ASX energy stocks may be a good addition to your portfolio. Learn more about the sector’s benefits and risks, and find some new potential investing options.

The Australian stock market is filled with companies from a variety of sectors, including:

  • Energy
  • Healthcare
  • Mining
  • Real Estate
  • Technology
  • Telecommunications
  • And countless more.

Energy stocks are a popular choice for any investor who wants to diversify their portfolio into a potential growth market. However, like all sectors, there are pros and cons to investing in ASX energy companies.

Before you start pouring funds into energy shares, it is important to conduct your own due diligence. This will help you to understand what the sector is like, how it has performed in the past and its future earning potential. Find out about any drawbacks that may impact how much you invest in Australian energy stocks — or whether you invest in them at all.

This guide will help you to understand ASX energy stocks and inform you as to whether they might be a smart addition to your existing portfolio.

What is the energy sector?

The ASX energy sector is comprised of companies that explore and develop a variety of different energy assets. These range from coal and oil to uranium, gas and even renewable energy, which has become more prevalent in recent years.

Since Australia is a country rich in natural resources — and a major exporter of liquefied natural gas (LNG) and uranium to global markets — the energy sector is a popular area for all types of investors.

Generally, the energy sector is regarded as comprised of two industries:

  1. Energy equipment and services. This includes oil and gas drilling, equipment and services companies.
  2. Oil, gas and consumable fuel. This includes companies engaged in energy-related activities such as exploration, production, refining, marketing, storage and transportation.

Sub-industries

Within these industries, the ASX attributes each company with a sub-industry which defines what the company does and the type of energy it explores and develops. This can help to point you in the direction of which energy shares you are interested in.

For example:

  • Ampol Limited (ASX:ALD) is in the oil and gas refining and marketing sub-industry.
  • Beach Energy Limited (ASX:BPT) operates in oil and gas exploration and production.
  • New Hope Corporation Limited (ASX:NHC) conducts business in coal and consumable products.

As of October 2022, there are 140 energy companies listed on the ASX. There is a huge spread of these types of companies, including some of the biggest energy companies in the world — among them — household names.

These include operations such as Woodside Energy Group (ASX:WDS) and Santos (ASX:STO), with massive market caps of more than $67 billion and $25 billion, respectively.

At the other end of the spectrum, retail investors may be interested in potential short-term gains from smaller companies with much more volatile share prices, such as:

  • Red Sky Energy (ASX:ROG)
  • Blue Star Helium Limited (ASX:BNL).

Is the energy sector worth investing in?

There is a very good reason many investors decide to expand their portfolios with energy stocks: energy is an integral part of our everyday lives. Energy is essential for our daily commutes. It keeps our homes warm in winter and cool in summer. It can be harnessed by solar panels to reduce power bills.

The bottom line? Energy is an in-demand resource and its various uses will predictably make it even more in-demand in the years to come.

Here are some top reasons why people believe the energy sector is worth investing in:

  • It comprises a sizeable portion of the stock market, with companies of various sizes, market caps and growth potential.
  • Demand for energy will continue to rise year-on-year, according to World Energy Outlook.
  • While previous results do not necessarily indicate future success, many forms of energy have seen above-average returns over the past decade.
  • There is a diversity of energy types in which to invest — from hydrogen and lithium, to gas and coal, solar and wind power.
  • You can choose ASX energy companies that match your investment goals — whether that means blue-chip firms, exploration companies, stocks that pay dividends or others.

How have energy stocks performed historically?

There is no denying that COVID-19 and other global influences have negatively affected the energy sector in recent years. It was one of the poorest performers in 2020 due to a range of factors, such as:

  • High oil and gas supply
  • Reduced demand
  • The cheaper cost of renewables such as solar

However, bullish investors could still see energy’s recent performance as a positive. You only need to look back at 2016 to find that energy was the best-performing sector in the stock market.

Reduced share prices provided a cheaper entry point for investors, which was one of the reasons why the sector bounced back strongly to become the top-performing sector in the first half of the year.

What are the benefits of investing in energy stocks?

No one invests in a company because they think it is going to fail. That is why before investing your hard-earned money in energy stocks, you need to ensure that there are enough benefits to outweigh any potential risks.

Other benefits of investing in energy stocks include:

Relative stability

Because most of the energy sector revolves around the price of crude oil, it is much easier to assess and predict price changes. Energy is a commodity driven by demand, so if oil prices are rising, then you can expect energy stocks to follow — and vice versa.

