Even if oil prices reverse course, some segments of the energy industry will continue to prosper.
High gasoline prices are infuriating motorists, but for investors in energy stocks, the rocketing cost of fuel has been a blessing. With profits growing, shares of oil companies have been climbing impressively.
During the three years ending in April, the average natural resource fund returned more than 28% annually, according to Morningstar, the mutual fund tracking company. Can energy stocks keep advancing? Probably. Even if oil prices decline, profit margins would remain high for many companies. And two segments of the industry—oil service and alternative energy—look particularly appealing.
The oil service business helps companies like Exxon-Mobil and Chevron drill and explore for oil and gas. As producers race to find more energy, the service companies can respond to the rising demand by charging higher prices.
Demand for drilling services will remain strong for years—no matter what happens to oil prices—since old oil fields are being depleted rapidly and must be replaced. “The big integrated companies have a huge amount of cash flow, and they are willing to pay what-ever it takes to get the best drilling services,” says Warren Spitz, portfolio manager of RiverSource Diversified Equity Income Fund.
Spitz is particularly keen on Transocean, which owns rigs used for deepwater drilling in the Gulf of Mexico and the North Sea. As companies scramble for oil, they are searching in deeper water—and paying higher prices to rent drilling rigs. Spitz also likes Baker Hughes, which makes drill bits and other supplies. Baker Hughes also helps clients evaluate oil finds, an important service at a time when producers are examining fields once considered too difficult to exploit.
The oil spike has given a particularly big boost to companies that help produce wind and solar power. Once shaky fledglings, the alternative energy producers have emerged. And with companies around the world scrambling to find new energy sources, the wind and solar producers are likely to enjoy rapid growth for years, says Kevin Landis, portfolio manager of Firsthand Technology Value Fund.
Technological breakthroughs have lowered the costs of alternative energy dramatically, says Landis. Demand for wind power seems likely to rise because several states have passed laws requiring increased use of renewable sources.
To invest in alternative energy, Landis recommends Vestas Wind Systems, which has produced 35,000 wind turbines around the world. The company is opening a new plant in Colorado that will boost sales in the U.S. “There are only a few wind turbine makers, and Vestas is a leader,” says Landis. To invest in solar power, consider Cypress Semiconductor, says Landis. The semiconductor maker produces cells used to generate solar power.
If you would like to play the broader energy market, consider Vanguard Energy Fund, which has returned 35.0% annually during the past five years. Vanguard focuses on oil blue chips, such as Royal Dutch Shell and Occidental Petroleum.
Another strong choice is T. Rowe Price New Era Fund, which has returned 31.8% annually during the past five years. The fund has scored big gains by holding a mix of giant integrated oil producers and ser-vice companies, such as Transocean.