Investing in energy IPOs can be a way to build a strong investment portfolio, but it’s important to consider factors such as the company’s focus, financial performance, and market reception. Hybrid companies that incorporate both traditional and renewable energy businesses may offer future gains.
When an energy company is planning an initial public offering (IPO), it can generate excitement among financial professionals. Energy companies are often cash-strapped due to the nature of the business, especially when energy prices are high and prospects for profitability may be rosy as a result. Selecting a high-energy IPO where there is a lot of attention around new stocks is one way to build into an industry stalwart investment portfolio and will introduce you to the market for new issues.
Sometimes in financial markets, a company that has publicly traded shares may agree to be acquired by a private entity. By doing so, the public company no longer lists its shares for public investors. Later, when market conditions improve for oil and gas or if operations at the company strengthen, management may decide to issue another energy IPO and relist the shares on the public markets.
This could be a compelling way to enter the energy IPO market. The company and management have a history in the stock market and may have gone private just to increase prospects for profitability. Investing in an energy company that you and the markets are already familiar with introduces familiarity to a portfolio and could be rewarding.
Pure-play energy companies focus on a particular line of business, such as drilling for oil or transporting natural gas through pipelines, for example. Selecting an energy IPO with a company that has a singular focus is one way to participate in these markets. Compare the financial performance of a new issue available in a public presentation with that of other companies in the same or similar industry. Review the ROI of competitors to understand the challenges facing this segment of the energy industry and also what drives profitability.
Consider companies that have a hybrid approach to the energy industry. As alternative energy gains momentum around the world and technology becomes more affordable, traditional energy companies developing oil and gas are increasingly turning to green power as well. Investing in an IPO where there is evidence of the incorporation of both traditional and renewable energy businesses could pave the way for future gains.
Look at the way the markets are receiving new issues, particularly energy IPOs, over a period of time. The more investors reward an IPO in a sector, the more likely its private rivals will go public. If there is positive momentum around the new issues in the energy sector, it is easier to shop around and find the right energy IPO investment for you. When energy IPO performance is lackluster, it may be better to wait on the sidelines for a more opportune time.
Smart Asset.
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