TORIX – Q3 2017 Commentary
The Tortoise MLP & Pipeline Fund had positive returns during the third quarter and has outpaced its ETF counterpart (VNQ) year to date. However, the asset class has experienced a sell off, driven mostly by oil prices in the first half of the year.
Despite stabilized crude oil prices during the third quarter (and through October), company specific issues have negatively affected the sentiment of the broader index. Much of the selloff came as a result of Enterprise Product Partners announcing it will slow down its projected distribution growth rate. It is important to note that they are not cutting the distribution but rather slowing the growth.
Their reasoning is that the market is not rewarding the high growth rate (approximately at 6.5%), and they will look to use cash as a way to fund new projects. Normally, MLPs will fund internal investment by issuing equity (or new MLP units). Equity capital markets have been relatively difficult for larger deals in the MLP space this year.
Tortoise believes it is possible that other MLPs may reassess distribution policies in order to best balance shareholder return through payouts and company growth. The Tortoise team remains confident that the fundamentals within the MLP space are strong and believes that the long term outlook for midstream companies is positive.
Market Overview:
– Crude oil prices stabilized throughout the third quarter as inventories meaningfully declined during the period
o Helped to drive positive performance across pipeline companies, including last quarter’s move into positive territory
– On the supply side, production curtailment compliance among OPEC countries was high and U.S. rig counts leveled off
o Summer driving season resulted in strong demand for refined products
– Midstream fundamentals remained steady during the third quarter supported by strong second quarter earnings reports
o More than half of the companies in the Tortoise North American Pipeline Index surpassed expectations
o Average EBITDA growth on a year over year basis was 21% for midstream companies
– The team believes these positive fundamental results from second quarter were misrepresented in the markets as stock performance for some companies lagged in the third quarter
Performance Overview:
– Pipeline companies returned 2.1% for the quarter but MLP performance was more restrained, returning -2.0%
o Weak equity capital markets and company-specific issues weighted on MLPs casting doubt on the entire midstream segment
– Enterprise Product Partners announced it will slow down its projected distribution growth rate
o They will look to use cash as a way to fund new projects
– Plains All America Pipeline revised down its 2017 and 2018 guidance despite a quarter in line with expectations
o Plains also announced a reevaluation of its distribution policy to enhance distribution coverage and leverage metrics
– In capital markets, Energy Transfer Partners raised approximately $1 billion of equity
o It was the largest deal during the quarter and it was an amount that proved difficult for the market to digest
– In general, pipeline companies structured as C-corps are not as reliant as access to capital markets helping performance during challenged market conditions
o Solid C-corp performance translated into solid performance for the fund as they account for 75% of the fund
– Performance varied among pipeline companies based on the commodities transported
o Local gas distribution companies were strong performers during the period
Market Outlook:
– In general, debt markets were more supportive than equity
o Trend was seen as MLPs and other pipeline companies raised more than $18 billion
– Merger and acquisition activity among MLPs and other pipeline companies remained stable totaling approximately $15 billion
– The team’s long-term outlook for the midstream sector remains positive
o Projection for capital investments in MLPs, pipeline and related organic projects at approximately $125 billion for 2017 to 2019
– Fundamentals within the MLP space remain strong while providing a relatively attractive yield
– At the end of the day, cash flow growth drives value in the long term and Tortoise maintains a strong positive outlook for growth in the MLP space
Performance Review:
