Detail

The energy sector or industry includes companies involved in the exploration and development of oil or gas reserves, oil and gas drilling, and refining. The energy industry also includes integrated power utility companies such as renewable energy and coal.

The industry is usually divided into three major components: upstream, midstream, and downstream. Upstream regards exploration and extraction of crude oil, midstream encompasses transportation and storage of crude, and downstream concerns refining crude oil into various end products.

Upstream businesses consist of companies involved in the exploration and production of oil and gas. These are the firms that search the world for reservoirs of the raw materials and then drill to extract that material. These companies are often known as "E&P" for "exploration and production." The upstream segment is characterized by high risks, high investment capital, extended duration as it takes time to locate and drill, as well as being technologically intensive. Virtually all cash flow and income statement line items of E&P companies are directly related to oil and gas production.

Midstream businesses are those that are focused on transportation. They are the ones responsible for moving the extracted raw materials to refineries to process the oil and gas. Midstream companies are characterized by shipping, trucking, pipelines, and storing raw materials. The midstream segment is also marked by high regulation, particularly on pipeline transmission, and low capital risk. The segment is also naturally dependent on the success of upstream firms.

Downstream businesses are the refineries. These are the companies responsible for removing impurities and converting the oil and gas to products for the general public, such as gasoline, jet fuel, heating oil, and asphalt.

E&P companies do not usually own their own drilling equipment or employ a drilling rig staff. Instead, they hire contract drilling companies to drill wells for them and the contract drilling companies generally charge for their services based on the amount of time they work for an E&P company. Drillers do not generate revenue that is tied directly to oil and gas production, as is the case for E&P companies. Once a well is drilled, various activities are involved in generating and maintaining its production over time. These activities are called well servicing and can include logging, cementing, casing, perforating, fracturing, and maintenance. Oil drilling and oil servicing thus represent two different business activities within the oil and gas industry. As is the case for drilling, many public companies are involved in well service activity. The revenue of service companies is tied to the activity level in the oil and gas industry. Rig count and utilization rates are indicators of the amount of activity happening in the United States at any given time.

Oil and gas producers tend to perform well during periods of elevated oil and gas prices. However, energy companies earn less when the price of energy commodities falls. Oil refiners, on the other hand, benefit from the falling cost of feedstock to produce petroleum products like gasoline when crude oil prices drop. Furthermore, the energy industry is sensitive to political events, which historically have led to volatility—or wild fluctuations—in the price of oil.