Ecofin Power and Water Opportunities has published results for the year ended 30 September 2015. The value of their portfolio fell 24.0% over the financial year but, due to the effect of the gearing provided by the Convertible Unsecured Loan Stock, Zero Dividend Preference Shares and bank debt, the net asset value per ordinary share declined by 34.4%. This translates to -31.7% on a total return basis. By comparison, the MSCI World Utilities Index rose by 4.2%. The MSCI World Energy Index of companies in the energy sector fell by 27.9% and the FTSE All-Share Index fell by 2.3%. The price of an ordinary share declined by 29.3% or -25.6% on a total return basis. The annual dividend increased by 8.4% to 7.25p.
The Chairman says one big factor behind the poor performance was a fall of 69% in the share price of Lonestar Resources Limited, their largest holding (14.2% of the portfolio) at the beginning of the financial year. The manager thinks that relisting Lonestar in the US rather than Australia could be beneficial for its share price.
The managers describe how the fall in the oil price disrupted energy markets and had ‘knock-on’ effects – which were particularly severe in the United States – on power markets and prices, on credit markets and even on investor perceptions about the attractiveness of renewable energy. Weak natural gas prices in the U.S. also put significant pressure on the profit margins of those independent power producers and unregulated power utilities which operate a diversified generation fleet, including coal and nuclear generators, as the price they receive for electricity is increasingly set by the gas price. As the oil price continued its decline over the year and uncertainty about the outlook mounted, investors shunned “energy” companies and companies they deemed to have any exposure to energy commodity prices.
The managers say the US pipeline operator Williams Companies, Inc., a long-time investment of the Company’s and its second largest holding at the beginning of the year, was, after Lonestar, the worst performer in the US portfolio as its share price fell by 33.4% – even though it is an operator of gas, not oil, pipelines, its revenues are largely fee-based and related to volumes shipped, not commodity prices, and gas consumption is continuing to grow in the U.S. as utilities replace coal with gas generation. Their exposure to renewable energy through US yieldcos (listed renewable energy subsidiaries of large utilities) was also unhelpful. These companies, which hold portfolios of operating and cash generative assets, have been de-rated in response to the similarly structured MLP (master limited partnership) sector – which operates oil pipelines.
In contrast, the Company’s European portfolio performed relatively well – and the UK portfolio very well – against a background of weak equity markets in the United Kingdom and the Euro area and a marked underperformance by the utility sector in Continental Europe which was also characterised by an historically wide dispersion of returns. The European portfolio had relatively little exposure to energy commodity or power prices, favouring instead environmental and regulated utilities and infrastructure companies in the Euro area which stood to benefit from the European Central Bank’s programme of quantitative easing. Nevertheless, Direct Energie, a small independent French power supplier and the Company’s third largest investment at its year end, was the largest contributor to the Company’s net asset value as its share price rose 105.5% in local currency terms over the year. The German multi-utility E.ON, however, the Company’s fifth largest investment both at the beginning and end of the year, saw its share price fall by 47.0% due to a combination of factors but, importantly, due to continued weakness in power prices and uncertainty about the German government’s energy policies.
ECWO : Ecofin suffers as Lonestar collapse amplified by gearing