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Ecofin Water & Power Opportunities plc (EWPO)
Annual General Meeting18 March, 2016
1
MARKETS IN 2014 AND 2015
70
80
90
100
110
120
130
140
Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16
EWPO Ordinary Share NAV FTSE All‐Share Index MSCI World Index (£)
2
40
60
80
100
120
140
160
180
Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15
EWPO Ordinary Share NAV Oil Price (WTI) MSCI World Index (£)
EWPO IN THE ENERGY CYCLE
3
EWPO vs MARKETS
‐17.5‐20.0
5.4
‐0.4
1.0
‐17.6
-25
-20
-15
-10
-5
0
5
10
Calendar 2014 Calendar 2015
14.3
29.7
12.2
23.6
1.1
‐5.4-10
-5
0
5
10
15
20
25
30
35
Ords NAV Share Price
MSCI World MSCI World Utilities
FTSE All-Share MSCI World Energy
Returns in £, including dividends reinvested
4
EWPO IN 2015
• A volatile year for equity, currency and commodity markets
• Utilities as a sector underperformed the broader equity market
• Within the sector, commodity driven names were particularly hard hit
• Performance: Europe: good stock selection Exposed to dollar strengthChina: reduced in April
GearingEnergy exposure: direct (Lonestar) and “energy‐related” (gas pipelines)US equities: unregulated utilities; yieldcos
• Lonestar: operational success but share price fell with oil prices (oil price ‐31% in 2015)
• Discount widened from 19.6% on 1 January, 2015 to 22.9% on 31 December, 2015; it then narrowed in February 2016 to 18%
• Dividend maintained at 7.25p per Ordinary Share
5
DISCOUNT TO NAV
Ordinary Share NAV
Share Price
Discount to NAV
6
GROWING DIVIDENDS
6.50p 6.50p
6.88p
7.25p
6.00
6.20
6.40
6.60
6.80
7.00
7.20
7.40
2012 2013 2014 2015
Ordinary Share Dividends
FTSE All‐Share yield (29 February, 2016): 3.9%
EWPO yield: 6.7%
• Total redemption value of CULS and ZDP Shares is £176,091,000
• Continuation vote on 14 June, 2016
• Plans (investment policies, capital structure, dividend policy) will be announced in late April
7
2016 MATURITIES
On 31 July, 2016:
ZDP Shares
60,000,000 shares outstanding will mature;
Investors will receive 160.70p per share at maturity for every 100p invested at issue
Final redemption value £96,420,000
6% CULS
£80,000,000 nominal outstanding will be redeemed at 100% of nominal value unless they have previously been converted into Ordinary Shares
Final redemption value £79,671,000
CONTINUATION VOTE – INDICATIVE TIMETABLE
8
Date in 2016 Event
February Board consultation with largest Shareholders
March ‐ April Board discussions with Manager regarding proposed new investment policy, capital structure, etc.
April – May Announcement of proposals
May Publication of circular describing proposed new investment policy, capital structure, etc.
14 June General meeting to approve changes in investment policy and to vote on continuation
31 July ZDPs and CULS are redeemed
9
OUTLOOK
• Commodity markets affecting equity market sentiment; oil prices seen as health gauge of the global economy; volatility persists
• Interest rates are expected to stay low due to weak economic growth; a favourable environment for utilities
• Expect £ to continue to be relatively weak; EWPO offers unhedged exposure to the US$
• The sectors EWPO invests in have underperformed – some for several years – and valuations are depressed. Opportunities from selection of utilities, renewables and infrastructure investments:
• Lonestar and other energy‐related shares will recover when oil prices do
Sub‐sector Portfolio role
Utilities Capital preservation
Renewables Growth
Infrastructure Growth & income
10
THE PORTFOLIO (as at 29 February, 2016)
North America40.7%
UK 10.6%
Continental Europe 38.7%
Other Developed6.9%
Emerging Markets3.1%
% by Geography
11
THE PORTFOLIO (as at 29 February, 2016)
0%
10%
20%
30%
40%
50%
60%
Utilities Renewables Infrastructure Energy Unquoteds BondsToday 59% 16% 17% 6% 3% 1%Year Ago 42% 14% 19% 19% 4% 2%
% by Sector/Type
Today Year Ago
12
LIQUIDITY (as at 29 February, 2016)
% of Portfolio which may be liquidated assuming trades represent 30% or 10% of traded market volume in 5 days or 1 month:
30% 10%
5 Days 1 Month 5 Days 1 Month
Total Portfolio 82% 86% 74% 85%
Portfolio excluding Lonestar and Unquoteds 88% 91% 79% 91%
13
• Course of interest rates will be a critical driver again this year, offering trading opportunities; interest rate rises probably further out
• Tightening of reserve margins is supportive for future returns in power generation, but power prices remain weak due to mild winter
UK
10.6%UK
• Regulated assets attractive on yield basis but investible universe is small (7 companies)
• Portfolio is defensively positioned
• Universe is not directly exposed to Brexit risks
14
• Power prices are at historic lows due to depressed commodity prices, weak power demand, significant new renewables capacity and mild weather
• Commodity exposed names have been under great pressure: E.ON, Engie
• Regulated utilities, environmental groups and infrastructure have performed well
CONTINENTAL EUROPE
38.7%
ContinentalEurope
Looking ahead:
• Extremely low interest rates and QE should encourage growth, especially in southern Europe
• Political context is improving for integrated utilities; governments are increasingly concerned about security of supply and want to incentivise power generators to maintain capacity even in a low pricing environment; Regulators also need to support the required investment in transportation and interconnections
• By reducing costs and capital expenditure, companies are generating record levels of free cash flow which supports dividend payouts. Utilities’ dividend yields are at their highest levels relative to bond yields, making the universe particularly attractive
