The first half of the year is in the books. Following its best quarterly performance in nearly ten years in the first quarter, the S&P 500 returned 3.8% in the second quarter. For the first half of 2019, the S&P 500 returned 17.3%.
According to the Select Sector SPDR exchange-traded funds (ETFs) that divide the S&P 500 into sector index funds, every sector gained in the first half of the year. However, there were steep sell-offs during the second quarter of crude oil and natural gas. The price declines caused the energy sector to decline in the second quarter; the only sector to see a second quarter decline.
The Energy Select Sector SPDR ETF (XLE) tracks a market-cap-weighted index of energy companies in the S&P 500. The XLE represents the stocks of large energy companies from different sub-sectors (e.g., integrated, oil production, equipment services). It is, therefore, a good benchmark for conservative energy investors. Some of the XLE’s biggest holdings are ExxonMobil, Chevron, ConocoPhillips, EOG Resources, and Schlumberger.
During the first quarter, the XLE generated a total return of -2.8% (including dividends). At one point in the quarter this decline was much steeper, but an oil price rally late in the quarter helped recover some of that decline. For the first half, the XLE returned 13.0%.
The integrated supermajors returned an average of 0.1% for the quarter. They were led Royal Dutch Shell’s 4.3% return. ExxonMobil, the first quarter’s biggest gainer, was the quarter’s biggest decliner in this group, down 4.1%. For the first half of 2019, Chevron turned in the biggest gain among its peers, up 16.7%. Chevron is also the only member of the five integrated supermajors with a positive total return over the past 12 months, up 2.3%.
The 20 largest upstream companies averaged a 2.7% decline for the quarter. However, that return was inflated by Occidental’s buyout of Anadarko, which drove up Anadarko shares by 55.8% for the quarter. On the other hand, the market punished Occidental for the acquisition. Its 22.8% quarterly decline was the worst among the 20 largest upstream oil and gas companies. For the first half of the year, this group returned an average of 14.9%, but over the past year this group has experienced a 20.5% average decline.
As in the first quarter, the midstream sector outperformed the upstream companies. The Top 20 midstream companies gained an average of 1.4% for the quarter. Leading the way was the 22.9% return of the MLP Buckeye Partners, which agreed during the quarter to to be acquired by IFM Investors for $41.50 per unit in an all-cash deal. For the first half, the Top 20 midstreams returned 4.4% on average.
The refining segment in the U.S. was extremely volatile during the quarter. Refiners sold off on the news of tariff threats with Mexico, but recovered strongly near the end of the quarter. For the quarter, the Big Three — Marathon Petroleum, Valero, and Phillips 66 — were down an average of 1.4%. Valero repeated as best performer among the refiners in Q2, with a total return of 2.0%. The worst performer was Marathon, which was down 5.7% for Q2 and down 3.5% for the first half. For the first half, the Big Three returned an average of 7.9%.
The price of West Texas Intermediate had recovered to nearly $60 per barrel by the end of the quarter, but natural gas prices remain depressed. If this trend remains — and I believe it will — companies that are more oil-centric are likely to outperform those that are more focused on natural gas for the remainder of the year.