"The energy sector remained depressed as of the end of May, but I'm looking at refiners as one of the first types of companies to rebound fundamentally as people start to go back to work, largely because of demand for gasoline," says Maurice FitzMaurice, portfolio manager of Fidelity® Select Energy Portfolio (FSENX).
Much of the energy sector faces an extremely challenging outlook, according to FitzMaurice, as producers are forced to cut spending. Meanwhile, excess capacity existed in many areas even before the downturn in commodity prices.
That said, the availability of crude oil could support increased utilization and help to boost refining margins.
As of May 31, oil & gas refining and marketing companies represented 11% of the portfolio, and integrated oil & gas companies, which take part in all phases of production and distribution, including refining, comprised about 42% of the portfolio.
When evaluating refiners, FitzMaurice looks for companies with a low cost structure, high-quality assets, a disciplined management team, and a strong balance sheet.
"I think these companies could weather the downturn without facing financial distress, share dilution, or long-term loss of value, and could start to pick up when more people get back to work," he says.
Fidelity® Select Energy Portfolio held securities mentioned in this article on May 31, 2020. As of this date, these companies accounted for the following percentages of fund assets: Valero Energy, 4.40%; Phillips 66, 3.31%; and Marathon Petroleum, 3.28%.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
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