If U.S.-Iran talks reach a deal, crude could plunge; hedging energy portfolios recommended

Crude prices could fall rapidly if the United States and Iran reach a deal in their talks, according to an outlook. Recommendations have been made on how to defend energy portfolios in light of this outlook. The main recommendation is to take a differentiated approach to upstream, integrated, and midstream sectors.

Upstream companies are directly exposed to crude oil production. Devon Energy was cited as a leading example of a direct-exposure strategy. If crude prices plunge, upstream companies’ earnings are affected first.

Integrated energy companies operate across the business, from exploration to refining and sales. Chevron was given as an example of an integrated company. When prices are hit by a shock, integrated companies have relatively greater downside-buffering capacity than upstream companies.

Midstream companies have volume-based revenue structures, such as pipelines, transportation, and storage. Enterprise Products Partners, Energy Transfer, Kinder Morgan, and Enbridge were recommended as representative midstream companies. Their dividend yields were assessed as relatively stable.

In summary, a strategy was proposed to reduce upstream exposure and shift some investments to integrated and midstream companies to guard against the risk of a sharp decline in crude oil prices. Investors were also advised to review each company’s dividend structure and the share of revenue based on contracts.