• By focusing capex on promising segments like infrastructure and renewables, utilities are entering a new era of growth and sustainable returns
15
• Only regulated utilities – to which the portfolio has relatively little exposure – have performed well since the Fed’s rate hike
• Integrated utilities, independent power producers and all companies with commodity exposure have been weak
NORTH AMERICA
40.7%
NorthAmerica
Looking ahead:
• Low to moderate growth in the US economy should be a good environment for utilities; expect returns of c. 8% (4% yield plus 4%+ average growth) – interest rate moves will be important
• Renewables are a clear area of growth driven by policy incentives and improving cost competitiveness
― State mandated targets are supporting growth, along with constructive Federal policies (surprising extension of investment tax credit)
― Given advances in manufacturing efficiencies, prices have declined dramatically and renewables are now economic and competitive with little or no subsidy
― Generation from renewables will increase from 9% of power output in 2014 to c. 12% by 2025
• Energy and related exposures will rebound from depressed levels when oil prices recover
16
LONESTAR RESOURCES
• Operationally the company has been successful: ‒ production rose 32% in 2015
‒ EBITDA met guidance in 2015 despite ever lower oil prices
‒ Development and acquisition activity replaced production 8 times in 2015
‒ Undrawn banking facilities
• But the steep fall in the oil price has had an indiscriminate effect on share prices in the unconventional sector
• EWPO established Lonestar’s predecessor company, Ecofin Energy Resources plc, in July 2010 and owns 55.5% of the company
• Lonestar is well positioned with over 30,000 net acres in the Eagle Ford, the lowest cost unconventional basin in the US
0
20
40
60
80
100
120
0
5
10
15
20
25
30
Dec 13Mar 14Jun 14 Sep 14Dec 14Mar 15Jun 15 Sep 15Dec 15
Lonestar Resources Oil Price (WTI)
US$/share $/barrel
17
% Company Country Sector 2015 Total Return (local currency)
Dividend Yield
6.2 Direct Energie France Power +123% 0.8%
5.4 NextEra Energy US Power; renewable energy +2% 2.7%
4.1 E.ON Germany Power; renewable energy ‐35% 5.4%
3.9 SSE UK Power; renewable energy +1% 6.9%
3.5 Suez Environnement France Water and waste management utility
+24% 3.8%
3.3 Engie (GDF Suez) France Power; renewable energy ‐11% 6.9%
3.3 Lonestar Resources US Shale oil & gas ‐55% ‐
3.2 Williams Companies US Gas pipeline operator & distributor
‐39% 12.6%
3.2 Sempra Energy US Power ‐14% 2.9%
2.9 GE US Infrastructure +26% 3.2%
39.0
LARGEST HOLDINGS
18
This document is being issued by Ecofin Limited (the “Investment Manager”), which is authorised and regulated by the Financial Conduct Authority, in relation to Ecofin Water & Power Opportunities plc (“EWPO”).
This document does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe or purchase, any shares in EWPO nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract therefore. The information and opinions contained in this document are for background purposes only and do not purport to be full or complete. No reliance may be placed for any purpose on the information or opinions contained in this document or their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained in this document by the Investment Manager and no liability is accepted by the Investment Manager for the accuracy or completeness of any such information or opinions.
This material is being circulated by the Investment Manager on a confidential basis. The information contained herein is confidential to such person and is neither to be disclosed to any other person, nor copied or reproduced in any form, in whole or in part, without the prior consent of the Investment Manager.
The Investment Manager believes that the source of the information disclosed in this document is reliable. However it cannot and does not guarantee, either expressly or implicitly, and accepts no liability for the accuracy, validity, timeliness, merchantability or completeness of any information or data (whether prepared by the Investment Manager or by any third party) for any particular purpose or use or that the information or data will be free from error. The Investment Manager does not undertake any responsibility for any reliance which is placed by any person on any statements or opinions which are expressed herein. Neither the Investment Manager, nor any of its affiliates, directors, officers or employees will be liable or have any responsibility of any kind for any loss or damage that any person may incur resulting from the use of this information.
EWPO is a UK incorporated closed‐end investment trust whose shares are listed and traded on the London Stock Exchange’s Main Market for listed securities. The promotion of EWPO and the distribution of this document inside and outside the United Kingdom is also restricted by law. This document, so far as it relates to EWPO, is being issued to and/or is directed at persons who are both (i) professional clients or eligible counterparties for the purposes of the FCA Conduct of Business Sourcebook and (ii) "qualified investors" as defined in section 86 of the United States Commodity Exchange Act (each a "Relevant Person"). Any investment or investment activity to which this document relates is available only to, and will be engaged in only with, such Relevant Persons.
IMPORTANT NOTICE