Tortoise Talk. Energy update

Transcription

1 Tortoise Talk Energy update First quarter 2018

2 Tortoise Talk First Quarter 2018 The broad energy market had a volatile start to the year with strong performance in January that turned sharply negative in February before returning to positive territory in March. The net return for the first quarter of 2018 was -5.9%. Despite the recent volatility, specifically in the midstream segment, we believe there is reason for optimism in Driving this optimism is our belief that commodity prices will remain stable and drive increased production, balance sheets are stronger, and companies are better positioned to self-fund capital projects reducing reliance on the health of the capital markets. The broader equity market retreated into negative territory for the first quarter, returning -0.8%. Fixed income performance was also negative, returning -1.5% for the quarter total returns (%) 1Q S&P Energy Select Sector Index Tortoise North American Oil & Gas Producers Index SM Tortoise MLP Index -9.6 Tortoise North American Pipeline Index SM -0.8 S&P 500 Index As of 3/31/2018. Source: Bloomberg. It is not possible to invest directly in an index. Please see index definitions on disclaimer page. Past performance is no guarantee of future results. Upstream Crude oil prices, represented by West Texas Intermediate (WTI), started the year strong as they broke through the $60 per barrel threshold on the last day of Oil prices opened the quarter at $60.42 per barrel, peaked at $66.14 on January 26, 2018 and ended the quarter at $ Natural gas prices were volatile at the beginning of the year, particularly as the Northeast experienced a bomb cyclone that brought exceptionally cold weather in January. The high demand for natural gas in the region drove prices sharply higher, even as liquefied natural gas (LNG) was brought in from Russia to help fill demand. Natural gas prices opened the year at $3.69 per million British thermal units (MMBtu), quickly peaked at $6.24 on January 2, 2018 and ended the quarter at $2.81. Partly driven by changes in commodity prices, performance of upstream oil and gas producers returned -5.7% during the period, with all of the negative performance coming in February. Broad energy = S&P Energy Select Sector Index Equity market = S&P 500 Index Fixed income = Bloomberg Barclays U.S. Aggregate Bond Index Oil and gas producers = Tortoise North American Oil and Gas Producers Index SM 2018 Tortoise

3 Page 2 Crude oil & natural gas prices WTI crude oil price $ per barrel $70 $60 $50 $40 $8 $7 $6 $5 $4 $3 Henry Hub natural gas price $ per MMBtu $30 $2 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 As of 3/31/2018. Source: Bloomberg. Note: MMBtu = million British thermal units U.S. crude oil production is expected to average 10.7 million barrels per day (MMbbl/d) in , a record high if achieved. With oil prices above $50, many regions are economical for drilling activity. One basin particularly benefitting is the Bakken. Due partially to its location, predominantly in the Dakotas, drilling became less economical as crude oil prices declined during the energy downturn. With prices trending higher, the basin volume declines have reversed and returned the Bakken to growth as well design improvements and increased pipeline takeaway capacity has led to increased drilling. Natural gas production is expected to average 79.6 billion cubic feet per day in 2018 and 84.9 bcf/d in , significantly above 2017 levels. The production increases are facilitated by increased pipeline takeaway capacity in the Northeast and are led in large part by associated natural gas production from the Permian basin. We expect demand to emerge in the form of greater natural gas fired power generation, higher industrial activity and exports. Midstream Midstream energy companies faced structural headwinds during the first quarter, along with negative sentiment in the overall energy market. Pipeline companies returned -9.6% in the first quarter while MLPs returned -11.1%. Other income-oriented asset classes also retreated during the quarter, with REITs returning -6.7% and utilities returning -3.3% for the same period. Specifically, continued simplification transactions, a distribution cut and modest equity issuance weighed on midstream sector sentiment. The average MLP yield at the end of the quarter was 8.9%. We believe the structural headwinds are transitory and that midstream fundamentals are healthy. Our outlook for the midstream sector remains strong as the need to build out new pipeline capacity remains. We project capital investments in MLPs, pipelines and related organic projects at approximately $117 billion for 2018 through These projects will facilitate the acute need for more takeaway capacity to accommodate the growth in crude oil, natural gas, and natural gas liquids production and export infrastructure. Further, midstream valuations are very attractive, at levels not seen since the financial crisis in Pipeline companies = Tortoise North American Pipeline Index SM MLPs = Tortoise MLP Index (TMLP) REITs = FTSE NAREIT Equity REIT Index Utilities = S&P Utilities Select Sector Index

