Chevron's Announced Acquisition Of Anadarko Left The Market Wondering Who's Next

About: Chevron Corporation (CVX), APC, EPD
by: Tortoise

Chevron's plan to acquire Anadarko highlights the value of the Permian basin, LNG capacity and midstream connectivity.

Enterprise Products Partners reviewed their big cash flow tailwind and several large scale projects at their investor day event.

Enterprise is bullish on ethylene and propylene along with the IEA who projects demand for plastics to double over the next 20 years.

Welcome to the Tortoise QuickTake podcast. Thank you for joining us. Today, Tortoise provides a timely update on trending topics in the market.

Hello, I am Matt Sallee, Energy Portfolio Manager at Tortoise.

Chevron (NYSE:CVX) stole the show last week with their $50 billion acquisition of Anadarko (NYSE:APC) announced Friday morning. The deal valued APC at 6.6x EBITDA and represents a 39% premium to their prior close. In our view, the deal highlights the value of the Permian basin, LNG capacity and midstream connectivity. The news got the entire space moving with most Permian E&Ps gaining several percent as the market asked, “who’s next?” I’m not going to name names, but our expectation is there will be additional deals as the majors, including Exxon (NYSE:XOM), Occidental Petroleum (NYSE:OXY) and Shell (NYSE:RDS.A) (NYSE:RDS.B) are looking to expand shale asset footprints. We expect they will be looking at independents with a large Permian footprint that ideally offsets existing acreage.

Another big industry event last week was the Enterprise Products (NYSE:EPD) investor day. I’ll hit some key takeaways and interesting tidbits but first who is Enterprise?

Well, first off, they’re one of our largest portfolio holdings with $7 billion in cash flow last year and enterprise value of $90 billion. They are the self-proclaimed “Amazon of energy” and why is that? They don’t produce anything but they handle all the production and they have a world-class distribution system that takes it to consumers. By the way, using the numbers I just referenced, Enterprise has an enterprise value to EBITDA of 12.9x. Compare this to Amazon (NASDAQ:AMZN) which trades at 32.9x EBITDA. For fun, if EPD were a tech company and closes that 20 turn discount, the implied stock price would be $93 or triple the current value… I’m just saying.

Believe it or not, I did get more out of the investor day than just my new EPD price target. The key fundamental takeaways are their big cash flow tailwind from numerous projects put in service in 2018 and ramping throughout 2019 plus several more large scale projects entering service in 2019. Some of the noteworthy projects in this list include one new crude and one new NGL line out of the Permian, a pipe being converted from NGL to crude service, several processing plants, one PDH unit and one IBDH unit. If you’re wondering what the heck a PDH and IDBH are, look around your office and chances are there are dozens of objects within reach that are, at least partially, made from the materials produced by these plants. If you want to see the full names of these facilities you can reference the transcript but I’m not trying to pronounce them publicly [PDH: propane dehydrogenation; IBDH: isobutane dehydrogenation].

These and many other current projects drive visible growth for the next few years and beyond that, the company has another >$5 billion of investment under evaluation. Importantly, the company can fund these projects without issuing new shares, so it is accretive to cash flow per unit. For 2019, the plan is to take this cash flow growth and build coverage while maintaining 2% distribution growth. But in early 2020 the company will revisit their growth rate, and we think will increase it to around 4-6%. They also updated the market how they are viewing their $2-billion stock buyback program. I was a little disappointed with their color that it will only be used opportunistically in the case of price dislocation similar to what we saw in Q418. As expected on the structure question, the company largely dismissed the idea on converting to a c-corp. I can’t blame them, why convert and have a future tax liability even if you aren’t paying in near term. Also, who knows if corporate rates will remain at the new, lower level for the long term. And, finally, if you want to convert to attract “the generalist investor,” look no further. EPD already counts BlackRock (NYSE:BLK), T. Rowe (NASDAQ:TROW) and Fidelity among some of their investors.

On the macro side, EPD’s fundamentals group gave a thorough energy value chain update. Highlights include a projected 35–50 years of drilling inventory in the Permian, making it one of the key supply growth source for the world in the future. And, according to the company, we’re going to need it. India and China currently consume about 10% and 30%, respectively, of the energy compared to the U.S. on a per capita basis. As those countries urbanize and develop they will almost certainly require vast increases in energy. For perspective since 2000, non-OECD Asia’s energy demand has increased about 80%.

They are particularly bullish on ethylene and propylene which are the key building blocks used in a large portion of manufactured goods you see around your house, car, office, etc. In fact, the IEA projects demand for plastics to double over the next 20 years. Not a bad outlook for EPD and U.S. energy in general.

Disclosure: I am/we are long EPD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The S&P 500® Index i s a market-value weighted index of equity securities.

The PCE inflation rate is the Personal Consumption Expenditures Price Index. It measures price changes for household goods and services. Increases in the PCEPI warn of inflation while decreases indicate deflation.

Broad Energy = 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.

Producers = Tortoise North American Oil & Gas Producers IndexSM

The Tortoise North American Oil & Gas Producers IndexSM is a float-adjusted, capitalization weighted index of North American energy companies primarily engaged in the production of crude oil, condensate, natural gas or natural gas liquids (NGLs). The index includes exploration and production companies structured as corporations, limited liability companies and master limited partnerships but excludes United States royalty trusts.

MLPs = The Tortoise MLP Index® is a float-adjusted, capitalization weighted index of energy master limited partnerships (MLPs). The index is comprised of publicly traded companies organized in the form of limited partnerships or limited liability companies engaged in transportation, production, processing and/or storage of energy commodities.

The 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) (“S&P Dow Jones Indices”) to calculate and maintain the Tortoise MLP Index®, Tortoise North American Pipeline IndexSM and Tortoise North American Oil and Gas Producers IndexSM (each an “Index”). S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“SPFS”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and, these trademarks have been licensed to S&P Dow Jones Indices. “Calculated by S&P Dow Jones Indices” and its related stylized mark(s) have been licensed for use by Tortoise Index Solutions, LLC and its affiliates. Neither S&P Dow Jones Indices, SPFS, Dow Jones nor any of their affiliates sponsor and promote the Index and none shall be liable for any errors or omissions in calculating the Index.

Disclaimer: Nothing contained in this communication constitutes tax, legal, or investment advice. Investors must consult their tax advisor or legal counsel for advice and information concerning their particular situation. This article 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. This article reflects our views and opinions as of the date herein, which are subject to change at any time based on market and other conditions. We disclaim any responsibility to update these views. These views should not be relied on as investment advice or an indication of trading intention. Discussion or analysis of any specific company-related news or investment sectors are meant primarily as a result of recent newsworthy events surrounding those companies or by way of providing updates on certain sectors of the market. Tortoise, through its family of registered investment advisers, does provide investment advice to Tortoise related funds and others that includes investment into those sectors or companies discussed in these articles. As a result, Tortoise does stand to beneficially profit from any rise in value from many of the companies mentioned herein including companies within the investment sectors broadly discussed.