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11/30/23 Capitalist Times Live Chat
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AvatarRoger Conrad
1:57
Hello everyone and welcome to the November live chat for Capitalist Times members. As always, there is no audio. Just type in your questions and we’ll get to them as soon as we can concisely and comprehensively. We will send you a link to a transcript of the complete Q&A, probably tomorrow morning as these things tend to run for a while.
 
Let’s get started with some questions we received prior to the chat.
 
 
Hi Roger,
 
Hope you had a nice Thanksgiving. Is ARESF worth new/additional money at this time? Perhaps I've missed it, but I don't recall any mention of it recently while I have noticed the current review of RIOCF albeit they are different investments.
 
Thanks for your sage advice, as always.--Chuck B.
 
A. Hi Chuck
 
Artis REIT had a pretty solid Q3 result, with a 3.5% weighted average rent increase and 6% net operating income growth, excluding the impact of acquisitions and divestitures. Occupancy was solid at 91%. FFO and adjusted FFO per share were somewhat lower, however. And debt metrics worsened, as did net asset value per share.
 
I've maintained for a while that Artis is best viewed as an investment fund, rather than a conventional REIT.
1:58
And results going forward will depend heavily on assets bought and sold, as well as the results of the ongoing strategic review. During the quarter, Artis sold one of its remaining western Canadian office properties, which were at one time the core of the business. It also sold a piece of its Dream Office holdings, negotiated sales of another CAD109.3 mil of office properties and bought back shares. But management is challenged by the cost refinancing maturing debt in an environment of much higher interest rates in Canada than a year ago.
 
During the earnings call, Artis' CEO stated "we're going to let the strategic review that's underway sort of be the primary focus and hopefully maintain the distribution we have." That to me says the REIT is likely to keep paying the current monthly rate of 5 cents per share Canadian at least well into first half 2024--but that there are also a lot of moving parts that could require it to cut, including the need to use asset sales proceeds to cut debt. I think the
potential for a cut is priced into the shares now. And there's a possibility of full privatization by Sandpiper most likely, which would have to be at some premium to the current price. But my view is there are better places to invest now, including all of the stocks on the REIT Sheet Recommended List.
 
 
Q. Roger: I recently attended a wealth seminar conducted by a "wealth planner/manager" who has strongly suggested he has a plan that will save "tens of thousands maybe "hundreds of thousands of tax expense for affluent senior citizens and their estates. He strongly suggests putting his plan into effect by 2026 to take advantage of the tax cuts that went into effect early in the Trump administration. It is my understanding that about 2026, the Trump tax reductions are set to phase out and tax rates go back to their prior rates (and possibly even higher). Its a very bold statement by someone who has little knowledge of my ultimate tax situation. In his seminar there was very little information how his plan
1:59
could result in the savings that had been suggested.
 
I have grown my traditional and ROTH accounts to rather large proportions but the ultimate savings are hard to accept UNLESS what he has in mind is to do legal conversions of traditional IRA's to ROTH's which have possibly steep costs to implement. Can you make any general comments on the advisors' plan? Based on the discussion during the seminar, I am sure he will make suggestions some of the attendees would be unfamiliar with such as donor advised funds and other lesser known but legal planning techniques such as Qualified Charitable Distribution plans.
Thanks for holding these chats and for your consideration of this question.--Jimmy C.
 
 
A. Hi Jimmy
 
Unfortunately, I really don't feel qualified to give you first rate tax advice. But I do have a few comments.
 
 
First, trying to forecast what the tax code will look like in three years is highly problematic. I've heard very convincing arguments, for example, that most or all of the Trump tax reductions will be extended or made permanent. That's even if Mr. Trump doesn't win next year's presidential election, which at this point is at least a strong possibility.  
 
Second, if you and your accountant aren't 100% clear on what's being proposed here, there's absolutely zero justification for trying to follow the advice. And as you've said, everyone's tax situation is different--what might produce savings for some might actually create a lot of work and even higher costs for others.
 
