NTG: Trading At An Enormous Discount And Benefiting From Positive Trends

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Tortoise Midstream Energy Fund invests in a 25-asset portfolio that consists of master limited partnerships.The NTG fund has outperformed the S&P 500 Index over the past few years, which any investor ...

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It provides an easy way for income-seeking investors to purchase a portfolio of midstream master limited partnerships without needing to deal with the tax problems that can be associated with these securities. This can be critical for some investors due to tax rules that make it difficult to include a company structured as a master limited partnership in a retirement account or other tax-advantaged structure. The fund also provides an easy way to obtain a diversified portfolio of midstream partnerships and corporations without purchasing several companies individually. As is the case with most midstream companies, the Tortoise Midstream Energy Fund provides its owners with a very attractive yield of 7.51% at the current share price. The current yield of the Tortoise Midstream Energy Fund is quite reasonable, but it is not the highest that is currently available in the sector. We can see that here:   Fund Name Morningstar Classification Current Yield   Tortoise Midstream Energy Fund Equity-MLP 7.51%   ClearBridge Energy Midstream Opportunity Fund (EMO) Equity-MLP 7.17%   Kayne Anderson Energy Infrastructure Fund (KYN) Equity-MLP 8.90%   Neuberger Berman Energy Infrastructure and Income Fund Inc (NML) Equity-MLP 9.37%   NXG Cushing Midstream Energy Fund (SRV) Equity-MLP 13.83%   Click to enlarge As we can see, the current yield of the Tortoise Midstream Energy Fund is one of the lower yields available among the various midstream funds today. This might, admittedly, reduce the appeal of the fund according to many investors. After all, many of those individuals who are looking for an income investment would prefer to get the highest yield that they possibly can. However, in most cases, when a fund has a lower yield than its peers, it is a sign that the market believes that the yield is sustainable based on the fund's current portfolio performance. This is always nice because nobody wants to suffer a distribution cut in an inflationary environment. As regular readers might remember, we previously discussed the Tortoise Midstream Energy Fund in early November. It would be an understatement to say that the equity market has delivered a strong performance since that time. At the time that this article was published, the equity market was in the very early stages of its bull run that started in November 2023 and continued through to the present day. As a result, we might expect that the share price performance of the Tortoise Midstream Energy Fund has been pretty good since the date that my previous article was published. This assumption has proven to be correct, as the fund's shares have appreciated by 19.19% since the date that the previous article was published: Seeking Alpha As we can immediately see, the Tortoise Midstream Energy Fund has outperformed the S&P 500 Index (SP500) since the date that the previous article was published. This is almost certainly going to appeal to any potential investor, regardless of their goals. After all, who doesn't like to outperform the market? However, it is probably a good idea to note that this fund was underperforming the S&P 500 Index before mid-July 2024, so it certainly will not always be the case that it will outperform the broader market. As I explained in a previous article: A simple look at a closed-end fund's price performance does not necessarily provide an accurate picture of how investors in the fund did during a given period. This is because these funds tend to pay out all of their net investment profits to the shareholders, rather than relying on the capital appreciation of their share price to provide a return. This is the reason why the yields of these funds tend to be much higher than the yield of index funds or most other market assets. When we include the distributions paid by the Tortoise Midstream Energy Fund from early November 2023 through the present in the performance chart above, we get this alternative chart of its performance: Seeking Alpha Here it immediately becomes apparent that investors would have been better off-putting money into the Tortoise Midstream Energy Fund than into the S&P 500 Index. This is mostly because of this fund's higher yield relative to the index, as well as the fact that its share price outperformed. Once again though, this will not always be the case, as shown by the simple fact that this fund's total return over the past five years has been much worse than that of the S&P 500 Index: Seeking Alpha For the purposes of constructing this chart, I added in the Alerian MLP ETF (AMLP), which invests in similar assets to this fund. This was simply to show that midstream investors in general did not lose money just because of the 2020 industry collapse, as the industry recovered pretty quickly. The 51.29% loss suffered by this fund was mostly a result of the leverage that it had at the time. As we will see from the remainder of this article, the fund's management mostly learned from their mistakes heading into that crisis, and the fund no longer has the leverage that it once