This year has been a tale of two halves in the energy sector. The Energy Select Sector SPDR (NYSE: XLE) was up 13.2% through July 1, versus a 6.8% gain for the S&P 500. But between July 1 and Dec. 26, the Energy Select Sector SPDR was down 20%, versus a gain of 5.9% in the S&P 500.
This underperformance was a product of broad declines in the energy sector. Oil producers, oilfield services providers and drilling companies were especially hard hit. In fact, most of these stocks fared worse than the Energy Select Sector SPDR since it is heavily weighted toward larger, integrated companies:
Top 10 constituents of the Energy Select Sector SPDRBut the energy sector is extremely diverse. Not all segments trade in unison. Even in a lousy year there were solid performances.
I used Fidelity's stock screening tool to evaluate the performance of energy stocks. Of the 514 listed in the energy sector, 114, or 23%, had positive total returns for the year. A number of stocks more than doubled in value, but those all had market caps under $500 million. So I restricted the screen to companies with market caps of more than $500 million trading above $5 per share. With those restrictions there were still 82 stocks with positive returns. Here are the top 10, and there is clearly a common theme among these top performers:
The top 10 was dominated by master limited partnerships (MLPs), with eight entries on the list. Another, Cheniere, owns MLP interests. MLPs issue units rather than shares, but more importantly have distinct tax advantages over corporations. The primary advantage is that MLPs aren't subject to the corporate income tax. MLPs pass profits directly to unitholders in the form of quarterly distributions. This arrangement avoids the double taxation of corporate dividends.
The only entry on the list that was not an MLP or affiliated with an MLP was the top performer, Westmoreland Coal (NASDAQ: WLB). The coal sector has been battered in recent years, but Westmoreland, the sixth largest North American coal producer, bucked the trend with a total return of 81.6%.
The second leading performer with a total return of 80.7% was Phillips 66 Partners (NYSE: PSXP). This partnership is comprised of midstream assets dropped down from its sponsor, the refiner Phillips 66 (NYSE: PSX) in a 2013 IPO.
In third place was Tallgrass Energy Partners (NYSE: TEP), another 2013 IPO. Tallgrass provides natural gas transportation and storage services for customers in the Rocky Mountain and Midwest regions of the U.S.
Coming in fourth was Cheniere Energy (NYSE: LNG) which owns 100% of the general partner interest and 47.2% of the limited partner interest in Cheniere Energy Partners (NYSE: CQP). Cheniere Energy and its affiliates are involved in building terminals for the export of liquefied natural gas.
Rounding out the top five was MPLX (NYSE: MPLX), which like PSXP was formed from midstream assets dropped down from its sponsor, the refiner Marathon Petroleum (NYSE: MPC).
The rest of the top 10 consisted of midstream (i.e., pipeline and transportation) MLPs except for Emerge Energy Services (NYSE: EMES). Emerge is primarily a domestic producer and supplier of sand used for hydraulic fracturing in U.S. shale basins. The fracking sand securities have been extremely volatile. Emerge's entry on the list comes despite a decline of nearly 60% since the end of August.
Overall, 2014 will go down as a poor year for the energy sector, but some segments and stocks will always outperform the broader market averages. In 2014 it was the midstream MLPs, in particular, that performed extremely well.
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