Based on what you've said, it sounds like this presentation was basically a sales pitch. You could see what it costs to get the full program. But again, the tax code is complex and constantly changing.
I wouldn't do anything unless you completely understand what the costs and benefits are.
 
 
Q. Hello Folks, You have often said there is still money to be made in coal. I am curious as to why you have put ARLP on the endangered dividend list. In their last earnings call, management said that they would be able to maintain the current distribution. They did, however, express disappointment about the share price, so I guess it's possible that more free cash might go into stock buybacks. Given the very high yield of the stock at present, it does not seem that a 25% cut, which you pencil in, would necessarily be a disastrous blow, especially for investors who bought the stock below its current price. Do you see something truly nasty coming for this company -- like EVA, for example? Are you skeptical of their new investment plans in oil royalties, battery recycling, etc? 
2:00
Thank you for your insights. Best regards, Jeffrey H.
 
 
A. Hi Jeffrey
 
Global markets for coal have been quite robust over the past couple years, and that's helped Alliance Resource Partners' results. And Q3 results do support the current quarterly dividend rate of 70 cents per share. Coal price realizations were 8.3% higher than a year ago, oil and gas royalty volumes were up 28.2%. And while distributable cash flow was lower by -15.5% from a year ago, coverage was still strong at 1.75 times.
 
On the other hand, the revenue mix for US coal producers has changed pretty radically the past several years,
including for Alliance. Basically, the US utility market that sustained them with stable cash flow from long-term contracts is shrinking fast--in fact under current plans it will vanish entirely in the next 10 years. That means output is rapidly shifting to export markets, where price and demand is considerably more volatile. And that means cash flow should be considered increasingly volatile as well.
 
Alliance has protected its business by slashing debt, with interest expense by -24.4% over the last 12 months. But I think we've clearly reached the point where the company dividend should be considered at least 50% variable, with if anything a downward long-term bias. The payout is high, with current share price reflecting as much as a 50% cut--which should limit downside if/when the dividend is reduced. And as you point out, they do have some other interesting investments.
But generally speaking, this is a shrinking business long-term and I'm much more comfortable looking to high yielding oil and gas related stocks.
 
 
 
Q. I’m a PXD shareholder and trying to figure out the details of the buyout by XOM. I know that the terms are that PXD owners will receive 2.3234 shares of XOM. What I can’t figure out if it’s the XOM price as of the announcement on 10/9 or the XOM price on the date of approval by shareholders? And, will the FTC (or whichever govt. agency is involved with approval) approve before the issue goes to the PXD shareholders? I read a LOT of articles about the merger but could not find the answer to this question.
Thanks—Tom L.
 
A. Hi Tom 
 
The number of ExxonMobil shares in this acquisition is fixed, regardless of what XOM's price is at the time of the deal.
2:01
So you can calculate the current value at any time by simply multiplying XOM's price (now about $103) by the number of shares--which is right now a value of about $240 per PXD share.
 
Generally, companies will wait until federal anti-trust approval is in hand before asking a vote from shareholders. That appears to be the case here, which basically means waiting for the 90 day review period to expire, or for further requests from the FTC/DOJ for information--which the companies would provide and wait for feedback. It's also possible the FTC/DOJ will impose conditions, which the companies will then have to review and decide whether or not to contest. If the conditions are acceptable, the companies will then ask for shareholder approval in a vote--which we would recommend a yes.
 
This deal was officially announced on October 11. And management of both companies has given "first half 2024"
as an expected closing date. That means--despite statements from ExxonMobil's CEO that he "doesn't see regulatory issues--that they acknowledge the possibility of a challenge. If there is to be one, I would expect we'll see news of it in December. I would look for that, however, to take the form of conditions. Since the combined companies will have less than 20% of total Permian Basin production, there would seem to be little ground for a full-on attempt to block the deal.
 
 
Q. Hi, Folks. In the October issue of EIA, don’t understand the sentence below. “Invest in rate base”?

So low gas costs mean lower effective customer rates, which leaves more room for companies to invest in rate
base for renewable energy expansion and the grid upgrades needed for it.— Dave R
 
 
A. Hi Dave
 
Basically, invest in rate base is a phrase that applies to regulated utilities. "Rate base" is the total of assets on which investor rate of return is calculated. When utilities increase their rate base, they boost their earnings.
 
That's distinct from the actual rates customers pay--which are a combination of returns on rate base and other costs that are passed along automatically. Fuel costs are an example of costs passed through to customers without any impact on utility rate base or utility earnings, as they tend to vary from month to month.
When fuel costs rise, customer bills rise along with them. That makes it much more difficult for regulators to allow rate base increases, which would push up customer bills further. But when fuel costs come down, it's easier for customers to absorb rate base investment--say in an upgrade to the grid to improve reliability.
AvatarElliott Gue
2:08
Q: I’m a PXD shareholder and trying to figure out the details of the buyout by XOM. I know that the terms are that PXD owners will receive 2.3234 shares of XOM. What I can’t figure out if it’s the XOM price as of the announcement on 10/9 or the XOM price on the date of approval by shareholders? And, will the FTC (or whichever govt. agency is involved with approval) approve before the issue goes to the PXD shareholders? I read a LOT of articles about the merger but could not find the answer to this question.
A: When the deal closes, probably by mid-2024, you will receive 2.324 shares of XOM for every share of PXD you own. I believe fractional shares will be paid in cash. You would them become an XOM shareholder. The number of shares you receive won’t be adjusted due to the price of XOM shares. So, the value the shares you receive in XOM will depend entirely on the price of XOM on the day the deal is finalized.
2:09
We continue to like XOM – it’s our favorite major – and we regard the PXD merger as a good dea for both sides. So our recommendation is to hold PXD and accept the shares in XOM you receive once the merger is finalized. 
Kerry T.
2:12
Hi Elliott:

In yesterdays creating wealth you said

"In this service, I spill a great deal of digital ink on “big picture” macroeconomic indicators and trends."

I just wanted to say that I'm glad you do! The commentary on the economy and more importantly market forecasts are why I subscribe. So keep spilling.
AvatarElliott Gue
2:12
Well, thanks for subscribing! Truth be told, I can't help myself talking about the economy -- I've been studying economic indicators since I was a first year economics undergraduate at Univ. of London (close to 3 decades ago) and I've been fascinated ever since.
Jack A.
2:22
Hi Elliott:

What are your thoughts about Exxon's recent purchase of a lithium producer? Do you see much profit potential?
If you haven't already done so, could you comment on the desire of Biden to make a deal with Saudi Arabia to help with their nuclear development, and provide them with military security in exchange for an increase in oil production... Could this be a cause of the recent increase in our oil reserves? How much of an impact do you see it having on oil prices going forward?
Thanks
AvatarElliott Gue
2:22
Exxon's lithium announcement -- basically acreage in the Arkansas Smackover Formation (great name) -- garnered a lot of attention in the media. However, it's important to remember it's a tiny peice in the XOM puzzle -- roughly $2 billion in potential revenue for a company that generates approx. $400 billion in annual revenues. It's also tiny in comparison to their deal to acquire PXD ($68 billion). So, I guess my short answer is that it really doesn't matter all that much to their bottom line and wont for the forseeable future. More broadly, I think it makes sense for XOM to dip its toe into a market like this -- after all, they do have a ton of expertise in the extraction industry, a low cost of capital, engineering expertise...so it's not too long of a cast from their underlying business of oil & gas production. Frankly it would worry me if this deal were much larger, or if XOM were robbing CAPEX from their O&G upstream core business, but that's not the case. Let me address the Saudi/ Biden and OPEC
AvatarElliott Gue
2:22
question here in just a few minutes. I wrote a reply in a Word file on my PC...now I just need to find that file! As soon as I do, I'll post it into the chat here.
Dennis H.
2:23
Roger,
What's your take on Organon (ogn)?  It's down a lot, but seems to have good earnings projected and a great dividend. Thanks
AvatarRoger Conrad
2:23
Hi Dennis. Since spinning off from Merck a couple years ago, Organon--the focused womens health company--has been pretty underwhelming, the latest disappointment being reduced 2023 guidance for revenue and EBITDA margin. That was in part due to the strength of the US dollar, which depressed the US dollar value of foreign revenue. But the company has also been hit by competition for its signature treatments and a lack of meaningful growth from new treatments. Cost of sales also rose by 11%, a major factor depressing earnings excluding items by -34%. The dividend yield is high and the payout covered by earnings. But the lack of payout increases is a pretty clear warning this company is still trying to get its bearings. And a sub-investment grade credit rating is another worry with $6.6 bil in maturing debt ahead in 2028--3X market cap. I recommended selling this one in CUI Plus/CT Income following the spinoff. And I think for high yields, midstreams like Energy Transfer LP are much better bets for a 9% yield.
David O.
2:43
Need your wisdom. Your service is the backbone of my retirement portfolio! Nonetheless, I do have private equity holdings through an advisor…oil royalties…apartment reits…other businesses. My advisor tells me they are safer than the public offerings.

This I can tell you…when they falter and cut dividends, you are stuck. You can’t bail out, rather crash and burn as the Navy pilots say. No one to sell to. One of my holdings has been in litigation for 5 years waiting to disburse funds.

What good are private equity holdings if all the exits are blocked to sell? No doubt some of the offerings are good. What percentage private equity holdings would you advise for retirement portfolios?
AvatarRoger Conrad
2:43
Hi David. As you point out, liquidity is always an issue with assets like private equity holdings, non-publicly traded limited partnerships and even rental real estate. When you go into any of them, you have to be prepared to leave your capital there indefinitely--and for the possibility of under/non-performance.

I think it's a stretch to say these assets are always safer than publicly traded securities. You are often a more direct owner, so the payoff over time for a successful investment is typically larger. But safety really depends on what the asset is, quality of management, how it's funded, what its revenue streams are etc. Oil royalties, for example, will usually be more volatile than apartment rents.

I personally believe the best retirement portfolio will be a mix of assets you take the time to understand so you're aware of risks. Riskier stuff I prefer to be liquid/publicly traded so I can get in and out.
Barry B.
2:49
I keep hearing the talking heads say lots of Non-OPEC oil coming online, Guyana, US, Africa etc etc. This does not seem to be a concern to you, please explain because I value your opinion and am suspicious of the others.
AvatarElliott Gue
2:49
It's very rare for non-OPEC production to decline outright -- since 1965 non-OPEC had added an average of a little over 1 million barrels per day of output per year. The problem is really unrestrained growth in oil output that outstrips demand growth for a prolonged period of time, which is what we saw back in 2013-15, which prompted the Saudis to flood the market and squeeze non-OPEC producers. That's what led to the 2014 to 2020 bear market. But, I don't believe that's the case at this time. After all global non-OPEC oil production was actually lower in 2022 than in 2019; a recovery in global demand in 2022 to new record highs by year-end coupled with weak supply growth is what catalyzed a rapid drop in global inventories that continued through most of this year. In my view the prospects for a major surge in non-OPEC supply are overblown. US shale production is growing, but the growth is northing compared to what we saw in the shale boom years. The Permian Shale represents 40 to 50% of US output
AvatarElliott Gue
2:49
and year-over-year production growth there is 320,000 bbl/day compared to 810,000 bbl/day year-over-year in early 2020. Most of the producers there are talking about flat CAPEX and maybe 2 or 3% growth in production for 2024 as well. Guyana is really one of the only major new projects outside OPEC pursued in recent years because most companies cut investment aggressively starting in 2015 and it remains at only 50% of the 2014 cycle peak. For the most part, growth there will just offset declines from maturing fields elsewhere.  SO, in years where oil demand growth is weak, supply can outstrip demand and OPEC has to step in and sop up the difference. But I see no structural surplus like what we saw and warned about back in 2014-15. In a normal year, with global demand growing, Non-OPEC will struggle to meet that growth. Further if balances were really as loose as some forecasters say (IEA in particular) than I'd expect to see a global build in inventories well above the seasonal average. Instead we see the
opposite
Mr. G
2:51
The drop in NEP has been both breathtaking and disheartening, although the dividend return is outstanding if it is retained.

