I had originally intended on presenting my 2020 energy sector predictions today, but those aren’t quite ready. I expect to publish that column no later than a week from today.
Instead, I present another column I always write at the end of each quarter: The performance of different areas of the energy sector. Since the end of the quarter also represented the end of the year, I will also cover the top-performing energy companies of the year.
The S&P 500 returned 8.5% during the fourth quarter, and an impressive 28.9% for all of 2019. The rally in 2019 was broad-based. Every sector that makes up the Select Sector SPDR exchange-traded funds (ETFs) that represent the S&P 500 was up at least 20% for the year — except for one.
The Energy Select Sector SPDR ETF (XLE) tracks an 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 5.5% (including dividends). For all of 2019, the XLE returned 11.7%, but some segments of the energy sector outperformed even the S&P 500.
The most impressive energy sector performances in 2019 came from the midstream sector. These are the companies that transport and store oil and gas. But within this sector, the midstream corporations turned in outstanding performances, while the midstream companies that are structured as master limited partnerships (MLPs) generally lagged behind.
The Top 20 midstream companies rose by an average of 15.9% for the year, but a different picture emerges if we look at just the midstream corporations. Major midstream corporations like Enbridge, TC Energy (formerly TransCanada), and Kinder Morgan respectively returned 36%, 56%, and 44%. Enterprise Products Partners, the largest MLP, returned 21.9%. TC Energy’s return was the best among the Top 20 midstream companies.
The integrated supermajors returned an average of 2.3% for the quarter, and 8.8% for the year. Every member of this group was in positive territory in 2019, but Chevron was the only member with a double-digit return (+15.3%).
The 20 largest upstream companies averaged a return of 10.5% for the quarter, following declines in both the 2nd and 3rd quarters. For the year, this group returned 9.6%.
In general, the Canadian upstream companies handily outperformed their U.S. peers, with many turning in gains of over 30%. However, the top performer in the Top 20 was U.S.-based Hess, with a 68% return for the year. At the bottom of the pack was Occidental’s 28% decline for the year. This decline was caused by negative reactions to Occidental’s buyout of Anadarko.
The Big Three refiners — Marathon Petroleum, Valero, and Phillips 66 — were up an average of 6.8% for the quarter and 23.4% for the year. Both Valero and Phillips 66 turned in a 2019 gain of over 30%, while Marathon lagged behind with a gain of 6.1%.
The biggest drag on the energy sector continues to be depressed oil and natural gas prices. The problem in the oil sector is primarily too much supply, and not because of softening demand. It’s an important distinction, because oversupply can be resolved. But market perception seems to be largely that of softening demand.
It will take a while for bearish sentiment to shift, but I believe it’s premature for investors to abandon oil-related opportunities. There were plenty of opportunities in the sector in 2019, if one knew where to look. That will also be the case in 2020.