First Half Energy Sector Score Card
This worst first-half performance for crude oil since 1998 is in the books. The price of West Texas Intermediate (WTI) and Brent crude both fell 14% in the first half of the year. Coal and natural gas also declined by more than 10% in the first half. On the bright side, the half closed out with seven straight winning sessions for crude oil, a sign that perhaps better days are ahead.
The energy sector was hard hit in nearly every segment. The Energy Select Sector SPDR ETF (NYSE: XLE), which represents the largest energy companies in the S&P 500, declined by 14.8% in the first half. But the S&P Oil & Gas Exploration & Production SPDR ETF (NYSE: XOP), which is more representative of the smaller-cap drillers, had a total shareholder return (TSR) of -22.9%.
Among the 20 largest North American and Western European energy companies, only four registered positive returns. The top performer of this group was Williams Partners LP (NYSE: WPZ), with a TSR of 9.3%. The worst performer of this group was Schlumberger (NYSE: SLB) with a TSR of -20.5%.
Among the five supermajors, the top performance was turned in by Royal Dutch Shell (NYSE: RDS.A) with a TSR of 0.7%. Chevron (NYSE: CVX) was last among this group with a TSR of -9.6%, followed closely by ExxonMobil (NYSE: XOM) at -8.9%.
The carnage was so extensive in the upstream companies that only two of the 50 largest oil and gas producers registered a positive TSR for the first half. These were, incidentally, both portfolio holdings in The Energy Strategist. The top performer from the Top 50 oil and gas companies was recently announced buy-out target Rice Energy (NYSE: RICE), which returned 24.7% YTD. (However, Rice Energy was only the 2nd best performer in the portfolio in the first half; more on that below).
The midstream sector performed better than upstream. The Alerian MLP Index (AMZ), which captures about 75% of the midstream sector’s market, registered a TSR for the first half of -6.3% following a surge over the past week. The top-performing MLP for the first half was Southcross Energy Partners LP (NYSE: SXE), which notched an impressive TSR of 135%. But this followed a disastrous 2016 which, among other things saw its parent enter and exit Chapter 11. Since the beginning of 2016, SXE is still down by 11%.
SXE was the only MLP with a triple-digit first-half performance. Noble Midstream Partners LP (NYSE: NBLX), the 2nd best performer, registered a TSR of 26.2%. Also topping 20% for the first half were VTTI Energy Partners LP (NYSE: VTTI), Western Refining Logistics LP (NYSE: WNRL), and EQT GP Holdings LP (NYSE: EQGP).
Downstream companies fared better than upstream or midstream, as one might expect in an environment of declining oil prices. Most of the major refiners turned in positive first half performances. The best performer among the refiners was Alon USA Energy, Inc. (NYSE: ALJ) with a first half TSR of 19.9%. Delek US Holdings, Inc. (NYSE: DK) notched a return of 11.2%, while Tesoro (NYSE: TSO) followed at 8.4%. Valero (NYSE: VLO), the world’s largest independent petroleum refiner, barely broke even with a TSR of 0.8%, while Phillips 66 (NYSE: PSX), a major holding in Warren Buffett’s portfolio, declined by 2.7%.
My stock screener also classifies ethanol companies in the “Oil and Gas Refining and Marketing” (i.e., “downstream”) category. Back in January, I warned investors in Don’t Get Trumped in Ethanol that President Trump’s administration posed unique risks for the ethanol industry. I even suggested that aggressive investors consider shorting the sector. In fact, three of the four worst downstream performers were biofuel companies, and two of them are pure ethanol companies. Advanced biofuel maker Amyris Inc (NASDAQ: AMRS) turned in the worst performance with a first half TSR of -71.0%, followed by Pacific Ethanol Inc (NASDAQ: PEIX) at -34.2%, and Green Plains Inc (NASDAQ: GPRE) at -25.4%.
But the sector that shone brightest in the first half was the solar sector. The Guggenheim Solar ETF (NYSE: TAN) is a global index designed to track companies within several business segments of the solar power industry. The Guggenheim Solar ETF’s Top 10 holdings include three of our portfolio holdings in The Energy Strategist. The ETF had a first-half TSR of 20.0%, while two of our three solar holdings respectively earned the #1 and #3 performance spots for the first half, with returns of 61.3% and 24.3%. Rice Energy, mentioned earlier, was the #2 portfolio performer.
I will be covering these portfolio holdings in-depth in the next issue of The Energy Strategist, so please consider subscribing as I position the portfolio for the 2nd half of the year.