FYI: Copy & Paste 7/16/14: Dimitra Defotis: WSJ
Regards,
Ted
H. Kevin Birzer of the Tortoise MLP & Pipeline Fund has averaged 24% annual returns over the past three yrs.
For investors looking for income and an energy allocation, the Tortoise MLP & Pipeline Fund has performed like a hare.
The mutual fund (ticker: TORTX ) boasts one of the top performances among an increasing variety of funds that invest in master limited partnerships, those energy pipeline and infrastructure assets with rich, tax-deferred yields. But the fund owns regular energy corporations, too, and the combo has produced a three-year annualized return of roughly 24%, and a 36% total return in the past year, well ahead of the Standard & Poor's
500 Energy Index and the benchmark Alerian MLP Index.
The fund's five co-managers look for businesses that produce double-digit cash-flow growth and collect steady fees. And with gushers from American oil-and-gas fields filling pipelines coast to coast, the fund's relatively low dividend should continue its recent growth spurt.
We asked co-manager H. Kevin Birzer to talk about picks and risks. Birzer co-founded Tortoise Capital Advisors, which is one of the largest MLP asset managers and is based in Leawood, Kan.
Barrons.com: How do you choose winners?
Birzer: It comes down to: Do these assets have to exist? Second question is: Do they have the right management team? Third, we don't want a lot of cash flow volatility risk. We look at the nature of the assets and the contract structure. Refiners have huge volatility. A pipeline, on the other hand, generally gets paid for transporting the product into the refinery and out of the refinery based on volume. There has been a heck of a lot of activity with the shale plays, and pipelines tend to be the cheapest, easiest way to get those hydrocarbons to market.
Manager's Bio
Name: H. Kevin Birzer
Age:
54
Title: Co-founder, Tortoise Capital Advisors and co-portfolio manager, Tortoise MLP & Pipeline Fund
Education: B.S., University of Notre Dame; M.B.A., New York University
Free Time: Reading, co-founder and volunteer with The Giving Grove, a Kansas City nonprofit that develops inner city edible tree gardens
Q: What names do you like?
A: Our top holding today is Spectra Energy ( SE ), a large, diversified pipeline company that is investment-grade rated and has a $28 billion market capitalization. They own Spectra Energy Partners ( SEP ), an MLP. Spectra Energy has a great footprint of assets. Its Texas Eastern Pipeline goes from Texas up to New York City carrying natural gas right smack dab through Pennsylvania, where the Marcellus Shale has gone from virtually no production to about 12 billion cubic feet per day. Nearly 20% of the U.S. supply of natural gas now comes through Pennsylvania. It is just crazy how this has changed over the last five years. Spectra is in the process of making that pipeline bidirectional, to reverse gas from New York and take it back to Tennessee or other parts of the country. That is a great asset. Spectra also has a valuable pipeline from Canada's oil sands that extends to Missouri. They have about $20 billion in pipeline growth projects [with] pretty good commitments up front for both return of your capital as well as return on your capital during the contract period. That means low risk. Spectra can grow its distributions at about a 10% rate for many years to come. It yields about 3%. Probably 14% [annual] returns over the long term.
Q: Will pipelines become obsolete as oil and gas production dwindles?
A: In some cases, yes. There are some pipelines that are so, so strategic and they are sitting on a gold mine. Spectra's pipelines are sitting on some gold mines.
Fund Facts
(as of July 10, 2014)
Tortoise MLP & Pipeline Fund (TORTX)
Assets: $1.8 billion
Expense Ratio: 1.33%
Front Load:
5.7
5%
Annual Portfolio Turnover: 2
5%
Yield: 1.2%
Source: Morningstar
Q: Spectra stock is near a
52-week high. How much upside is there?
A: We have added to our position over time, from $2
5, and it is near $42 today. As a long-term investment I think it is a strong buy. We do a long-term, discounted cash flow analysis. No matter how you slice and dice it, you end up with: the current yield, yield growth, and visibility into that growth. In New York City, you are not going to heat your home this winter if Spectra doesn't exist.
Q: What other names do you like?
