Must-know: US energy sub-sectors during the global energy decline

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Nov. 20 2020, Updated 3:40 p.m. ET

Context setting

In this part of the series, we’ll discuss how the recent slump in energy price impacted U.S. energy companies and exchange-traded funds (or ETFs). We’ll start by analyzing how different energy sub-sectors have been affected.

This will give us an idea about the sectors that are usually affected by energy prices. We’ll also learn what type of companies are usually insulated from sharp drops in energy prices.

The good

From the above chart, there’s only one sector that stands out because it didn’t decrease—master limited partnerships (or MLPs).

MLPs are special corporate structures that pay most of their earnings as distributions to unit holders. MLPs usually have steady growth. Read more about MLPs here.

The sector is resilient because of the pervasive fee-based model that most of the midstream companies use. Their profits are usually linked to long-term fixed-fee contracts. The contracts are fairly immune to shorter-term swings in energy prices.

The Alerian MLP ETF (AMLP) would be an ideal way for investors to gain low-cost access to the sector.

The bad

Three energy sub-sectors took cuts ranging from 10%–15%. The companies include:

  • International integrated energy companies like ExxonMobil (XOM) and Chevron Corp. (CVX)
  • Oilfield equipment and services (or OFS) companies like Schlumberger (SLB)
  • Refining companies like Valero Energy (VLO)

These sectors didn’t perform well. However, they performed better than the pure upstream exploration and production sector. We’ll discuss this in the next part of the series. These companies have operations that aren’t directly linked to energy prices.

For example, refining companies’ profits depend on the difference between the prices of refined products and crude oil prices. OFS company profits are loosely related to energy prices—only over a longer term.

Integrated companies have significant upstream operations. They also have other operations that traverse the energy “stream”—all the way down to petrochemicals. These operation that help diversify their profit sources.

The ugly

Companies with profits that are directly linked to energy prices will be negatively affected the most. Energy price drops will hurt these companies. Pure upstream exploration and production companies fall under this category. They’ve taken the worst losses among the energy sub-sectors.

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