The Energy Sector Lagged In The Third Quarter

The S&P 500 returned 1.2% during the third quarter, which was a weaker performance than the previous two quarters. Nevertheless, for the first half of 2019, the S&P 500 has returned 18.7%.

According to the Select Sector SPDR exchange-traded funds (ETFs) that divide the S&P 500 into sector index funds, every sector is still in positive territory on the year. However, the energy and health care sectors both continue to lag the broader market, with both experiencing declines in Q3.

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 third quarter, the XLE generated a total return of -6.2% (including dividends). Following the recent attack on Saudi Arabia’s infrastructure, the sector had surged into positive territory, but by the end of the quarter it had given back those gains. Year-to-date, the XLE has returned 5.9%, ahead of only the health care sector’s 5.5% return. These are the only S&P 500 sectors with single-digit returns on the year.

In the energy sector, the integrated supermajors returned an average of -6.2% for the quarter.  Every member of this group declined during the quarter. BP had the worst quarterly return with a loss of 7.4%. The best performer of this group was Chevron, which lost 3.7% for the quarter. However, year-to-date all member of this group are up, led by Chevron’s 12.3% return.

The 20 largest upstream companies averaged a decline of 11.4% for the quarter, which also followed a decline in Q2. The biggest news of the quarter was Occidental’s buyout of Anadarko, which removed Anadarko from the Top 20. Particularly hard hit during the quarter were the smaller members of this group like Concho Resources, Continental Resources, and Cabot Oil and Gas, all of which experienced declines of more than 20% during the quarter.

The midstream sector continues to outperform the upstream companies as it has all year, but midstream did decline in Q3. The Top 20 midstream companies declined an average of 2.9% for the quarter. Half of the Top 20 experienced a decline in Q3, but there were notable gainers like TC Energy (formerly TransCanada), which was up 5.7% on the quarter. Leading the pack among the Top 20 was the MLP Phillips 66 Partners with a 16.7% gain. The catalyst for its gain appears to be the recent announcement that it will eliminate all of its incentive distribution rights (IDRs) and general partner (GP) economic interests. Year-to-date, the Top 20 midstream companies are up an average of 19.7%.