NRGX - NRGX: Nothing Special

2023-07-20 17:57:15 ET

Summary

• The Pimco Energy & Tactical Credit Opportunities Fund is trading at a significant discount to its NAV.
• The fund's dividend yield is around 5.5% annually, which is not impressive for an energy-focused instrument, especially considering its high expense ratio of 1.76%.
• Despite a discount to NAV of over 15%, the fund's fixed-income investments have been hit by rising interest rates, and its repo financing and swaps are likely to be more expensive upon renewal.

Recently, I stumbled upon a CEF, which focuses on Energy - Pimco Energy & Tactical Credit Opportunities Fund (NRGX). The thing that caught my attention was the quite significant discount that the fund is trading, compared to its NAV. However, after looking at the instrument in more detail, I don't think that if offers an advantageous opportunity. Its fixed income exposure seems to be a drag in the current environment and the dividend yield is not impressive for the Energy space, especially if the considerable expense ratio is taken into account.

NRGX overview

The Energy and Tactical Credit Opportunities Fund is a closed-end fund ((CEF)) managed by PIMCO, which is an investment management company, specializing in fixed income. The primary objective of the fund, according to PIMCO is total return, while current income generation has a secondary role. PIMCO states that NRGX should have at least 2/3 of its investments in energy investments, including MLPs. However, for regulatory purposes, the weighting of the latter is capped at no more than 25% of total assets in the latter.

Looking at the fund's characteristics, the discount of over 15% to NAV is standing out. Another notable characteristic is the total expense ratio standing at 1.76%. The dividend yield is around 5.5% on an annualized basis, which although decent is nothing special for an energy focused instrument. Shareholders receive their distributions on a quarterly basis, providing a regular income stream.

Holdings overview

While this CEF is more tilted towards equity, PIMCO stayed true to its nature and added a considerable fixed income flavor. Looking at the entire portfolio holdings of the fund, it appears that it has more than long exposure to fixed income securities is more than 46%, which however is reduced on a net basis by the leverage that NRGX uses, the majority of which is a reverse repo of US$137.6M with the Canadian Imperial Bank of Commerce. This agreement is due in few days - 27 July 2023 and renewing it could be more expensive as interest rates continues to climb in the meantime.

Fixed income aside, equity indeed takes the largest portion of NRGX's holdings - over 63%. Energy equity investments account for nearly 55.6% of the total, while investments in MLPs have a little over 6% weighting. The biggest single position of the fund by far is Venture Global LNG, an owner and operator of LNG facilities, which accounts for close to 12.2% of total net assets. Unfortunately, this company is not public, hence doesn't have a market price. However, it has a credit rating of B, assigned by Fitch.

Other than that, the portfolio is full of dozens of other instrument, including various derivatives. The most notable are probably the swaps, through which NRGX receives exposure to equities, mostly MLPs.

Performance and potential

Since its inception in the beginning of 2019, NRGX has achieved total return (including dividends) of a little over 15%, which is approximately 3.1% CAGR. This result is below both the MLP's specialized Alerian MLP ETF ( AMLP ) and the US energy focused Energy Select Sector SPDR® Fund ETF ( XLE ). Still, the discount to NAV of NRGX may seem attractive at more than 15%. The problem is that since 2020, the discount has always been there and it seems there's no upside triggers, which may lead to closing it.

What's more, the fixed income investments of the funds have been hit by raising interest rates and their market value has melted to around US$382M, compared to a total notional of US$421.4M as of 30 June. Furthermore, the repo financing and most swaps are expiring within a year and renewing them would likely be more expensive as interest rates have risen in the meantime. The best scenario for NRGX seems monetary policy pivot, which could reverse some of the fixed income unrealized losses.

Conclusion

Despite what appears to be a significant discount to NAV, I just don't see the case for considerable share price appreciation of NRGX. The dividend yield, although decent, is nothing special in the context of energy focused funds. For example, the MLPs focused ETF - AMLP offers a much higher dividend of 8.5%, while having a much lower expense ratio. As far as NRGX goes, the fixed income exposure seems to be a drag at the moment, while expenses may soon increase as repos and swaps are being renewed in the current interest rate environment.

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