includes several company types. Integrated majors, such as ExxonMobil or Chevron, engage in nearly every stage of the oil and gas business, from exploration and production to refining and marketing. These large entities often have diverse assets across multiple regions.

Upstream companies, also known as exploration and production (E&P) firms, focus on finding and extracting crude oil and natural gas. Their activities involve searching for potential reserves and drilling wells. Midstream companies specialize in the transportation and storage of these raw materials, utilizing pipelines, trucks, rail, and ships to move products from production sites to refineries. This segment also includes entities that manage the flow and optimization of natural gas portfolios.

Downstream companies refine crude oil and process natural gas into finished products like gasoline, jet fuel, and heating oil, which are then distributed and marketed to consumers. Oilfield services companies provide crucial support throughout the exploration and production process, offering equipment, technology, and services such as drilling, well construction, and seismic testing. They are subcontractors to E&P firms.

To invest in these companies, research their business models. Understand the specific industry segment a company operates within, its market capitalization, and its dividend policies. Examine financial health metrics, such as revenue trends and debt levels, to evaluate stability and prospects.

Acquiring company shares begins with opening a brokerage account. Investors can choose between a self-directed account, where they manage investments, or an advisory account, where a professional provides guidance.

Fund the account, typically through electronic transfers. Once funds are available, place trade orders. A market order buys or sells shares immediately at the best available price, while a limit order specifies a maximum price to buy or a minimum price to sell.

Investing Through Pooled Investment Vehicles

Pooled investment vehicles offer an alternative way to gain exposure to the gas and oil sector, providing diversification across multiple assets within a single investment. These vehicles gather money from many investors and invest it collectively, often managed by professionals, simplifying the investment process.

Exchange-Traded Funds (ETFs) hold a basket of securities or track specific commodities. Energy-focused ETFs can track broad energy sector indices, oil services companies, or the price of specific commodities like crude oil. ETFs trade on stock exchanges throughout the day, similar to individual stocks, allowing for real-time pricing and trading flexibility.

Mutual funds are professionally managed investment portfolios that pool money from investors to purchase a diversified collection of securities. The net asset value (NAV) is calculated once per day after market close. Energy-focused mutual funds can be actively or passively managed.

Master Limited Partnerships (MLPs) are publicly traded limited partnerships focused on natural resource activities, including oil and gas transportation and processing. MLPs have a pass-through tax structure, meaning they are not subject to corporate taxation; profits and losses pass directly to investors. To maintain this status, MLPs must derive at least 90% of their income from qualifying sources. MLP units trade on securities exchanges, similar to stocks.

Royalty trusts are investment vehicles that own interests in oil and gas production or mineral rights, distributing income from royalties to unit holders. These trusts typically do not engage in physical operations; an outside company performs extraction. Royalty trusts are structured as pass-through entities, avoiding corporate-level taxation if a high percentage of profits are distributed. Investors receive distributions taxed as personal income. Units of royalty trusts trade on public stock markets, similar to stocks, but are not actively managed and typically have a finite life as resources deplete.

Acquiring shares or units in ETFs, mutual funds, MLPs, and royalty trusts typically occurs through a brokerage account, similar to individual stocks.

Understanding Advanced Investment Instruments

Beyond traditional stocks and pooled funds, more complex financial instruments offer specific ways to invest in the gas and oil sector. These instruments often involve different risk profiles and require specialized understanding.

Futures contracts are agreements to buy or sell a specific commodity, such as crude oil or natural gas, at a predetermined price on a future date. These contracts are standardized and trade on organized exchanges. Trading futures involves leverage, where a small amount of capital (margin) controls a much larger contract value, amplifying both potential gains and losses.

Options contracts provide the buyer the right, but not the obligation, to buy or sell an underlying asset, such as energy company shares or an energy ETF, at a specified price (strike price) before an expiration date. A call option grants the right to purchase, while a put option grants the right to sell. Investors pay a premium for these rights. Options can be used to speculate on price movements or to hedge existing positions.

Direct Participation Programs (DPPs) are less liquid, often private investment vehicles that allow individuals to invest directly in specific oil and gas projects, such as drilling programs. Structured as limited partnerships or LLCs, DPPs enable investors to share directly in income, expenses, and potential tax benefits without corporate-level taxation. Investors receive a Schedule K-1 for tax reporting. DPPs generally have high entry barriers and often require investors to meet specific financial thresholds to qualify as accredited investors.

Accredited investor status is typically met by individuals with a net worth exceeding $1 million (excluding primary residence) or an annual income over $200,000 ($300,000 for joint filers). Private equity investments in the energy sector involve firms pooling funds to invest in companies with high growth potential, including those involved in oil and gas production, transmission, and distribution.

Trading futures and options typically requires opening a specialized brokerage account and obtaining specific approvals due to inherent leverage and risk. Direct participation programs and private equity investments are not traded on public exchanges. Engagement with these opportunities usually involves direct investment with program sponsors or private funds, often requiring accredited investor status.