Shares of integrated energy giant Chevron Corporation (NYSE:CVX) fell a painful 26% in the first half of 2020, according to data from S&P Global Market Intelligence. That's bad, but it was even worse at peer ExxonMobil (NYSE:XOM), where the stock was down roughly 36%. Midstream bellwether Enterprise Products Partners (NYSE:EPD) didn't escape the hit, either, falling roughly the same amount as Exxon. There was, for the most part, no place to hide in the entry sector in the first six months of the year.
There's a short answer and a long answer here. The quick take is that oil prices plummeted and have yet to mount a material and sustained recovery to the levels seen in late 2019. That, however, doesn't do justice to the turbulence that the energy sector has experienced so far in 2020.
Coming into the year, the supply/demand balance for energy was slightly off-kilter. The long-term rise of U.S. onshore oil production, thanks to the fracking boom, was a key factor. OPEC had been attempting to offset the increased U.S. production by trimming its output. Only every time OPEC cut, the U.S. produced more oil, still leaving the world with just a bit more energy than needed. Prices were weak.
Eventually OPEC and partner Russia disagreed on the direction being taken. That led to a price war that flooded the market with supply and pushed prices sharply lower. Eventually OPEC and Russia came to terms, with a little help from the United States, but the damage had been done.
The really big problem was that the price war coincided with the global rise of COVID-19. So there was a material oversupply of oil at the very moment when governments effectively shut down their economies in an effort to slow the spread of the coronavirus. Oil prices actually fell below zero at one point, meaning that oil companies were, effectively, paying customers to take their oil. That's an oversimplification of a very complex and technical event, but the historic price decline shows just how bad the situation actually got.
Since the top lines at both Chevron and Exxon are highly reliant on the price of oil, their shares fell sharply. But that's not the only issue investors are worried about here. Both have a long history of using their balance sheets to work through difficult periods in the highly cyclical energy sector. Leverage at each rose dramatically in the first quarter, with Chevron's financial debt-to-equity ratio jumping from about 0.12 times at the start of the year to 0.25 times. Exxon's ratio went from around 0.15 times to roughly 0.36 times. Both are still at the low end of the peer group, leverage wise, but the impact of this oil downturn has been very material and isn't over yet. In fact, oil has been piling up in storage. Until that excess oil has been worked through, it's unlikely that oil prices will mount a sustained recovery. It wouldn't be surprising to see leverage rise further from first-quarter levels.
Midstream giant Enterprise generates around 85% of its gross margin from fee-based assets. Its business has held up relatively well so far, but with demand down, investors are rightly worried that less material will flow through its pipelines, processing plants, and transportation assets, among other things it owns. Perhaps more troubling, low oil prices have reduced capital spending in the oil space. If Enterprise's customers pull back, then it too will have to pull back because new midstream assets simply won't be needed if production levels off or falls. That means slower growth ahead. In some ways, investors have been punishing Enterprise for just being associated with oil, but the long-term growth issue is material, too.
The energy sector is still working through a very difficult period, with noteworthy bankruptcies grabbing headlines. There is no easy fix, and the ongoing economic impact from COVID-19 will play a material part in the industry's recovery. Exxon, Chevron, and Enterprise are all likely to muddle through in one piece, but the ride will be bumpy and, at times, difficult. This is not a sector for the faint of heart today.