Oil Got Trounced and Solar Soared in the First Half

The first half of 2017 marked the worst first-half performance for crude oil since 1998. 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.

Nearly every segment of the energy sector was hard hit. The Energy Select Sector SPDR ETF, which represents the largest energy companies in the S&P 500, declined by 14.8% in the first half. The S&P Oil & Gas Exploration & Production SPDR ETF, which is more representative of the smaller oil and gas 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, with a TSR of 9.3%. The worst performer of this group was Schlumberger with a TSR of -20.5%.

Among the five super major oil and gas companies, the top performance was turned in by Royal Dutch Shell with a TSR of 0.7%. Chevron was last among this group with a TSR of -9.6%, followed closely by ExxonMobil at -8.9%.

The carnage was so extensive that only two of the Top 50 oil and gas producers had a positive return in the 1st half. The top performer in this group was Rice Energy, which returned 24.7% in the first half. Rice surged recently on news that it is being acquired by EQT Corporation.

The midstream sector performed better than upstream. The Alerian MLP Index, which captures about 75% of the midstream sector’s market, registered a TSR for the first half of -6.3%. The top-performing MLP for the first half was Southcross Energy Partners LP, 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, the 2nd best performer, registered a TSR of 26.2%. Also topping 20% for the first half were VTTI Energy Partners LP, Western Refining Logistics LP, and EQT GP Holdings LP.

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 with a first half TSR of 19.9%. Delek US Holdings notched a return of 11.2%, while Tesoro followed at 8.4%. Valero, the world’s largest independent petroleum refiner, barely broke even with a TSR of 0.8%, while Phillips 66, a major holding in Warren Buffett’s portfolio, declined by 2.7%.

Back in January, I warned investors in Why The Ethanol Industry Should Fear President Trump that the new administration posed unique risks for the ethanol industry. At the time, I wrote, “The downside [for ethanol companies] seems relatively high given the risks ahead, and it’s hard to see much upside past this year.”

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 turned in the worst performance with a first half TSR of -71.0%, followed by ethanol producers Pacific Ethanol Inc at -34.2%, and Green Plains Inc at -25.4%.

But the brightest spot in the sector in the first half was the solar sector. The Guggenheim Solar ETF is a global index that tracks companies within several business segments of the solar power industry. The ETF had a first-half TSR of 20.0%, handily outperforming even the broader market benchmarks. SolarEdge, a maker of inverters for solar photovoltaic (PV) systems, soared by 61.3% in the first half. (Full disclosure: I own shares of SolarEdge). First Solar, a provider of PV systems, rose by 24.3%. Chinese solar PV provider JinkoSolar rose by 36.6%.

The solar sector clearly has momentum headed into the second half of the year. Even though it had a terrible first half, so does oil as the half closed out with seven straight winning sessions for crude prices. The midstream sector also finished strong, but rising oil prices could spell trouble for downstream companies in the second half.

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