TORIX – Q1 2018 Commentary
During the quarter, Tortoise MLP & Pipeline Fund underperformed its benchmark. The MLP and broad energy sectors sold off during the quarter due to negative sentiment as well as uncertainty following a FERC ruling. The team remains optimistic about the space believing that commodity prices will remain stable and that companies are better positioned to self-fund capital projects. As of the end of last month, the TTM yield of TORIX is 3.09%.
Market Overview:
– The broad energy market had a volatile start to the year with strong performance in January
o Turned sharply negative in February before returning to positive territory in March
o Net return for energy sector was -5.9% during first quarter
– Despite the recent volatility, there is reason for optimism in 2018
o Driving optimism is that commodity prices will remain stable and drive increased production
o Balance sheets are stronger
o Companies are better positioned to self-funded capital projects reducing reliance on the health of the capital markets
– Midstream energy companies faced structural headwinds during the first quarter along with negative sentiment within the overall energy market
o Other income oriented asset classes also retreated
Performance Overview:
– During the period, TORIX returned -10.62% compared to its benchmark at -9.65%
– A top contributor during the period was ONEOK, Inc.
o Announced increased growth projects at expected high returns and fully funded equity needs
– Another top contributor was Plains GP Holdings, LP
o Expected crude oil production growth from the Permian Basin
– One of the top detractors Williams Companies, Inc.
o Sold off due to the FERC regulation overhang
– Another top detractor was Kinder Morgan, Inc.
o Sold off due to regulatory uncertainty on TransMountain Project
Market Outlook:
– On March 15, the FERC ruled against an existing policy allowing MLPs to include an income tax allowance in cost-of-service rates
o Removal of this allowance may result in a lower tariff rate and ultimately lower cash flow for affected pipelines
– The change only affects pipelines with interstate natural gas and crude oil pipelines operating on a cost of service basis
o Pipelines using negotiated or market based rates are unaffected
– The team believes that structural headwinds are transitory and midstream fundamentals are healthy
– Outlook for midstream sector remains strong as the need to build out new pipeline capacity remains
o Project capital investments in MLPs, pipelines, and related organic projects at approximately $117 billion for 2018-2020
– These projects will facilitate need to takeaway capacity to accommodate the growth in crude oil, natural gas, and natural gas liquid production
Performance Review:
Peter Malone, CFA
Research Analyst
Direct: 617.226.0030
Fax: 617.523.8118
Crestwood Advisors
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Suite 500
Boston, MA 02109
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