Friday marked the end of the second quarter and first half of 2023. The S&P 500 returned 8.3% for the quarter, but that performance was highly uneven. As in Q1, eight of the 11 sectors underperformed the S&P 500 in Q2.

This is primarily because the S&P 500 index has a high concentration of technology holdings. The sector — after a dismal 2022 — posted excellent returns in Q1 and Q2, undercutting the S&P 500. In contrast, the Dow Jones Industrial Average lags the S&P 500 by more than 10% annually.

The middle sector, as shown in the chart below, was the materials sector, which returned 3.2% in Q2. The energy sector, which I had predicted to underperform this year, had the sector’s 2nd worst performance in Q2 and is also its second worst year to date. Only the utilities sector and its return of -5.7% was worse than the energy sector’s return of -5.4% YTD.

According to the data provider FactSet — which I use to analyze companies — the average upstream company returned 0.5% in Q2. They are companies that produce oil and gas. Of the 53 companies that FactSet classifies as “Upstream,” 22 had negative earnings in Q2. The average Upstream company is down 9.6% YTD.

Top performers in Q2 in the Upstream sector were Evolution Petroleum Corporation (+29.7%), EQT Corporation (+29.5%) and Southwest Energy (+20.2%). ConocoPhillips, the largest Upstream company, returned 5.6% in the quarter.

Among the 46 companies that FactSet classifies as “midstream,” the average yield was 1.2%. By far the best of the bunch year-to-date was NGL Energy Partners, which generated a first-half total return of 221.5%. It was also the best first-half return of any energy company in any category.

The integrated supermajors were down 1.1% on average. Of this group, Shell performed best in Q2 with a total return of 5.9%. Shell was the only integrated supermajor with a positive return in Q2 and is the best-in-class producer for the year with a return of 8.0%.

The big three refiners — Marathon Petroleum
Valero and Phillips 66
— lost an average of 11.0% per quarter. All of these companies were down, but Valero was the worst performer, down 15.2% during the quarter.

Oil prices are well below a year ago by the second half of 2023, but OPEC production cuts are likely to be felt before the end of the year. This should support oil prices and provide a better outlook for energy companies in the second half of the year.

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