A: Williams Cos. ( WMB ), a corporation, as opposed to Williams Partners ( WPZ ), the MLP. It operates 1
5,000 miles of interstate gas pipelines, more than 10,000 miles of oil and gas gathering pipelines. It is a pure play general partner on Williams Partners and Access Midstream Partners ( ACMP ), which are to merge. Williams got rid of a lot of its exploration and production assets. They now have one of the biggest gathering and processing businesses in the country. Williams has a footprint in all the big plays in the country except the Bakken. It is an investment-grade-rated company with $40 billion in market-equity capitalization. They are just getting paid for moving products from point A to point B; about 80% of their business will be fee-based after the merger they are doing.
Q: What would be the case for buying it here?
A: Similar to Spectra, yield plus growth. The company says it can grow cash flow 1
5% annually every year between now and 2017. Williams Cos. has a 2.9% yield and if you add 1
5% growth, you have upper-teens returns. This isn't a trade, this is a long-term investment.
Top 10 Holdings
(as of May 31, 2014)
Spectra Energy (SE)
Williams Cos. (WMB)
Oneok (OKE)
NiSource (NI)
EQT (EQT)
Enbridge (ENB)
Plains GP Holdings (PAGP)
Enterprise Products Partners (EPD)
TransCanada (TRP)
Pembina Pipeline (PBA)
Source: Tortoise Capital Advisors
Q: Why aren't we talking about price-to-earnings ratios?
A: We can talk about P/E, we can talk about enterprise value to earnings before interest, taxes, depreciation and amortization (Ebitda), we can talk about discounted cash flow. In my mind this is one segment of the world where just talking about yield and growth is the best proxy for returns.
Q: Another pick?
A: Oneok ( OKE ) is the general partner, a corporation, that controls what happens at the master limited partnership, Oneok Partners ( OKS ). Two different legal entities, but their assets are extremely closely tied.
Q: The general partner gets a rising percentage of the distribution. What else do you like about Oneok the corporation?
A: About two-thirds of its business is fee-based -- very low risk and a great investment. And, they have a big footprint in the Bakken shale, unlike Williams and Spectra. They have about $2 billion in their construction backlog and $3 billion to $4 billion in unannounced projects. Their market cap is about $14 billion. They think they can grow their distribution at least 10% per annum for the next several years. I get a mid-3% yield with 10% growth. So 13% returns is a heck of a good story.
Q: You see big opportunities in the Permian basin in Texas. Who benefits?
A: Plains All American Pipeline ( PAA ). We own the general partner, Plains GP Holdings ( PAGP ). Plains probably touches 20% of the crude oil in our country every single day. If Plains All American didn't exist, you'd have a problem. Plains also happens to have this great footprint in West Texas. As new pipelines are built, Plains benefits.
Q: Barron's has questioned how MLPs account for maintenance capital expenditures, including Kinder Morgan ( KMI ), which Tortoise owns. What are your thoughts?
A: You have to be careful: What makes up that distributable cash flow is operating income or Ebitda. You start with Ebitda, you back out interest expenses or your debt burden, and you back out maintenance capital expenditures. That leaves distributable cash flow -- what's available to pay out. There could be an inherent conflict of interest: Management may want to skimp on maintenance capital expenditures because that would increase what is paid out -- distributable cash flow. If a management team is trying to cut corners, cut the maintenance capital expenditures, you could have an issue. We ask: Have the companies reinvested appropriately? Have they accounted for it appropriately? Have they disclosed appropriately to investors? We invest in managements that are running assets for the long term.
Q: What else do you worry about?
A: Interest rate risks. Broad economic risk. The re-plumbing issue: There are basins that probably aren't as valuable anymore. The Haynesville three to five years ago was a hot natural gas play, but it is not as economic to get natural gas out of that area today with natural gas prices in the range of $4.
50 to $4.7
5 per million British thermal units. To get Canadian oil sands out of the ground, oil needs to be priced at $70 to $80 a barrel. If oil prices drop to $70 or $80, you may not have a whole lot going on in Canadian oil sands. I worry about regulation, especially tax changes but also about fracking. I worry about what is allowed as an MLP asset.
Q: What kind of returns do you expect from pipelines in 2014?
A: Our expectation from the day we started this company 12 years ago until today really has not changed a lot: low double digits, 10% to 14%. Ten years ago I would have said yields of 6% and distribution growth of 4% to 6%. Today, I probably would say lower yields, probably 4%, but higher growth and 10% to 14% returns long term.
Q: Thanks.
M* Snapshot Of: TORTX:
http://quotes.morningstar.com/fund/f?t=TORTX®ion=usa&culture=en-US
