Hello, I am Matt Sallee, Energy Portfolio Manager at Tortoise. Thanks for joining us in this week’s Tortoise QuickTake Podcast.
In an otherwise quiet week for energy, there was plenty of macro news for the market to digest. First, let me start with a “Trumpdate.” The President was in Europe last week to commemorate the 75th anniversary of D-Day. During the visit, he managed to generate plenty of buzz, first calling the mayor of London a “stone cold loser,” I mean, I’ve never even heard that one before. Next, in what had to be one of the most awkward meetings of all time, President Trump and Queen Elizabeth met Monday. I found myself keeping an eye on the news coverage waiting uncomfortably for something hilarious to happen. Well, for better or worse, I guess better, the worst thing that happened was a slight breach of etiquette when he touched the Queen which, apparently, you’re not allowed to do. Who knew! This was followed by thousands of protesters who took to the streets with the 20’ tall Trump baby blimp to demonstrate their disapproval for the President. On a more serious note, Wednesday’s and Thursday’s activities were headlined by D-Day commemoration ceremonies that, as a distant observer, looked to be incredibly powerful and I’d like to recognize all those who served, and currently serve, to keep the world safe and free.
Moving on, the big market news last week was Fed President Jerome Powell signaling openness to a rate cut if needed. This action would be taken in response to the economy softening from uncertainty due to the ongoing trade disputes with China, Mexico and others. I found this fairly surprising given prior comments from the Fed and the fact that rates are already ridiculously low. Apparently, the market was surprised too and the Dow jumped over 500 points following the comments.
The possibility of a cut gained momentum Friday after a soft jobs number leading the market to rally further on increasing potential for a cut. I’m not buying it.
We were on the road last week at the investor day for one of the world’s largest LNG exporters, Cheniere (LNG), and came away with several meaningful takeaways.
- As expected, Sabine Pass Train 6 received final investment decision. Also, with some debottlenecking and efficiencies, it increased capacity guidance per train by a little over 4%. This led the company to increase total run-rate EBITDA guidance to a $5.4 billion midpoint, translating to $9.00 per share of distributable cash flow. Not bad for a $65 stock. The cash flow per share guidance is up 12.5% thanks to Train 6 and the debottlenecking.
- The company also provides much-anticipated capital allocation details. The plan calls for improving the balance sheet by reducing $3-4 billion of debt through the early 2020s, targeting mid to high 4x leverage metrics. Also, it plans to repurchase $1 billion of stock over the next three years and while it didn’t initiate a dividend it will revisit annually and implement as capital needs decline.
- And, finally, the company announced a new capacity agreement with Apache (NYSE:APA). This is its first producer customer and an evolution of the structure where the contract effectively represents a fixed tolling fee to Cheniere which will market the gas for Apache and give it the spread between Permian and international gas prices. I’m guessing other producers would be very interested in this contract type.
Speaking of LNG, America is exporting more “Freedom Gas” than ever, in fact Bloomberg recently ran a story that because of the emergence of cheap U.S. gas globally, Japan is going to idle some coal capacity for the near term and increase imports of LNG to fuel power generation. This is a big deal because it doesn’t have the grid flexibility that exists in the U.S. to make a short-term switch. It has to make the commitment to shift generation for several months which it feels comfortable doing, thanks to the U.S. supply in the market. And, two days later its Ministry of Finance published a report indicating the shift to LNG may be a longer-term move and it increased the long-term LNG demand forecast 5% which, combined with renewable power, will replace coal and nuclear to achieve economic and environmental benefits. This reminds me, a recent study by the Paris-based International Energy Agency calculated that if all coal-fired generation was replaced with natural gas it would eliminate enough CO2 to achieve nearly half of the UN’s Climate Change Panel 2050 emission goal. This is not only realistic but it could be accomplished long before 2050.
I’ll finish with a comment on performance. Midstream continued its trend of recent resilience, adding nearly 3% in the past week despite huge swings in oil prices and a double-digit loss in NGL prices. It’s nice to see the correlation breaking down recently. It’s about time.
Disclosure: I am/we are long 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 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.