Global energy demand continues to increase as the world population grows and electricity demand for cooling, vehicles and data centers increases.

Meanwhile, sources of energy supply are changing: while oil and coal based energy will continue to form the backbone of energy supply for the next decade or more, low-carbon energy sources such as wind, sunlight, hydro, natural gas and nuclear will satisfy a portion of future supply.

In an elevated oil price environment that prevailed for most of the past 5 years, traditional energy producers and energy infrastructure companies have done well. While the future direction of oil prices remains important, but impossible to predict, we continue to recommend that most investors maintain some exposure to the oil and gas industry as part of a balanced portfolio.

The challenges for the energy sector are well-publicized and are no different from other commodity producers. High commodity prices bring on expansion and overproduction, which typically results in lower prices. However, producers overall were more disciplined over the past few years with increased cash distributions and share buybacks when oil prices were high. That alleviated some investor concerns.

Global energy demand will continue to grow

The International Energy Agency’s World Energy Outlook 2024 predicts that global energy consumption, based on current trends (their “base case”), will continue to grow by 1.3% per year until 2030 (although somewhat below the 1.5% per year growth rate of the past decade).

Main growth drivers remain economic growth in Asian countries, and global population growth and higher electricity demand for cooling, electric vehicles, and data centres.

Low-carbon energy sources, led by solar and wind, will cover some of the increase in consumption, with natural gas and nuclear also contributing additional supply. Oil supply will flatten out while coal supply will decline.

Renewable energy is expected to show dramatic growth from 2023 levels through 2030 and beyond, from 12% of the total energy supply in 2023 to 18% by 2030 and 33% by 2050. The largest sources of renewable energy—solar, wind, hydro, and bioenergy—are expected to grow at a rapid pace, with wind and solar the outstanding performers.

Fossil fuels (oil and coal), will likely decline from 57% of total supply in 2023 to 52% in 2030 and 37% by 2050. Most of the decline should come from the reduced use of coal.

Lower multiples, higher yields

Let’s look at the average valuations of the top 10 stocks held in the iShares Global Energy ETF (IXC) and the Global X MLP and Energy Infrastructure ETF (MLPX).

In summary, Energy Producers and companies that provide Energy Infrastructure services have low valuations and attractive dividend yields compared to the broad market. However, when compared to their own history, the Energy Producers remain relatively cheap, while the strong price performance of the Energy Infrastructure companies over the past year has made them somewhat expensive currently relative to their own history.

Apart from the reasonable valuations, the top 10 companies held in the ETFs also have solid balance sheets as indicated by their investment-grade credit ratings as indicated in the table above.

Keep up with global energy demand by looking for these 3 key factors in energy stocks

#1  Innovative new drilling and exploration techniques.

Oil exploration companies that continually improve their extraction techniques are more efficient and profitable for investors.

Many oil exploration companies have adopted a new standard for drilling. It is now commonplace to see multi-well pad drilling (or “octopus” drilling). This new drilling practice has been adopted by most major oil firms and is actively used by a number of companies we recommend, including Ovintiv and Imperial Oil.

Traditionally, oil exploration companies have needed a pad or land site for each well it drilled. However, multi-pad drilling lets producers drill as many as 50 wells from a single pad.

Here’s how the technology works: oil exploration companies set up a well pad and then install a multi-well rig. The drill from that rig then literally “crawls” on hydraulic tentacles to numerous drill locations within its range. When drilling at each location is completed, it takes just two hours for the rig to move to a new location. With traditional horizontal drilling methods, it takes about five days to move from pad to pad and start drilling a new well.

 #2 Diversified drilling sites in multiple geographic locations where exploration has been successful in the past.

When you invest in any resource stock, you need to look at how long the company’s reserves are likely to last. Those with low reserves need to have consistent success in their exploration programs to maximize the production of the wells and the surrounding area. That success is far from guaranteed.

Good energy company stocks have a range of oil and gas development projects, but their strong base of production cuts the risk of relying on new developments alone.

#3 They provide a hedge against inflation

Global energy demand is subject to wide and unpredictable swings in the prices it gets for its products. In the rising phase of the business cycle, when business is booming, resource demand expands faster than resource supply, so resource prices shoot up. This balloons profits at resource companies. When the economy slumps, resource prices fall, and this drags down resource profits and stock prices.

In addition to rising and falling with the business cycle, however, resource stocks have a history of rising along with long-term inflationary trends. This gives them a rare ability: they provide a hedge against inflation.

Use our three-part Successful Investor approach to take advantage of the global energy demand

1. Invest mainly in well-established stocks with a history of revenues, earnings and dividends.
2. Spread your money out among most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities).
3. Downplay or avoid stocks in the broker/media limelight.