4 Page 3 FERC update On March 15, 2018 the Federal Energy Regulatory Commission (FERC) ruled against an existing policy allowing MLPs to include an income tax allowance (ITA) in cost-of-service rates. Removal of this allowance in cost-of-service calculations may result in a lower tariff rate and ultimately lower cash flow for affected pipelines. This change only affects MLPs with interstate natural gas and crude oil pipelines operating on a cost-of-service basis. Pipelines using negotiated or market-based rates are unaffected. The ruling also does not impact pipelines held by c-corporations or gathering and processing assets. Ultimately, we do not believe the FERC announcement will materially impact the midstream sector. Many MLPs issued press releases confirming this lack of materiality shortly after the announcement. Downstream The U.S. exports story continues to build, especially with liquefied natural gas (LNG) exports. Dominion Energy s Cove Point export terminal in Maryland became the second facility to ship LNG cargo from the U.S. following Cheniere Energy s Sabine Pass facility. The Cove Point facility is particularly important to the northeast given the region s robust natural gas production. Other export facilities are currently under construction and several more are proposed. With low cost natural gas prices in the U.S. and high international prices, along with increasing global demand, U.S. LNG potential is great. According to the International Energy Agency, the U.S. could lead the world in LNG exports by At Tortoise, we actively research the entire energy value chain, including renewable energy. Wind and solar have played an increasing role in electricity generation. Wind is projected to generate 779,000 megawatthours per day (MWh/d) in During that same period, conventional hydropower is projected to generate 732,000 MWh/d, barring any changes in forecasted factors such as precipitation and snowpack. This would be the first year that wind generation exceeds hydropower electricity generation. Solar electricity generation is also expected to increase to 294,000 MWh/d in 2019 from 211,000 in We expect this growth to present further investment opportunities. Capital markets MLPs and other pipeline companies raised more than $45 billion in total capital during the first quarter, with slightly more than half of the issuance in equity, which was predominantly equity issued to sponsors. There were no initial public offerings (IPOs) during the period. We believe the need for alternative forms of capital, like private investment in public equity (PIPEs) and preferred equity will continue into the foreseeable future and expect companies to retain more discretionary cash to fund growth projects. MLP and pipeline company debt & equity offerings 2012 $61 Equity Debt 2013 $ $ $ $ $ $46 $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $(billions) Source: Company filings. As of 3/31/2018. Includes equity issued to sponsors. $100 $110 $120

5 Page 4 Merger and acquisition activity among MLPs and other pipeline companies slowed during the first quarter with approximately $11 billion in activity announced. Enbridge Inc. had the largest transaction of the quarter as it purchased newly issued common units of Spectra Energy Partners, LP in exchange for all of its incentive distribution rights (IDRs) and general partner economic interests for approximately $7.2 billion. Announced MLP and pipeline company acquisitions Source: Company filings. As of 3/31/2018. Includes MLP and pipeline corporations, including those transactions between MLPs. Regulatory corner $11 In March, President Trump ordered steel and aluminum tariffs against all foreign states except Canada and Mexico, with a subsequent agreement with South Korea to amend the existing agreement. We expect the tariffs to have a modestly negative impact on energy. Upstream producers will experience increased prices of steel used for well and steel pipeline inputs for future midstream projects. Midstream companies will likely pass higher input costs for new pipelines to customers in the form of higher tariffs. There is also the potential risk of a broader trade war which could slow global GDP and in turn global crude oil demand. The National Highway Transportation Safety Administration (NHTSA) is expected to release more lenient corporate average fuel economy (CAFE) standards as they enter a redetermination process following the Environment Protection Agency s (EPA) opinion that the current standards in place for are improper and in need of revision. Current targets require car manufacturers to meet fuel efficiency levels of 54.5 miles per gallon for new cars made in 2025, which automakers do not estimate is feasible based on consumer demand for less fuel efficient vehicles. Concluding thoughts $49 $62 Despite the battering the energy sector, particularly the midstream segment, took this quarter, we see the tide turning for the broad energy sector in Energy production growth is strong, commodity prices are constructive to facilitate new drilling and the U.S. holds an advantageous position globally. In our view, these positive trends will translate to the midstream sector as structural clarity with simplifications and IDR eliminations continue, and uncertainty is lifted around FERC and midstream companies income tax allowance. Midstream companies remain a critical component for the energy value chain in maintaining a vibrant pipeline network to support the anticipated growth. If you d like to hear from Tortoise CEO Kevin Birzer about our views on the midstream energy sector, please watch the featured video on our website at. $97 $133 $138 $143 $0 $20 $40 $60 $80 $100 $120 $140 $160 $(billions)

