Narrator: Welcome to the Tortoise QuickTake podcast. Thank you for joining us. Today, a senior member of Tortoise provides a timely update on trending topics in the market.
Brian Kessens: Hello. I am Tortoise Managing Director and Portfolio Manager Brian Kessens with this week’s QuickTake podcast.

Energy stocks ended last week lower with broader energy off a little over 1% and MLPs down 2%, even though oil finished slightly higher based on trade war optimism and China crude oil demand surging 9.2% year over year.

Last week was a busy one, with an electrified conference, a potential FBI investigation, and a big appetite for new debt. But first…

Another MLP eliminated its IDRs last week. Noble Midstream Partners announced a strategic review in April. The outcome of that review is the elimination of its IDRs and a dropdown of midstream assets from parent company Noble Energy for $1.6 billion. The all-in EBITDA multiple is 8x EBITDA, a lower IDR elimination multiple than precedent transactions, while the impact to cash flow is accretive. Financing for the transaction was $400 million in debt and $1.2 million of equity that included a $250 million PIPE and with the remaining consisting of equity issuance to the parent. We view the transaction favorably as it removes the uncertainty of the strategic review, with Noble Midstream gaining further scale and unit liquidity, while maintaining top-tier distribution growth of 10% and modest leverage of 3.1x. Two remaining companies yet to eliminate IDRs are Shell Midstream and BP Midstream. It is hard to forecast the timing on these given the large number of projects at the parent companies, yet know we continue to press both management teams on the issue. Stay tuned.

Last week the AP reported, based on three anonymous sources, that the FBI is investigating Pennsylvania Governor Tom Wolf’s administration related to construction permits issued for Energy Transfer’s Mariner East pipeline. The report indicated the investigation is focused on whether the Wolf Administration forced staff of the Pennsylvania Department of Environmental Protection to approve pipeline construction permits for Mariner East 2 and 2X. Energy Transfer said it has not been contacted by the FBI, the FBI neither confirmed nor denied the investigation, and the Wolf Administration said it was surprised by the report of an FBI investigation. Governor Wolf, a Democrat, said, “I welcome anybody to look at what’s going on in the administration, and if something’s not right then people shall be held to account. Openness and transparency and integrity are absolutely important to me.” Mariner East 2 and 2X are part of a series of pipelines that transport natural gas liquids from Ohio, West Virginia and Pennsylvania to Marcus Hook, Pennsylvania for domestic distribution and export to international markets. Energy Transfer is currently constructing Mariner East 2X, scheduled to be completed in mid-2020. The entire Mariner East system will represent about 6% of Energy Transfer’s EBITDA when complete. We view the risk of the FBI investigation potentially resulting in further delays for Mariner East 2X, yet given the lack of confirmation of the investigation, remain open to its implications. Energy Transfer ended the week 3% lower than the MLP market. Energy Transfer’s CFO is apparently not concerned as he bought $200,000 of his company’s stock.

Despite midstream equity underperformance recently, the credit markets continue to be supportive of midstream. Last week, high yield rated Targa Resources targeted a $750 million debt raise. The offering ended up being upsized to $1 billion in senior unsecured notes that mature in 10 years with a relatively low coupon of 5.5%. And in upstream, Diamondback Energy received an upgrade from S&P to investment grade from high yield. Lower capex in 2020 is resulting in better free cash flow metrics that are favorable to leverage metrics.

Last week we attended the largest utility conference of the year, the Edison Electric Institute, or EEI conference. Takeaways reflect the healthy fundamentals in the utility industry. The top theme was higher growth capital expenditures focused on transmission and distribution and renewables. Renewables are a big piece of the growth, spurred by the focus on reducing emissions, or said differently, retirement of coal plants, and lower costs for both solar and wind. These are key points to the Tortoise teal deal, how we see energy evolving over the long-term. Further, regulators are generally supportive of growth as evidenced by constructive rates case decisions. Also discussed, some of this growth requiring new equity. With healthy balance sheets and payout ratios, we think the amount manageable.

Sticking with utilities, late last week the Public Utility Commission of Texas did note it is recommending a disappointing 9.25% return on equity and a 40% equity ratio in Houston Electric’s pending rate case. CenterPoint Energy, owner of Houston Electric, sold off 11.5% last week in response. For now, this case remains an outlier, with future rate cases in Texas under more caution.

Tuesday of this week brings an analyst day from one of the largest energy infrastructure companies in North Amercian, TC Energy, formerly TransCanada. What to look for? Confirmation of 8-10% annual dividend growth through 2021. Another Democratic debate is scheduled for Wednesday and we’ll be at a midstream conference mid-week. Also, Friday marks the anniversary of JFK’s tragic death. And as we sit here amidst dark energy markets, we at Tortoise find our purpose partly in JFK’s words that, “we are not here to curse the darkness, but to light the candle that can guide us thru that darkness to a safe and sane future.”

Thank you for joining us. And stay tuned for our next cast. Have topics you want covered or other feedback to share? Write us at info@tortoiseinvest.com.

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