Energy market commentary

Energy market commentary: February 2021

Energy was the top-performing sector in the S&P 500 for the second consecutive month.

March 4, 2021 | 5 minute read

Data as of January 31, 2021, unless otherwise noted.

Performance (total returns)

BenchmarksFebruary 2021YTD
Alerian MLP Index (AMZX)7.77%14.07%
Alerian Midstream Energy Select Index (AMEIX)7.48%12.73%
ICE BofAML U.S. High Yield Energy Index (HY Energy)2.38%3.89%
S&P 500 Energy Index (S&P Energy)22.66%27.30%

Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

Energy continues hot start to 2021: Energy finished as the top-performing sector in the S&P 500 for the second consecutive month, returning 22.66% in February. Since the beginning of November, S&P Energy has risen by more than 70% as crude prices have risen from $35.79/bbl to over $60 today. Midstream has also performed well this year, though it has not risen to the same degree as more commodity price-sensitive areas of the energy sector. HY Energy returned 2.38%, outperforming the broader high yield market by more than 200 bps on the month as the difference between energy and broad high yield spreads narrowed to the lowest level since October 2018. Crude prices have enjoyed a Goldilocks environment so far in 2021, with improvement in demand coinciding with continued supply curbs. The futures curve has moved into steep backwardation, signaling that current demand is outstripping supply. Looking ahead, we expect OPEC+ to gradually bring some halted production back online in the coming months, though continued improvement in the economic outlook could mitigate the impact on oil prices.

Energy earnings: A look back and a look aheadWith nearly all energy companies in the S&P 500 having reported Q4 earnings, it’s a good time to look back at the carnage of 2020 and look ahead to the outlook for 2021. 2020 was, in essence, a lost year for the sector. Earnings per share (EPS) fell 94% year over year to almost nothing as the COVID-19 pandemic sapped global energy demand and caused oil prices to plunge. As a result, major oil and gas companies aggressively cut down on spending; capital expenditures for energy companies fell 44%, compared to 14% for the rest of the S&P 500. This focus on getting leaner was borne out of necessity, but it also sets up 2021 to be a relatively strong year for the sector. Current consensus estimates show an expectation that 2021 EPS will climb to within 25% of 2019 levels, driven by both a recovery in revenues and profit margin expansion. Of course, energy fundamentals are famously volatile and will depend heavily on the path of crude and natural gas prices. However, we do see the potential for upside to current expectations. Having taken out significant costs in 2020, energy companies are in position to capitalize on significant operating leverage should commodity prices cooperate and revenues top estimates. It is possible these traditional fossil fuel companies are entering into a new stage of their life cycle, focused more on free cash flow generation and less on capital spending to fuel market share growth. Many major oil companies have also begun investing more heavily in green energy, and others will likely have to follow. 2021 will go a long way in demonstrating the trajectory of the energy industry.

Key takeaways

  • Energy was the top-performing sector in the S&P 500 for the second consecutive month.
  • The energy sector looks toward a brighter outlook after a lost year.

Index descriptions: Alerian MLP Index is the leading gauge of energy Master Limited Partnerships (MLPs) and is a float-adjusted, capitalization-weighted index, whose constituents represent approximately 85% of total float-adjusted market capitalization. Alerian Midstream Energy Select Index is a composite of North American energy infrastructure companies and is a capped, float-adjusted, capitalization-weighted index, whose constituents are engaged in midstream activities involving energy commodities. ICE BofAML U.S. High Yield Energy Index is designed to track the performance of U.S. dollar-denominated high yield rated corporate debt publicly issued in the U.S. domestic energy market. S&P 500 Energy Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) energy sector.

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This energy market commentary and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The energy market commentary is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such energy market commentary. The energy market commentary should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the energy market commentary or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

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