Insights, comments, and recommendations? Will we see the $80s again, if so, when?
AvatarRoger Conrad
2:51
NextEra Energy Partners is basically a funding vehicle for its parent NextEra Energy. And with the pending sale of its midstream natural gas pipelines to Kinder Morgan Inc, substantially all of its assets will be ownership stakes in solar, wind and energy storage facilities operated by NextEra Energy's unregulated power generation/transmission unit.

At present, NEP's cost of equity capital is very high (yield 14.7%) and its cost of debt is as well, with bonds maturing July 2024 yielding 6.3% to maturity. That means it's effectively sidelined for the time being as a source of funds for parent NEE--as it's just too expensive to finance "drop down" purchases of ownership stakes in NEE assets.

On the other hand, this is not the first time this has happened since the June 2014 IPO. And when capital market conditions have improved, NEP has again been an effective financing vehicle. My view is NEE has immense funding needs and is therefore willing to bet NEP will again be able to take drop downs.
AvatarRoger Conrad
3:00
Continuing on NEP/NEE, I think NextEra management provided a great deal of detail in Q3 results and guidance last month that support its contention that NEP has the cash flow to continue target 6% annual growth in dividends. Since then, we've seen the company follow through on its plan to sell NEP's Texas pipelines at a price that supports that guidance--which management also reaffirmed at the Edison Electric Institute Financial conference this month. And earlier today, credit rater S&P affirmed NEP's credit rating, citing diverse assets with an average contract life of 14 years to 90 different offtakers, low risk cash flow growth from repowering plans of existing assets, flexibility paying off convertible equity owners without significant dilution, NEE's suspension of IDRs and reduced distribution growth plans. I think recovery will take time for the stock. But the situation is stabilized and I intend to stick with NEP as well as NEE.
Mike C.
3:09
Happy holidays to everyone at CT!

A few questions for today’s chat:

First, curious about your take on ET’s prospects over the next year or two. After the merger, it’s my largest position (and I think I remember that it was a favorite for ’23). I’m also seeing a ton of insider buying.

Second, reflecting on Roger’s latest CUI, wondering if you think LEAPs make any sense for any of the names currently below dream buy prices.

Finally, do you have an opinion on AESI.

Many thanks for a great set of services! Best.
AvatarRoger Conrad
3:09
Hi Mike. Earlier this month, Energy Transfer closed its acquisition of the former Crestwood and simultaneously raised 2023 EBITDA guidance, as asset growth pushed NGL volumes to a new record. The stock is up about 16% year to date not including dividends. Where it goes to the end of the year is likely to depend on whether it focuses more on consolidation of recent M&A--realizing cost synergies, cutting debt, buying back shares--or seeking another acquisition of which there are many candidates. My view is consolidating operations is more likely in the near term but that we will see another big deal in the works for ET by mid-2024. And ET is still my top midstream pick for those who don't own it up to 15.