had. About The Fund According to the fund's website, the Tortoise Midstream Energy Fund has the primary objective of providing its investors with a high level of total return. This is not exactly surprising, as most midstream funds claim a similar objective. However, the fund's website does not provide any real insight into the fund's strategy. All it states is this: Tortoise Ecofin The only thing that we can really take away from this description is that the fund will include natural gas companies in some fashion. The website does not provide any information about whether the fund invests in common equities, preferred equities, bonds, or some combination of these securities. It also does not say anything about what entities will be included in the portfolio, apart from a reference to natural gas pipeline operators and possibly renewable energy companies. That could mean a great many things, depending on how broad a definition that one wishes to apply to this description. In addition, we have no information about whether the fund can potentially include companies other than natural gas pipelines. Fortunately, the fund's semi-annual report provides a better description of the fund's strategy: NTG seeks to provide stockholders with a high level of total return with an emphasis on current distributions. NTG invests primarily in midstream energy equities that own and operate a network of pipeline and energy related logistical infrastructure assets with an emphasis on those that transport, gather, process and store natural gas and natural gas liquids. NTG targets midstream energy equities, including MLPs benefiting from U.S. natural gas production and consumption with minimal direct commodity exposure. This provides more information about the fund's portfolio than the website, as it immediately tells us that the fund buys common equities of midstream pipeline operators. As such, the fund's stated objective of providing its investors with a high level of total return makes a great deal of sense because equities are total return vehicles by their very nature. A closer look at the fund's portfolio reveals that it is, indeed, invested primarily in common equities issued by midstream companies and partnerships. The semi-annual report states that the fund had the following asset allocation on May 31, 2024:   Asset Type % of Net Assets   Common Stocks 94.20%   Master Limited Partnerships 27.5%   Preferred Stock 1.3%   Money Market Fund 0.2%   Click to enlarge The \"Master Limited Partnerships\" allocation consists entirely of common equity partnership units issued by these companies, as we can clearly see here: Fund Semi-Annual Report There were only four master limited partnerships in the fund's portfolio as of May 31, 2024, and they are all among the best companies in the sector. Western Midstream Partners, LP (WES), Enterprise Products Partners L.P. (EPD), and MPLX LP (MPLX) have all been among the favorite partnerships of most investors in this sector for quite some time. Energy Transfer LP (ET) has a bit of a mixed reputation, as there are still some investors who distrust the company's management, but we cannot deny the strong performance that the company has delivered in the market over the past few years. Over the past three years, Energy Transfer has delivered a 109.48% total return: Seeking Alpha As we can see, only Western Midstream Partners has outperformed Energy Transfer recently. All four of these companies have substantially outperformed the S&P 500 Index. Thus, the conclusion is that the fund has made some excellent choices here regarding the midstream master limited partnerships that it has included in its portfolio. The Tortoise Midstream Energy Fund does not only have a very limited number of master limited partnerships in its portfolio. The fund's common stock holdings are also fairly limited in number: Fund Semi-Annual Report There are 21 companies shown above, so when added to the four master limited partnerships, we see that there are only 25 companies in the portfolio. The preferred equity holding that was mentioned earlier is an issue by EnLink Midstream, LLC (ENLC), which is also included in the fund's common stock portfolio. Thus, it does not change the fact that the fund only has economic exposure to 25 companies. This is far lower than most other equity closed-end funds, although it is not unusual for a midstream fund to have only a few companies in the portfolio. For example, this table shows the number of companies included in the portfolios of each of this fund's peers:   Fund Name Number of Holdings   Tortoise Midstream Energy Fund 25   ClearBridge Energy Midstream Opportunity Fund 24   Kayne Anderson Energy Infrastructure Fund 47   Neuberger Berman Energy Infrastructure and Income Fund 31   NXG Cushing Midstream Energy Fund 46   Click to enlarge (All figures come from the most recent holdings report for each respective fund). One of the reasons for this is that there are not very many companies in the midstream energy sector. The Alerian MLP ETF only has sixteen companies in it, after all. As most followers of this sector are well aware, there has been a great deal of consolidation taking place over the past few years. This has reduced the number of possible investments available for a fund like this one to invest in. That by itself is not necessarily a problem, as this fund makes no claims about being