6 Page 5 Disclaimer This commentary contains certain statements that may include forward-looking statements. All statements, other than statements of historical fact, included herein are forward-looking statements. Although Tortoise believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect, Actual events could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this publication. Tortoise does not assume a duty to update these forward-looking statements. The views and opinions in this commentary are as of the date of publication and are subject to change. This material should not be relied upon as investment or tax advice and is not intended to predict or depict performance of any investment. This publication is provided for information only and shall not constitute an offer to sell or a solicitation of an offer to buy any securities. The S&P Energy Select Sector Index is a capitalization-weighted index of S&P 500 Index companies in the energy sector involved in the development or production of energy products. The Tortoise North American Oil and Gas Producers Index SM is a float-adjusted, capitalization-weighted index of North American energy companies engaged primarily in the production of crude oil, condensate, natural gas or natural gas liquids (NGLs). The Tortoise North American Pipeline Index SM is a float adjusted, capitalization-weighted index of energy pipeline companies domiciled in the United States and Canada. The Tortoise MLP Index is a floatadjusted, capitalization-weighted index of energy master limited partnerships. The Tortoise indices are the exclusive property of Tortoise Index Solutions, LLC, which has contracted with S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC) to calculate and maintain the Tortoise MLP Index, Tortoise North American Pipeline Index SM and Tortoise North American Oil and Gas Producers Index SM (the Indices ). The Indices are not sponsored by S&P Dow Jones Indices or its affiliates or its third party licensors (collectively, S&P Dow Jones Indices LLC ). S&P Dow Jones Indices will not be liable for any errors or omission in calculating the Indices. Calculated by S&P Dow Jones Indices and its related stylized mark(s) are service marks of S&P Dow Jones Indices and have been licensed for use by Tortoise Index Solutions, LLC and its affiliates. S&P is a registered trademark of Standard & Poor s Financial Services LLC ( SPFS ), and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC ( Dow Jones ). The Tortoise MLP Index is a float-adjusted, capitalization-weighted index of energy MLPs. The Tortoise Midstream MLP Sub Index is comprised of all constituents included in the following sub sector indices: Crude Oil Pipelines, Gathering & Processing, Natural Gas Pipelines, and Refined Products Pipelines. The Tortoise North American Pipeline Index SM is a float-adjusted, capitalization-weighted index of pipeline companies (MLPs, corporations, LLCs) domiciled in the U.S. or Canada. The Tortoise North American Oil and Gas Producers Index SM is a float-adjusted, capitalization- weighted index of North American companies engaged primarily in the production of crude oil, condensate, natural gas or NGLs. The S&P 500 Index is a market-value weighted index of equity securities. The S&P Energy Select Sector Index is a modified market capitalization-based index of S&P 500 companies in the energy sector involved in the development or production of energy products. The FTSE NAREIT All Equity REITs Index is an unmanaged, capitalization-weighted index of all U.S. equity real estate investment trusts. The S&P Utilities Select Sector Index is a modified market-cap weighted index composed of constituents of the S&P 500 Index in the utilities sector. The Barclays U.S. Aggregate Bond Index is an unmanaged index comprised of government securities, mortgage-backed securities, asset-backed securities and corporate securities to simulate the universe of bonds in the market. The maturities of the bonds in the index are over one year. ¹ Energy Information Administration, April PIRA Natural Gas, March Energy Information Administration, March 2018

7 Page 6 Tortoise North American Pipeline Index SM, Tortoise North American Oil and Gas Producers Index SM, Tortoise MLP Index (the Indices ) are the property of Tortoise Index Solutions, LLC, which has contracted with S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices, LLC) to calculate and maintain the Indices. The Indices are not sponsored by S&P Dow Jones Indices or its affiliates or its third party licensors (collectively, S&P Dow Jones Indices ). S&P Dow Jones Indices will not be liable for any errors or omission in calculating the Indices. Calculated by S&P Dow Jones Indices and its related stylized mark(s) are service marks of S&P Dow Jones Indices and have been licensed for use by Tortoise Index Solutions, LLC and its affiliates. S&P is a registered trademark of Standard & Poor s Financial Services LLC ( SPFS ), and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC ( Dow Jones ). It is not possible to invest directly in an index.

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