TortoiseEcofin
July 01, 2019
Tortoise specializes in essential assets and income investing.

No Fireworks Expected at the Upcoming OPEC Meeting

  • U.S. crude oil inventories fell, sparking a rally in crude oil prices
  • In company news, Antero Resources announced well cost reductions and Gaslog Partners agreed to eliminate IDRs
  • Gulf Coast refiners stand to benefit from Philadelphia Energy Solutions recent refinery closure

Hello. I am Tortoise Managing Director and Portfolio Manager Brian Kessens with this week’s QuickTake podcast. A long awaited crude oil inventory draw finally arrived. In last week’s weekly inventory report, U.S. crude oil inventories fell nearly 13 million barrels with gasoline and diesel both also declining. Leading to the draw, exports reached an all-time high of 3.77 million bpd while imports fell to their lowest level since April. Expectations were also calling for a draw, though at a much smaller 2 million barrels. The news sparked a rally in crude oil prices, which finished the week higher by 3%. Energy stocks didn’t fare quite as well, finishing mostly flat across the energy value chain.

Moving to news: Antero Resources announced a plan targeting an additional 10% well cost reduction by 2020. Where do the cost savings come from? Service cost deflation, self-sourcing of sand and completion logistics, operational efficiencies and new produced water cost-savings initiatives. Further, Antero said that the new produced water transportation cost savings initiatives will lead to 20% lower lease operating expenses. Our takeaways are that the lowest cost producers are continuing to drive break-even costs even lower, and that service providers need to be prepared for continued revenue pressure from their producer customers.

Simplifications continued in the MLP sector. Last week Gaslog Partners (GLOP) agreed to exchange equity units for the elimination of its incentive distribution rights. The deal is immediately accretive to Gaslog Partners’ DCF per unit while the multiple of about 16x cash flow is consistent with recent precedent transactions. We view the transaction positively as it facilitates growth through a lower cost of capital, simplifies the structure and improves parent and partnership alignment. Further, the company transports LNG by marine vessel under long-term charters. We expect the company to continue to benefit from increased demand for LNG over the next decade.

After last week’s fire at the Philadelphia refinery, this week the company announced that the refinery would close and subsequently be put up for sale. The refinery, with 335,000 bpd of capacity, is the biggest on the east coast. Yet while large, the facility historically struggled financially. In fact, the refinery emerged from a bankruptcy restructuring last year, now owned by a private equity contingent. So the decision is not too surprising. What it does mean is that gasoline and diesel prices are likely to be higher for east coast customers with consequently higher margins for other east coast refiners. Any supply shortage fears however are unfounded as imports and greater movement of supply from the Gulf Coast to the Northeast can adequately make up for lost Philadelphia production. It is this ease in ability to supply the Northeast with refined product that partly explains the financial trouble historically. The other part is that the refinery does not have any competitive advantage in sourcing crude oil – it is not close to supply sources and unable to refine heavier crude oils. Gulf Coast refiners on the other hand benefit from proximity to supply and complexity that allows for refining several types of crude oils. The Philadelphia closure highlights those advantages held by others.

This week OPEC meets on Monday and Tuesday, though we don’t anticipate any fireworks. We expect the existing production curtailment agreement to be extended through year-end and that crude oil prices can firm up upon greater supply certainty. With the markets closed on Thursday for Independence Day in the U.S., the end of this week could be less newsworthy. Happy Birthday USA!

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.

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