diversified, and it will naturally be affected by anything that has a broad sector impact on the midstream energy sector, for better or worse. With that said, there is one very positive trend going on in the sector right now. This is the steep increase in natural gas consumption from the utility sector. According to the U.S. Energy Information Administration, the nation's electric utilities increased their consumption of natural gas by 213 billion cubic feet in the first four months of 2024 compared to 2023 levels: Zero Hedge/Data from Department of Energy We can see that the consumption of natural gas by utilities was at the highest level ever recorded during the January to April period this year. This was partly due to electricity generation during that period being at its highest level in years: Zero Hedge/Data from Department of Energy This benefited the nation's midstream companies during the period due to the simple fact that someone had to carry the natural gas from storage tanks to the utilities that burned it. MPLX's second-quarter 2024 earnings results, for example, showed a fairly large year-over-year increase in natural gas gathering and processing activity compared to the previous year's quarter. As I explained in a previous article, it seems almost certain that electric consumption will increase over the coming years in the United States. The deployment of artificial intelligence data centers and the widespread adoption of electric cars, for example, both require massive amounts of electricity. The limitations to wind, and solar technology almost certainly mean that this incremental electricity consumption will not be satisfied solely by renewable sources. I will admit that I doubt that either of these technologies will be deployed or adopted as quickly as their proponents predict, but it still seems likely that electricity consumption will increase in the coming years. At least some of this incremental electricity will have to be generated by natural gas, and that means that there will be more natural gas moving through the pipelines of midstream companies that supply it to the utilities. As we have been seeing in recent earnings reports from MPLX, The Williams Companies, Inc. (WMB), and a few others, growing volumes of natural gas moving through pipelines translate into higher revenue and cash flow for natural gas pipeline operators. That means that the companies held in the portfolio of the Tortoise Midstream Energy Fund should benefit from this trend. Leverage As is the case with most closed-end funds, the Tortoise Midstream Energy Fund employs leverage as a method of increasing the effective yield and total return that it earns from the assets in its portfolio. I explained how this works in my previous article on this fund:  In short, the fund borrows money and then uses this money to purchase the common equity of master limited partnerships and midstream corporations. As long as the purchased assets have a higher yield than the interest rate that the fund has to pay on the borrowed money, the strategy works pretty well to boost the effective yield of the portfolio. As the fund is capable of borrowing at institutional rates, which are considerably lower than retail rates, this will usually be the case. It is important to note though that this strategy is somewhat less effective today with interest rates at 6% than it was a few years ago when rates were basically 0%. This is because the difference between the borrowing rate and the yield that the fund can obtain from the purchased assets is a lot narrower than it once was. However, the use of debt in this fashion is a double-edged sword. This is because leverage boosts both gains and losses. As such, we want to ensure that the fund is not employing too much leverage because that would expose us to too much risk. I usually like to see a fund's leverage remain under a third as a percentage of its assets for this reason.  As of the time of writing, the Tortoise Midstream Energy Fund has leveraged assets comprising 18.20% of its portfolio. This represents a fairly significant decrease over the 22.02% leverage that the fund had the last time that we discussed it. It is not particularly surprising that the fund's leverage decreased over the ten-month period since it is usually the case that a rising share price correlates with a decrease in leverage. This is because a rising share price typically means that the fund's portfolio is growing. That was very much the case with this fund over the period. As we can see here, the fund's net asset value has increased by 19.89% since our previous discussion on the fund: Barchart This means that the fund's portfolio has increased in size over the period. If the fund keeps its debt stable, then the debt represents a smaller percentage of the portfolio today than it did before the increase in net asset value. This appears to be the case today. The current leverage of the Tortoise Midstream Energy Fund is substantially below the one-third maximum level that we would ordinarily deem to be acceptable for an equity fund. However, that does not necessarily mean that it is running a safe level of portfolio leverage for its strategy. We should compare it with its peers to see if it is excessively leveraged and exposing us to more risk than we would like. This is summarized in this chart:   Fund Name Leverage Ratio   Tortoise Midstream Energy Fund 