TORIX – Q4 2017 Market Commentary
The Tortoise MLP and Pipeline Fund outpaced its North American Pipeline Index during the fourth quarter, and the broad energy sector began to turn around. Despite a year of underperformance for the MLP space, Tortoise believes that midstream company fundamentals remain strong and a growth opportunity remains as the need for greater pipeline capacity has ramped up.
Market Overview:
– The energy sector ended 2017 on a high note with several tailwinds heading into 2018
o Key drivers include a decline in global crude oil inventories, OPEC extension of agreement to curtail crude production, and U.S. producers’ greater capital discipline and continued production in 2018
– Broad energy sector returned 6.1% during the quarter compared to 6.6% for the broader equity market
– Midstream transported volumes grew throughout the year, supported by consistently strong quarterly earnings reports
o These solid fundamentals did not always translate into positive stock performance
– Pipeline companies were flat in the final quarter returning 0.1% resulting in 2.8% return for 2017
– MLPs did not fare as well, returning -6.0% during the year
– While midstream fundamentals were healthy throughout the year, there was uncertainty about some MLPs due to simplification and incentive IDR restructuring
o Sometimes these actions also resulted in lower distribution rates
– Added boost of certainty came when tax reform came at year end
o Reduction in corporate tax rates
o Unchanged definition of qualifying income
o Improved pass through rates for partnerships like MLPs
Performance Review:
– TORIX outpaced the North American Pipeline index during the fourth quarter by 93 bps
– Performance across pipeline segments varied during the quarter
o Gathering and processing companies finished with a strong Q4
o Local gas distribution companies also turned in positive performances
o Crude oil and refined product pipeline companies were negative for the quarter
– Top two contributors were Cheniere Energy and Targa Resources
o Cheniere Energy – construction progress toward new liquefied natural gas facilities continues without delay
o Targa Resources – improving commodity prices and a positive outlook for natural gas liquid demand
– Top two detractors were Enbridge and Kinder Morgan
o Enbridge Inc. – potential for project delays while leverage ratios are elevated
o Kinder Morgan – regulatory uncertainty on TransMountain expansion project
Market Outlook:
– Long term outlook for the midstream sector remains positive as the need for greater pipeline capacity remains
o Team projects capital investments in MLPs, pipelines, and related organic projects at approximately $145 billion through 2019
– The Tortoise team expects 5-7% distribution growth within the midstream space
o MLP yields are currently around 7%
– MLPs and other pipeline companies raised nearly $15 billion during the fourth quarter
o Weighted slightly more toward debt than equity
o Largest announced midstream deal was Marathon’s $8.1 billion dropdown of refining logistics assets and fuels distribution services to MPLX LP
– The fund continues to focus on large and diverse North American pipeline companies with access to sizable pipeline networks
– The team maintains the ability and flexibility to access traditional pipeline corporations alongside MLPs
o Believe the sector maintains strong business fundamentals with long term growth opportunities
Performance Snapshot:
