As a matter of spreading one’s bets, some investment into energy may be a good idea. Fossil fuels-based energy sources aren’t going away any time soon, if ever, and oil is a commodity that serves as an enormously vital cog in the world economy. Some are nonetheless skeptical of energy investments given their horrific track record of returns over the past 3+ years and even over the past decade-plus, where annualized returns are approximately -20% on crude oil. Many have gotten burned and continue to do so. As such, limiting one’s exposure to investments that depend heavily on the price of oil may be a good idea for those who don’t believe the commodity is going to rise much, if at all, moving ahead. With the advances in directional drilling technology that have lowered the breakeven cost of production for many companies, continuing low oil prices make sense from that vantage point. However, well-managed oil and gas companies don’t necessarily need robust commodity prices in order to turn a profit and provide value to stakeholders. ExxonMobil (XOM), for example, has outperformed the oil market by 2,200 basis points annualized since mid-2006, with 4% year-over-year returns despite a 19% y/y fall in oil prices. Its correlation to the price of oil is +0.50, which is high but the business won’t go under with lower-for-longer prices. Chevron (CVX) has performed even better with outperformance of the oil market by approximately 2,700 basis points. Combined XOM and CVX make up approximately 40% of the oil market as generally represented in energy equity funds, so they tends to dominate the general industry’s performance. In a sense, a bullish oil thesis could be expressed through a lightly/moderately leveraged multinational oil conglomerate where an uptick in the commodity could produce strong gains, while a price decline could be absorbed reasonably well, creating favorable asymmetry. Those less bullish on oil could concentrate more on downstream firms where correlation to the price of oil is lower, often +0.30 to +0.40, somewhat below typical upstream correlation of +0.50 to +0.60. Downstream companies can benefit from lower oil given they purchase the commodity itself before refining, distributing, and marketing it for various commercial uses. The images below show various oil and gas conglomerates and their correlations to the commodity: