Hello. I am Tortoise Managing Director and Portfolio Manager Brian Kessens with this week’s QuickTake podcast.
Energy and the broad markets were logging a solid week last week until trade tensions escalated on Friday with China’s retaliatory tariff announcement and President Trump’s intention to respond. All-in, MLPs finished down 1.2%, the broader S&P 500 was off 1.4% and broader energy fell 1.9%. Prior to Friday, all were in the green. Crude oil as measured by WTI finished the week just shy of $54 per barrel, or down 1.4%. Trade concerns overshadowed a constructive draw in US crude oil inventories of 3.5 million barrels and Saudi Arabia indicating its production is the lowest in five years.
In midstream acquisition news last week, Pembina Pipeline Corp. (NYSE:PBA) announced the acquisition of Kinder Morgan Canada for $15 per share, or a 37% premium to the previous close. The assets fit well with Pembina’s existing footprint in Canada, with Pembina expecting $50 million in synergies with only nominal investment. Further, Pembina is acquiring the Cochin Pipeline from Kinder Morgan for $2 billion or at a 13x EBITDA multiple. The Cochin Pipeline connects Pembina’s Canadian assets to Edmonton and NGL hubs Mont Belvieu, Texas, and Conway, Kansas. The board also approved a 5% increase in the dividend upon closing. We think the transaction makes good sense for Pembina due to the strategic fit and nature of the cash flows which are supported by long-term, fee-for-service, take-or-pay contracts, with investment grade counterparties.
For Kinder Morgan (NYSE:KMI) which held a 70% stake in its Canadian public business unit Kinder Morgan Canada, expected use of proceeds is three-fold: reduce debt, invest in projects and look to potential share buybacks. And as a reminder, Kinder Morgan already committed to a 25% dividend bump in 2020.
Kinder Morgan is not the only pipeline company with capital allocation options. With midstream growth capex likely declining next year and many projects coming online generating new revenue streams, free cash flow, after dividends and capex, is set to materialize. Building on what James noted last week about takeaways from a recent energy conference, we were speaking with one large-cap midstream company about this capital allocation or that one when we were corrected in that it is not an ‘or’ decision, but rather an ‘and’ one. We expect the improvement in balance sheets and cash returned to shareholders to only accelerate next year.
On the regulatory front, the Nebraska Supreme Court approved the alternate route for TC Energy’s Keystone XL pipeline. This is a small step forward for Keystone XL, as many other approvals remain, including the likely support of the 2020 US Presidential election winner. If completed, the 830-mbpd pipeline would alleviate Canada’s pipeline transportation constraints, which are currently forcing barrels to less efficient transportation like rail.
It seems like every week we talk LNG and this week is no exception as Venture Global announced a milestone achievement - final investment decision on its Calcasieu Pass, LA LNG export project. The project, expected to start up in 2022, is backed by 20-year sales and purchase agreements with Shell (NYSE:RDS.A) (NYSE:RDS.B), BP (NYSE:BP) and Repsol (OTCQX:REPYF), among others. This announcement is particularly significant because the project (1) represents a second wave of U.S. LNG projects that will be completed between 2022 and 2025 following the first wave of completion between 2016 and 2020 and (2) the Venture Global facility will be the world’s largest scale modular LNG plant, which is designed to deliver the lowest cost U.S. LNG. Note, Baker Hughes (NYSE:BHGE) is supplying the 18 modularized trains providing 1.3 Bcf/d of capacity. Next up, look for a potential final investment decision from public companies NextDecade (NASDAQ:NEXT) and Tellurian (NASDAQ:TELL).
In other LNG news, Freeport LNG started production and Cheniere’s (NYSEMKT:LNG) Sabine Pass facility completed its scheduled maintenance. Following, LNG exports were at 6.5 Bcf on Thursday last week, an all-time high. That’s a record you can bet will be broken soon, however, as Kinder Morgan’s Elba Island export facility is expected to begin production soon.
What to take away from last week? Trade tensions remain in the spotlight as the key driver of broad market sentiment, and in energy, LNG developments accelerated while midstream transactions continue at levels around 13x EBITDA, well above the 10x EBITDA that the public markets value midstream.
This week has the potential to be a quiet one ahead of the Labor Day holiday - there are no industry conferences, the Jackson Hole central bank retreat is over and 2Q earnings reporting is through. Yet we won’t be surprised if geopolitical news keeps the market on edge as some try to enjoy the right edge of summer. We’ll be back next week to explain what might have come down. Thanks for listening.
Thank you for joining us.
Disclosure: I am/we are long KMI, TRP, PBA, LNG. 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 is 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 podcast 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 forwardlooking 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 podcast 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 podcasts. 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.