18.20%   ClearBridge Energy Midstream Opportunity Fund 29.34%   Kayne Anderson Energy Infrastructure Fund 22.27%   Neuberger Berman Energy Infrastructure and Income Fund 17.07%   NXG Cushing Midstream Energy Fund 29.23%   Click to enlarge (All figures from CEF Data). As was mentioned in the introduction, the Tortoise Midstream Energy Fund seems to have learned its lesson about the risks of leverage following the fund's near collapse in 2020. This fund currently runs a lower level of leverage than most, but not all, of its peers. Thus, it appears that we should not need to worry too much about its leverage today. Distribution Analysis The primary objective of the Tortoise Midstream Energy Fund is to provide its investors with a high level of total return. Most midstream companies and partnerships provide a significant proportion of their total returns via dividends and distributions made to their owners, which the fund passes through to its shareholders. To this end, the Tortoise Midstream Energy Fund pays a quarterly distribution of $0.77 per share ($3.08 per share annually), which gives it a 7.51% yield at the current share price. As we can see here, this fund does not possess a particularly attractive distribution history: CEF Connect As I stated in the previous article on this fund: As we can see, the fund cut its distribution substantially back in 2020, but it had a pretty good track record prior to that year. This is something that could prove to be a turn-off to those investors who are seeking a safe and secure source of income to use to pay their bills. However, it is understandable considering that the losses that the fund took that year reduced its ability to sustain its distribution at the prior level. Indeed, the losses incurred by just about anything invested in the traditional energy sector were very severe that year and both the fund and most midstream companies went into capital preservation mode to keep their balance sheets intact. Fortunately, we can see that the fund has made some efforts to raise its distribution now that the sector has recovered. Naturally, we want to analyze the fund's ability to sustain its distribution at the current level, since we would rather not be the victims of another distribution cut. As of the time of writing, the most recent financial report that is available for the Tortoise Midstream Energy Fund is the semi-annual report that corresponds to the six-month period that ended on May 31, 2024. A link to this report was provided earlier in this article. Obviously, this is a much newer financial report than the one that was available to us the last time that we discussed this fund. So, it should work very well to update us on the fund's ability to cover its distribution. For the six-month period that ended on May 31, 2024, the Tortoise Midstream Energy Fund received $8,515,019 in dividends and distributions along with $177,575 in interest from the assets in its portfolio. However, some of this money came from master limited partnerships and so is not considered to be investment income for tax or accounting purposes. As such, the fund only reported a total investment income of $3,252,606 for the six-month period. The fund paid its expenses out of this amount, which left it with $1,961,533 available for shareholders. That was not sufficient to cover the $7,842,927 that the fund paid out in distributions over the period. Fortunately, the fund was able to make up the difference through capital gains. For the six-month period that ended on May 31, 2024, the fund reported net realized losses of $2,597,622, but this was offset by $39,969,362 in net unrealized gains. Overall, the fund's net assets increased by $29,701,389 after accounting for all inflows and outflows during the period. Thus, the Tortoise Midstream Energy Fund covered all of its distributions, with a significant amount of money left over as excess returns. It does not appear that investors need to worry much about a potential distribution cut, as this fund's coverage is solid. Valuation Shares of the Tortoise Midstream Energy Fund are currently trading at a 12.77% discount to net asset value. This is an incredibly large discount, although it is not as good as the 15.58% discount that this fund's shares have had on average over the past month. Thus, it might be possible to obtain a better price by waiting a bit but, honestly, a double-digit discount is generally a good entry point for a fund. The current price looks acceptable for anyone interested in purchasing this fund. Conclusion In conclusion, the Tortoise Midstream Energy Fund is a reasonable way to bet on the midstream sector. The midstream sector is currently benefiting from some positive trends, including the rising consumption of electricity, as things such as electric cars and artificial intelligence require enormous amounts of electricity that needs to be supplied by natural gas. Tortoise Midstream Energy Fund trades at a large discount to its fair value and appears to be fully covering its distribution. However, its yield is not as attractive as some of its peers and there are still some investors who have memories of the large losses that this fund suffered back during the pandemic, which may lead some to overlook it. That certainly explains the large discount here.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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