Online trading Canada in US stocks requires careful study and analysis of the strong players and sectors in the US stock markets. Oil stocks are something traders have an eye on. But just how safe are they?
The safety of the US oil stocks in your portfolio is based on the kinds of companies you have selected. It also depends on the timeframe intended for your investment. Other factors that could have a bearing on the safety include the employment of hedging strategies, and company indebtedness. This is virtually the case with all equity investments, and not unique to oil stocks.
Safety in Blue-chip Oil Companies
Investors can find relative safety in a long-term portfolio containing blue-chip oil companies. They can also consider an ETF (exchange-traded fund). The ETF called Energy Select Sector SPDR (NYSEARCA: XLE) has a basket containing the biggest oil companies you could find in the S&P 500 index. Bigger oil companies usually diversify themselves between their operations upstream and operations downstream. They also pay dividends which help support share prices in markets that are down.
With a 3.12% dividend yield and a negative 4.08% annualized three-year return, the Energy Select Sector SPDR ETF has a better performance than the shale oil segment ETF, VanEck Vectors Unconventional Oil & Gas (NYSEARCA: FRAK). VanEck has a negative 12.36% three-year annualized return as well as a 2.27% distribution yield.
Shale Oil Companies Risky
You must know that shale oil companies are the riskiest. These companies that are involved in shale oil deposit exploration and production (E&P) usually carry the burden of high levels of debt thanks to the costs involved in drilling as well as the short life that shale oil deposit wells have. Shale oil companies also carry non-investment-grade ratings. 36 E&P companies had to file for bankruptcy in 2015, facing a $17 million total debt. Between 2010 and 2014, oil and gas companies in the US extracted debt of around $350.7 billion. Junk bonds made up over 50% of the issuance during these peak boom years for oil and gas.
Greater Risk for Indebted E&P Companies
Indebted E&P companies face increased risk on account of the Chapter 11 bankruptcy proceedings and the way existing equity holders get wiped out.The debt of the companies is converted to equity shares for settling the bankruptcy proceedings with the bond holders. If you are considering investing in E&P companies, you should assess their debt levels so you can ensure the loans can be serviced. Otherwise it would be wiser to avoid such companies with debt.
The right broker dealer can help Canadians carry out online stock trading in the US through advanced resources and market advice. Call TradeZero at +1 954-944-3885. You can also email [email protected].
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