Regular payouts

Many of the larger, blue-chip energy companies on the ASX pay out dividends to their shareholders, some of which are fully franked and, therefore, helpful at tax time.

Long or short term

Some investments in the energy sector lend themselves to long-term investments, while others are ideal for short-term traders who want quick results. Whether you are an investor or a trader, there is likely an energy stock that matches your strategy.

Always needed

No matter what happens to the price of one company’s energy shares, the sector itself is not going anywhere. Energy is a necessity and, therefore, will always be in demand.

What risks are involved in investing in energy stocks?

At the other end of the spectrum, there are some drawbacks to investing in energy shares that may make you think twice before investing. These include:

External factors

Unlike investing in a technology business that owns its product completely, the energy sector is beholden to external forces — namely, the economy and the supply chain. 

An oversupply of crude oil and natural gas can lead to consistent downturns, unexpected disruptions such as COVID-19 can be very influential, and even something like political turmoil in a country where the energy company is exploring, can be devastating to share prices in the short term.

Changing of the guard

While historically the established energy players have done well, there is now a global push for cleaner energy and more environmentally friendly policies. This means some companies could perform poorly if they don’t pivot to meet market demands. While this is bad news for companies that only deal in oil, for example, it is good news for clean energy companies. 

Volatility

Some companies are more volatile than others. Exploration mining companies, for example, rely on finding what they are looking for at their dig sites — gas, oil or otherwise. In the lead-up to announcing their results, the price may surge, but if the company does not find what they are looking for, it can lead to a big — and sudden — drop in the share price.

Is there any growth potential for energy stocks?

The global push towards more eco-conscious initiatives — particularly around how energy is secured, managed and used — means the future is unclear for the traditional energy powerhouses.

Since it has been a poor performing sector in recent years, energy companies that focus on oil, coal and certain gases may struggle if they don’t look for alternatives or greener ways of operating.

That being said, there may be significant growth potential for renewable energy stocks that focus on green, clean and renewable energy. There are many green energy companies listed on the ASX and they work in a variety of sub-sectors:

  • Blueglass (ASX:BLG) is in the green building and biomaterials space.
  • Australian Ethical Investment (ASX:AEF) is an ethical investment manager.

The energy stocks in which you choose to invest will depend on a range of factors, most notably your risk tolerance and the type of energy you are interested in.

For example, if you want to invest in established oil stocks that pay regular dividends, then, the largest and most popular players include:

  • BHP Group (ASX:BHP)
  • Woodside Energy Group (ASX:WDS)
  • Santos (ASX:STO).

Lithium is another energy sub-sector that is becoming very popular among investors. Galaxy Resources merged with Orocobre in mid-2021 to form Allkem (ASX:AKE), and holds assets in Australia, Argentina and Japan. Perth-based Mineral Resources (ASX:MIN), on the other hand, had been busy working on its large Mt Marion Lithium Project.

Alternatively, if you are interested purely in sustainable investing, then Calix Limited (ASX:CXL) and its patented Calix Flash Calciner technology may be intriguing. 

Elsewhere, Hazer Group’s (ASX:HZR) focus on producing low-emission hydrogen and high-grade graphite is a potential play for investors who believe the market will shift towards different energy outlets in the near term.

Popular global energy stocks on eToro

In addition to ASX energy stocks, you can also invest in some of the most popular global energy stocks on eToro. Find some of the biggest, best-known energy companies in the world, including:

TIP: Whichever energy stocks you invest in, make sure you do your research and monitor external factors to help minimise your risk.

Sign up to eToro today and start investing in energy stocks.

FAQs

What are renewables?

Renewables is a shorthand term for renewal energy sources. Most people are familiar with hydropower from dams, wind power from windmills and solar power from solar panels. Other renewables include biomass, biogas and biofuels. In 2020, 24% of Australia’s total electricity generation was from renewables.

How can you invest in the energy sector?

For many, investing in the raw materials used by the energy sector, such as gas and oil, is not overly practical. Investors may, instead, choose to invest in individual company stocks or in sector-related ETFs.

Which is the biggest energy company in Australia?

Based on market capitalisation, Woodside Energy Group (ASX:WDS) is the largest energy company in Australia. As of October 2022, the company’s market cap sits at $67.61B.

This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.

This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.

eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.