NTG - NTG: 9% Yield From This Natural Gas Pipelines CEF

2023-04-05 05:35:36 ET

Summary

• Tortoise Midstream Energy Fund is a closed-end fund focused on MLP equity.
• The differentiator for this CEF versus its peers is its focus on natural gas infrastructure.
• The CEF is currently trading with an -18% discount to NAV.
• The top 10 names make up over 71% of the entire fund.

Thesis

Tortoise Midstream Energy Fund ( NTG ) is a closed end fund aggregating MLP / C-corporates equities. As per the fund literature, the vehicle offers:

Exposure to natural gas infrastructure entities operating real, long-lived, essential pipeline and logistical assets that are actively participating in the energy evolution

The differentiator for this CEF versus its peers, is its focus on natural gas infrastructure. The vehicle had a very deep drawdown during the 2020 Covid crisis, and never really recovered:

The fund is still trading at a very deep discount of -18%, although all the underlying assets are liquid. As a reminder, CEFs trade at a discount to NAV for a variety of reasons, but the primary one is track record. From a purely market rules perspective, when market demand for the shares of the CEF is lower than the supply of shares available for purchase then the discount appears.

Natural gas has taken a pounding in the past months:

Now, if you knew absolutely nothing about the natural gas market but just took a look at this graph - would you say we are close to the top or bottom of the range here?

While natural gas transportation companies have a low beta to the actual price of the commodity, they are ultimately impacted by the capex allocated by the E&P companies and any potential increases in volumes. It does not happen overnight, but the market prices that in.

There is a severe constraint on pipeline capacity for natural gas, especially in the Appalachian Basin:

Overall, more LNG exports in the United States increases demand for North American natural gas, and that is going to tighten the U.S. market," said RBN Energy LLC analyst Lindsay Schneider. "We can produce sufficient supplies to meet that demand as long as there is pipeline capacity to get the gas to export locations."

The Appalachian Basin is the nation's largest gas-producing region, churning out more than 35 Bcf/d. Over the last decade, however, environmental groups have successfully stopped or slowed down pipeline projects and limited further growth in the Northeast.

EQT Corp. CEO Toby Rice acknowledged during the company's second quarter earnings call late last month that Appalachian pipeline capacity has "hit a wall." EQT, an Appalachian pure-play and the nation's largest gas producer, is keeping production flat as a result.

Source: Nat Gas Intel

Fundamentally NTG is capturing the proper sub-segment of the MLP market. One that will continue to generate substantial profits due to inability to build more pipeline. Similarly, with natural gas prices at cycle lows, this looks like a good time for natural gas E&Ps and transportation companies to start bottoming out.

Holdings

The fund has a very concentrated allocation to ten stocks:

The top 10 names make up over 71% of the entire fund. As an investor you are buying into these names with a 20% leverage ratio on top.

From a valuation standpoint the names in the fund look in line with the average industry metrics:

We can see that while the P/E ratio is slightly higher, the Price/Book values for the underlying names are in line. As per the fund's objective, the underlying names are mainly geared towards natural gas transportation:

The differentiator for this CEF is its allocation to natural gas infrastructure.

Premium/Discount to NAV

The fund is still trading at an enormous discount to net asset value:

As a rule of thumb, anything above a -10% discount to NAV is too wide. We would be looking for the portfolio manager to undertake more corporate actions to narrow the difference between the CEF's market price and the value of the underlying equities.

Conclusion

NTG is a closed end fund focused on MLP equities. The vehicle focuses on natural gas and liquids transportation infrastructure. The top ten names in the fund account for over 70% of the portfolio, making this fund a concentrated bet on a handful of names. Since its large drawdown in 2020 the CEF has been trading with a discount to NAV. That discount has narrowed throughout time, and today it clocks in at -18%.

From a fundamental perspective the underlying companies are not overvalued, and we are witnessing a bottoming out in natural gas prices. With the new build in pipelines severely constrained by environmentalist groups and government policy, we expect this sub-segment of the MLP market to continue to thrive as long as underlying leverage remains moderate. NTG has a liquid, moderately priced collateral, yet it trades at a substantial discount due to its poor historic performance. The fund has engineered tender offers in the past in order to tighten up that discount, but with moderate success. This CEF is an interesting play and offers a robust dividend yield with a modest amount of leverage.

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