Energy + energy infrastructure

Learn how the energy industry’s size, diversity and need for capital creates opportunities to generate total return.

Energy + energy infrastructure

Learn how the energy industry’s size, diversity and need for capital creates opportunities to generate total return.

Why energy and energy infrastructure?

Investing in energy may help provide a diversified source of returns, plus has the potential to generate an attractive level of income and higher growth.

The long-term trends of rising global energy consumption, increased focus on climate change and growing U.S. crude oil and natural gas supplies will drive significant need for natural resource and infrastructure investment in the coming years. 

Source of income

Investing in the equity and debt securities of private and public energy and energy infrastructure companies may provide attractive levels of current income.

Energy may provide a unique opportunity to generate income¹

Diverse investment opportunity

Energy and energy infrastructure companies represent a large opportunity for income and growth.

Energy market breakdown2
$1T
Upstream
$275B
Midstream (C-corp)
$193B
Midstream (MLP)
$1T
Power
$203B
Renewables
$58B
Services + equipment
$112B
Downstream
$940B
Credit

The energy industry is broad and diverse, with several large subsectors that are instrumental to ensuring the uninterrupted flow of and access to energy.

Significant investment capital is required to replace and grow drilling inventory that depletes over time. In general, cash flows are closely tied to commodity prices, including oil and natural gas. 

Midstream companies support the daily flow of energy products across the U.S. and around the world. They operate critical infrastructure responsible for gathering, processing, transporting, marketing, storing and delivering energy products to demand markets. 

Downstream businesses refine, market and distribute oil and natural gas products, such as gasoline, diesel and jet fuel, to end users. Companies operating in this segment include oil refineries, retail gasoline stations, petrochemical facilities and wholesale distributors. 

The service and equipment industry provides a broad array of supporting services and products to aid in every step of the energy life cycle. Oilfield services companies represent the largest of the service and equipment sectors. 

The power sector generates and distributes electricity to downstream customers including residential, commercial and industrial buyers. 

Flexibility to invest across the energy value chain

Because each subsector can perform differently year to year, having the flexibility to move across the energy value chain as market opportunities change may help to smooth portfolio returns and improve portfolio diversification.

Annual returns for energy subsectors³

Investor considerations

Investing in energy and energy infrastructure companies may contain certain risks.

Commodity price risk: The profitability of energy and energy infrastructure companies, particularly those involved in exploration and production, may be materially affected by the price of commodities such as crude oil and natural gas. 

Cyclicality risk: The operating results of energy companies tend to be cyclical. The highly cyclical nature of energy and energy infrastructure companies may adversely affect the earnings or operating cash flows of such companies. 

Energy demand risk: A sustained decline in demand for natural resources, including, but not limited to, crude oil, refined products, petrochemicals, natural gas, natural gas liquids, coal, metals and renewable energy sources could adversely affect the revenues and cash flows of energy and energy infrastructure companies. 

Regulatory risk: Energy and energy infrastructure companies are subject to stringent and complex federal, state and local environmental laws and regulations, which could restrict business activity and increase compliance costs for energy companies.

  • Bloomberg, as of March 31, 2020. Past performance does not guarantee future results. This data is for illustrative purposes only. An investment cannot be made directly in an index. Energy credit, Energy MLPs, Energy infrastructure, Investment grade bonds and Barclays Agg represent yield. S&P 500 TR represents distribution rates. Energy credit is represented by the ICE BofAML U.S. High Yield Energy Index. Energy MLPs are represented by the Alerian MLP Total Return Index. Energy infrastructure is represented by the Alerian Midstream Energy Select Index. Investment grade bonds are represented by the ICE BofAML U.S. Corporate Index. Barclays Agg is represented by the Bloomberg Barclays U.S. Aggregate Bond Index. S&P 500 TR is represented by the S&P 500 Total Return Index.

  • Bloomberg, as of June 2, 2020. Assets in private and public energy, power and energy infrastructure companies. All companies were sourced from the ICE BofAML U.S. High Yield Energy Index, ICE BofAML U.S. Energy Index, Russell 3000 Index and MSCI Canada Index, and identified by their GICS subindustry name classification. Upstream is represented by companies operating in the GICS subindustries of integrated oil and gas, oil and gas exploration and production. Midstream (C-corp) is represented by non-partnership companies operating in the GICS subindustry of oil and gas storage and transportation. Midstream (MLP) is represented by partnership companies operating in the GICS subindustries of oil and gas storage and transportation. Power is represented by companies operating in the GICS subindustries of renewable electricity, gas utilities, electric utilities, multi-utilities, renewable electricity and independent power producers. Renewables are represented by the WilderHill Clean Energy Index. Services + equipment is represented by companies operating in the GICS subindustries of oil and gas drilling and oil and gas equipment and services. Downstream is represented by companies operating in the GICS subindustry of oil and gas refining and marketing. Credit is represented by companies sourced from the ICE BofAML U.S. High Yield Energy Index and the ICE BofAML U.S. Energy Index. Market size is determined by summing up the total par amount outstanding and market capitalizations in each group.

  • Source data from 1/1/2009–12/31/2019. Past performance does not guarantee future results. This data is for illustrative purposes only. An investment cannot be made directly in an index. Subsectors are represented by the following: Crude oil: West Texas Intermediate spot price; Natural gas: Henry Hub spot price; Large-cap energy equities: S&P 500 Energy Index; Upstream equities: S&P Oil & Gas Exploration & Production Index; Energy services equities: S&P Oil & Gas Equipment & Services Index; Energy credit: ICE BofAML U.S. High Yield Energy Index; Midstream equities: Alerian MLP Index.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

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