Defining the Energy Sector | ETF Trends

The energy sector is broken down into the upstream, midstream, and downstream segments, providing investors a chance to invest in targeted segments of the crude oil industry.

The upstream energy segment refers to the exploration and production of crude oil and natural gas. For example, geologic surveys and any information used to find mineral deposits can be associated with the “exploration” part. Additionally, drilling and bringing oil and natural gas resources to the surface is part of the “production” aspect.

In the middle, we can find the energy infrastructure or midstream energy companies that are engaged in the transportation, storage, and processing of natural resources. These companies follow more fee-based business models that benefit from the transportation, processing, and storage of energy in the U.S. Most of these companies are structured as master limited partnerships, or MLPs, but C-Corporations have become more prominent in the midstream segment in recent years. Since these companies follow a fees-based model, they make money by the unit of energy they transport, so they are less affected by the actual rise or fall in the price of the actual commodity. The revenue equation for most business activities is fairly simple: price multiplied by volume. Consequently, more volume means more cash flows.

Lastly, the downstream segment of the energy industry includes everything that turns the raw crude oil and natural gas into finished products that everyone uses. The more widely known products include fuels like gasoline, diesel, kerosene, jet fuels, heating oils, and asphalt for building roads. Additionally, more complex products can utilize long-chain hydrocarbons from both oil and natural gas for products like synthetic rubbers, fertilizers, preservatives, containers, and plastics. Oil and natural gas components are even utilized to make more advanced manufactured goods like artificial limbs, hearing aids, and flame-retardant clothing, among others.

For more news, information, and strategy, visit the Energy Infrastructure Channel.