Good question on the long-term options or LEAPs. My view is that Wall Street forecasts of an earnings armageddon for utilities due to rising interest rates has proven wildly wrong--and now that rates are falling, we're seeing some re-establishment of positions. That may be offset some by politics in 2024.
AvatarElliott Gue
3:13
Q: Thank you for sending us the link to that excellent podcast you participated in on Substack. For those who haven't heard it, you basically made a case for oil prices being elevated going forward, being affected by limited supply. Of course, this runs counter to the recent fall in oil prices.... I have a theory about the fall in oil prices recently - and more importantly, concerns me about oil prices going forward - that I would love to get your thoughts on:
Joe Biden is a smart politician. He knows that the one thing that could well lead to his defeat in the next election is high gasoline prices..  He tried to do something about that in the last election and appealed to MBS in Saudi Arabia. But MBS in Saudi Arabia did the opposite and constrained supply.... (Calling him a "pariah" was certainly not helpful)....... So, Biden counteracted that with draining our strategic oil reserve....  But further draining of our reserve seems to be off the table in the next election........ So what does he do?.......... H
He has another plan..... He entices Saudi Arabia's cooperation by telling him in effect: "You recognize Israel, and increase oil supply, and we'll provide you with a military security alliance and help you with nuclear development"... Since Saudi Arabia is deadly afraid of Iran's nuclear capability, this is definitely a deal MBS finds attractive...........  Thus, my fear is that Saudi Arabia will be the "fly in the ointment" to your excellent case for higher oil prices going forward, because of its security concerns...
3:14
Thanks for taking the time to listen to it...I know it was a marathon podcast.
A lot of moving parts there. Let me address them in turn. First, I don’t think Saudi Arabia cut oil production last year because they wanted to harm the US or defy Biden after that ill-timed pariah comment. I think Saudi cut because they had to do so – at the time Saudi was producing 11 million bbl/day of oil, near an all-time record. And, on a sustained basis, they were averaging oil production over a trailing 6- and 12-month time frame at record levels.
While they claim 12 million bbl/day of capacity, and I’d assume that’s possible in short-term boosts, I suspect that producing at 11+ million bbl/day for a prolonged period would likely tax their sustainable output capacity and leave them with very, very little spare capacity to bring to bear in the event of a global supply disruption. Certainly, there’s a reason they’ve never produced at that level for any length of time in the past, even when the world was desperate for supply
Also, remember, Russian oil production actually rose in 2022 despite the Ukraine conflict -- there was no supply disruption. As with all wars involving countries with large natural resource sectors, production tends to rise to meet funding needed for war.
In effect, I think Biden was asking for something that Saudi just wasn’t capable of delivering.
Of course, I don’t know what sort of side deals Saudi may have cut behind the scenes with the US this year. However, I don’t think Saudi can be blamed for the slide in oil prices since late September. They’ve remained extraordinarily disciplined on their own production, verified by tanker movements data. For that matter, we’ve seen little tangible signs that the oil market is oversupplied this year – US inventories
are, for example, pretty much bang on the 5-year seasonal average. It’s normal for northern hemisphere oil inventories to rise through year-end and they were at 7 year lows just a few weeks ago.
In my view the biggest risk to oil remains a global economic downturn that causes a significant drop in demand. There are some legitimate concerns about demand, however, I think they’re overblown as oil prices have historically rallied into inflationary economic downturns like 1973-75.
Finally, even if Saudi did want to increase output to weaken the price of oil into the 2024 election cycle, they’d have to read carefully ... they’d need to do it in a way that didn’t anger other countries in OPEC. They’d also need to do it in a subtle enough way that it didn’t completely derail oil prices. I just don’t think that’s easy to do in a world with thousands of people watching every tanker cruising the world’s oceans.
AvatarRoger Conrad
3:14
Continuing on utilities and LEAPs--the problem with options is you have a limited time period for what you think will happen to actually occur. And I think as elections approach, the possibility of an outcome where tax credits from the IRA are endangered could hold back utility sector gains--even though growth is likely to remain healthy next year, and despite the fact that utility CAPEX plans fundamentally depend on state rather than federal level regulation/legislation. i do think the sector is very cheap right now, AES Corp especially so at just 9 times expected next 12 months earnings. And whatever the outcome of the election, this group will be able to fund robust spending on networks needed for increased use of data and AI--even if the election slows electrification in some parts of the country and tax credits are cut back. But I'm much more comfortable saying utes will be on much higher ground 2 years from now than 1.
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