TORIX – Q2 2018 Commentary
The Tortoise MLP and Pipeline Fund returned 13.21% during the quarter as the energy sector rebounded dramatically. The team believes that the fundamentals in the pipeline space are strong and the strategy should benefit from a positive shift in market sentiment.
Market Overview:
– The broad energy sector had a strong recovery returning 13.5% during the second quarter
o Energy was the top returning equity sector during the period
– Crude oil prices hit another milestone, with WTI crossing $70 a barrel in early May
– During the quarter there was an increased widening in cost per barrel between the Permian Basin and Cushing OK due to lack of transportation infrastructure
o They believe this trend will continue until new pipeline infrastructure becomes operational in late 2019 and early 2020
– The midstream energy market stabilized in the second quarter following greater clarity on those companies impacted by the FERC income tax allowance ruling in March
o Believe the ruling provides clarity and the changes will positively impact the MLPs that operate cost of service pipelines
– Midstream companies continue to simplify their structure by eliminating incentive distribution rights (IDRs) and through M&A activity
o Believe the proliferation of IDR eliminations will continue, but believe acquisitions of MLPs by C-Corps are isolated
Performance Overview:
– The Tortoise MLP and Pipeline Fund returned 13.21% during the quarter, bouncing back and far outpacing the S&P 500
o Pipeline companies returned 13.5% in the second quarter
– MLPs had a stark reversal from the previous quarter, returning 11.3% for the same period
– Capital markets activity slowed in the second quarter with MLPs and other pipeline companies raising approximately $18 billion in total capital
– Top performing position during the quarter was ONEOK, Inc.
o Performance driven by natural gas liquid volume growth benefitting integrated pipeline network
– Largest relative detractor was EQT Midstream Partners
o Sold off due to uncertainty around simplification transaction
Market Outlook:
– They believe that energy fundamentals remained intact throughout the earlier volatility while technicals drove market sentiment
o Missing piece of the puzzle for sustained recovery has been an increase in fund flows and institutional investment into the energy sector
– During the quarter, these catalysts started making an impact boding well for the energy sector
– As part of the evolution of midstream energy, many companies continue to strengthen their balance sheets
o Additionally increased U.S. production translated to strong midstream cash flow growth
– Higher distribution coverage is expected over the next several years as a result of operating leverage driven by volume growth, new projects, and slowed distribution growth
o With higher coverage, companies expected to direct an increased amount of internal cash flow to funding capital expenditures
– Companies are also expected to benefit from balance sheet capacity as leverage is projected to decline over the next three years
– Outlook for capital investments is approximately $120 billion for 2018 to 2020 in MLPs, pipelines, and related organic projects
Performance Review:
[Category Market Commentary}
Peter Malone, CFA
Research Analyst
Direct: 617.226.0030
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