I have always maintained that no matter what is going on in the energy sector, there are always some segments that are outperforming the market averages. Despite the steep and broad-based sell-off in energy companies that began in July, a number of names have managed to beat the market averages. I want to discuss today our portfolio holdings that have done just that, as well as how they managed to do it.

The price of WTI began to decline in earnest in July. On July 30, WTI closed at $104.29 per barrel. The next day it suffered a sharp decline to $98.23, and hasn’t been back above $100 since. If we look at the performance of market indices since July 30, as I write this the S&P 500 is up 4.6%, the Dow Jones Industrial Average is up 5.5%, and the Nasdaq Composite index is up 6.8%. Since July 30 all of these indices initially declined in August, got back into positive territory, declined back into negative territory in October, but since then have performed well and are back in positive territory. In comparison, the Energy Select Sector SPDR (NYSE: XLE) is down 21.2% over that time span:


Without a doubt, numerous energy names have been brutalized during this downturn. The small-cap oil producers have been hit especially hard, with many names down over 50%. However, in all of the portfolios we had a number of companies that did significantly better than the 21% decline of the Energy Select Sector SPDR. But we also had 5 portfolio holdings that not only had positive returns, they beat all of the market indices. These companies were Growth Portfolio holdings CST Brands (NYSE: CST), Tesoro (NYSE: TSO), and Dresser-Rand (NYSE: DRC), Conservative Portfolio holding Energy Transfer Partners (NYSE: ETP), and Aggressive Portfolio holding Marathon Petroleum (NYSE: MPC).  

Conservative Portfolio holdings AmeriGas Partners (NYSE: APU) and Sunoco Logistics Partners (NYSE: SXL) also had positive returns, but they didn’t beat the market averages.

During any downturn of the energy sector, I like to study those companies that do fare better than the averages. In the past I have written about the major downturn that took place in the second half of 2008, when oil prices dropped from near $150/bbl to the $30s. The large, integrated companies like Chevron (NYSE: CVX) held up pretty well during that period considering the huge drop in oil prices, and they have fared much better during the present downturn than the pure oil producers.

I have written often that refiners and fuel retailers are usually able to expand their margins as oil prices fall. That is reflected in the performance of the portfolio holdings that beat the market. Two of the companies — Tesoro (+29.5% during the downturn) and Marathon Petroleum (+12.4%) — are refiners who also own gasoline filling stations. Another, CST Brands (+24.1%), is one of the largest independent retailers of transportation fuels and convenience goods in North America. We added CST to the Growth Portfolio on Oct. 25, and it has returned 14.7% through Dec. 9. So three of the five market-beaters were refiners or fuel retailers. (Although I should note that in the 2008 downturn these sectors did not manage to beat the market; the sell-off at the time hit the refiners as well.)

The top performer on the list with a return of 32.1% during the downturn was Dresser Rand, which makes a wide variety of equipment for the energy industry. Under most circumstances, Dresser Rand would have probably seen its share price decline along with that of most of its competitors during this downturn, but the acceptance of a takeover offer by Germany’s Siemens (OTC: SIEGY) was the main factor behind the sharp jump in the share price.  

The final market-beater during this downturn was the Energy Transfer Partners. ETP is one of the larger master limited partnerships by market capitalization, and is broadly diversified with operations in four business segments: midstream, NGL transportation and storage, interstate transportation, and intrastate transportation and storage. Energy Transfer’s natural gas operations include more than 18,000 miles of pipelines, and other midstream infrastructure in many of the major shale gas plays in the U.S. Natural gas prices have held up pretty well during most of the downturn, and as I noted in this week’s MLP Investing Insider, two of the best-performing MLPs this year are primarily engaged in natural gas transportation and storage.  

Energy Transfer Partners was added to our Conservative Portfolio on Sept. 30, and is ranked as our #2 Best Buy. In our sister publication MLP Profits, it is ranked as the #1 Best Buy.

Conclusions

The purpose of today’s article was to analyze which companies performed best under a weakening oil price scenario. It consisted of the usual suspects — refiners and fuel retailers — but midstream gas services providers also fared well because natural gas prices haven’t suffered as much during the decline.

However, looking ahead we need to predict where oil prices and natural gas prices are headed. In a scenario with rising oil prices and weakening natural gas prices, only Energy Transfer Partners (of the companies mentioned above) is likely to hold its ground. In the final Energy Strategist issue of 2014 I will try to provide some guidance for what I think is likely to happen in 2015.

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