Ivy VIP Energy

06.30.20

Market Sector Update

  • Volatility in the oil markets continued as crude oil prices went negative for the first time ever. Subsequent oil prices rebounded more than double from the lows reached in late April to just under $40 a barrel.
  • Negative oil prices equated to producers willing to pay someone to move their crude instead of storing it. Storage around the world is rapidly approaching full capacity due to the largest unprecedented imbalance of oil supply to demand. Resulting supply of oil led to significant inventory builds and a collapse in oil prices.
  • Saudi Arabia, Russia and the U.S. agreed to lead a multinational coalition in major-oil production cuts by a record 9.7 million barrels. OPEC+ and its allies cut production by more than expected in the quarter and compliance is higher than expected. U.S. crude supply fell at a record pace by roughly two million barrels in the quarter and U.S. shale production dropped to a two-year low.
  • We believe the largest oil demand decrease in history bottomed in the first week of April as China started reopening its economy. Demand continued to improve faster than expected as the rest of the world started to reopen. Demand remains well below peak demand before the coronavirus. The quick response by OPEC+, Russia and the U.S. to reduce supply and improve demand led to oil moving higher in the quarter.

Portfolio Strategy

  • The Portfolio outperperformed its benchmark index, the S&P 1500 Energy Sector Index, for the period ended June 30, 2020. During the quarter, we lowered our cash position as oil fundamentals bottomed. The supply picture improved due to production cuts and forced shut-ins of production. We continued to increase our exposure to integrated oils.
  • Key contributors to the Portfolio’s relative performance included holdings in Exxon Mobil Corp., Parsley Energy, Inc., Chevron Corp., Cactus, Inc. and WPX Energy, Inc.
  • Industry allocations changed when compared to those of the prior quarter. Approximately 33% of the equity holdings in the Portfolio were allocated to the oil and gas exploration and production industry segment, followed by 20% to oil and gas equipment and services and 16% to oil and gas refining and marketing.
  • The focus of the energy strategy remains on investing in companies that can create value over the full course of the energy cycle. We identify those as companies that are low-cost operators, have strong balance sheets, have the ability to grow profitably and have strong return on capital.

Outlook

  • Oil markets are on pace to begin drawing down global inventory in the third quarter driven by the pickup in global economic activity in the second half of the year.
  • OPEC+ and its allies have extended production cuts and compliance remains high. Saudi Arabia continues to push back against non-compliant countries. The latest agreement including Iraq, Nigeria and other countries is to cut by more than their share over the coming months to make up for shortfalls in production targets.
  • U.S. production is down two million barrels and should not grow as capital spending is down 40% and rig count is expected to hit an all-time low. The U.S. is currently not drilling enough wells to overcome the natural decline in production.
  • Oil demand should rebound sharply over the next few months as worldwide economic activity resumes. The greatest risk to our outlook is the accelerating number of new coronavirus cases. We are concerned about a new wave of coronavirus infections, driven by upticks in daily new-case rates in several U.S. states as well as Beijing. We believe a rollback on re-openings would push out the demand recovery and put pressure on oil prices.

The opinions expressed are those of the Portfolio’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through June 30, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Top 10 equity holdings as a percent of net assets (%) as of 06/30/2020: Marathon Petroleum Corp. 5.3, Phillips 66 5.3, Valero Energy Corp. 5.2, WEX, Inc. 4.2, Hess Corp. 4.1, Pioneer Natural Resources Co. 4.0, Cactus, Inc. 3.9, Concho Resources, Inc. 3.8, Exxon Mobil Corp. 3.4 and Chevron Corp. 3.4.

The S&P 1500 Energy Sector Index is an unmanaged index comprised of securities that represent the energy sector of the stock market. It is not possible to invest directly in an index.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Risk factors: Risk factors: The value of the Portfolio’s shares will change, and you could lose money on your investment. Because the Portfolio invests more than 25% of its total assets in the energy related industry, the Portfolio may be more susceptible to a single economic, regulatory, or technological occurrence than a portfolio that does not concentrate its investments in this industry. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. The Portfolio typically holds a limited number of stocks (generally 35 to 55). As a result, the appreciation or depreciation of any one security held by the Portfolio may have a greater impact on the Portfolio’s net asset value (NAV) than it would if the Portfolio invested in a larger number of securities. Investing in the energy sector can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments, and the cost assumed by energy companies in complying with environmental safety regulations. The Portfolio may invest in Initial Public Offerings (IPOs), which can have a significant positive impact on the Portfolio’s performance that may not be replicated in the future. These and other risks are more fully described in the Portfolio’s prospectus.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.