JotCast | 2/25/21 Energy & Income Advisor Live Chat

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2/25/21 Energy & Income Advisor Live Chat

Roger Conrad

2:00

Hello everyone and welcome to this month's live chat for Energy and Income Advisor. Elliott and I are looking forward to your questions today. As always there is no audio. Just type in your questions and we'll get to them as soon as we can comprehensively and concisely. As always, we'll be sending you a link to the complete transcript to all of the Q&A. And we'll keep the chat open so long as there are questions to answer.

David O.

2:08

Gentlemen,

Educate me...if that is even possible! Retired, need income. In this world of money printing and currency debasement, I fail to see the “safety” of a chunk of my portfolio in bonds. Any bonds of moderate duration or less and of any quality do not pay squat. They are guaranteed loses with no meaningful income and without favorable tax treatment. Why not replace them with the likes of D, DUK, EIX? How “risky” would that be?

Roger Conrad

2:08

As we've pointed out here, it's been a seller's market in bonds for some time. That is, companies we like have been able to issue new debt to fund CAPEX and refinance maturing debt at rock bottom interest rates, even while extending maturities. But that's meant as you point out very low yields and a great deal of exposure to losses from rising benchmark interest rates--which we are seeing now particularly in the Treasury market. Our view has generally been that you're always going to be better off with stocks of companies that are growing dividends over time--thereby keeping up with inflation in terms of current income and generating capital gains, since stock prices will follow dividends higher over time Those are all great companies you name. Because some investors treat them as bond alternatives, they've sold off the past month or so. But there's basically been no correlation between returns on utilities and dividend paying stocks in any calendar year--we would see this as a buying opportunity.

Roger Conrad

2:09

Adding to my answer, there are also many stocks in our Energy and Income Advisor portfolio that feature very high yields as well.

Fred

2:10

Exxon had been doing pretty good recently. Despite all of the negative press, what is your guessits price will be by Summer, if oil maintains its range in the 50's and 60's?

Elliott Gue

2:10

I think XOM is the major that benefits most from rising oil prices and the potential for a new energy cycle that will see a floor for oil around $50/bbl. That's because XOM spent more than its peers on exploration and development of new oil and gas projects over the past few years even when they came under hefty criticism for spending more than they generate in free cash flow and for "borrowing to pay dividends." My intermediate term target for the stock is around $80...not sure whether that's likely before summer or not but I think we could see $70 to $80 by next fall.

Fred

2:13

Outlook for XOM over the next few months?

Elliott Gue

2:13

See my answer above... I wouldn't expect a straight line higher but I think $70 to $80 is a reasonable target later this year.

Jack A

2:18

The return of oil prices to their pre-pandemic level has been accompanied by a return of the major oil companies to their pre-pandemic values.

However, the pipeline companies (EPD and KMI for example) are still about 30% below their pre-pandemic prices..

What do you think is the reason for this? Do you see the pipelines catching up, or is something now fundamentally changed in the way they are evaluated by institutional investors?
Thanks.

Roger Conrad

2:18

Since Enterprise and Kinder proved their resilience last year during the pandemic--EPD has even returned to dividend growth--it clearly doesn't have anything to do with business strength and performance. Rather, we believe it's a lingering belief by investors that oil prices will not hold above $50 a barrel this year. As a result, they're valuing energy stocks where they would at $40 oil and not where they were the last time oil was holding over $50.

That said, we believe this means considerably more upside for the likes of EPD etc than potential downside the rest of the year. If oil does hold over $50--and we think it will--then their prices will eventually adjust up. If instead there's a relapse to $40, they've already taken steps to hold in cash flow to weather it.

Jim C.

2:21

Dear Roger & Elliott,

Can I have your opinion of Westlake Chemical (WLK) and Weslake Chemical Partners (WLKP)?

Kind regards

Elliott Gue

2:21

Westlake has done well mainly because I think it's viewed as a play on global economic reopening and a continued recovery for the global economy. The chemicals they make serve a number of end markets including highly cyclical auto, residential/commercial construction and packaging.

We haven't covered WLK/WLKP much in Energy & Income Advisor mainly because they're not directly in the energy or midstream energy business.

That said, I am a believer in the economic recovery thesis near term and it's a theme I've been recommending over in some of EIA's sister publications. Moreover, I suspect that a combination of very easy money + record-setting fiscal stimulus + an already-recovering US economy this year have the potential to ignite higher inflation, which tends to be a tailwind for chemicals.

So, not a name I recommend specifically but I like the market WLK is in. As for WLKP, I do believe there agreement with WLK helped insulate them from a tough environment last year. That shows some resilience though,

Elliott Gue

2:21

obviously, it comes with above-average commodity price risks.

James C.

2:22

Gents,
If the Nord Stream 2 saga ends with a finished pipeline, how does that impact the US NGL export plans, especially Enterprise Products Partners?
Thanks

Roger Conrad

2:22

I don't think much. Compared to LNG, NGL exports are still a relatively new development and American exports through Enterprise are very competitive in the most important markets for them--i.e. Asia. There is export capacity being built on Canada's Pacific Coast that will go to the same markets. But so long as the Permian is attracting producer interest for oil, there will be a lot of associated gas in Texas and therefore a low cost base of NGLs to export from the US.

Ben F.

2:30

Roger -

Hope you are well.

Comments on AGL Energy in Australia? The stock is cheap and it pays a nice dividend.

Sincerely,

Ben from New Mexico

Roger Conrad

2:30

Hi Ben. I must admit I've been surprised by how cheap AGL shares have become. I didn't see a lot of surprises in the Q2 FY2021 results (end Dec 31) or the guidance--they're being hurt by the combination of what many are calling "unsustainably" weak wholesale electricity prices and elevated natural gas prices in Australia. And it looks like they'll continue to be well into calendar 2022. This is still a company with great generation assets, the best position in terms of retail energy markets in the country and a lead position in new generation and grid technologies. And its competitors are getting hurt a lot worse than it is, so it will be in a more dominant position arguably when the cycle turns. Has I known conditions would get this bad, I would have advised selling after the Australian Labor Party lost the election. But at this point, I agree it's cheap and attractive--if you're willing to ride out what looks like it's going to be another 12 months of potential weakness.

Lee O.

2:38

i know this is energy,but any updated info on aqn

Roger Conrad

2:38

Algonquin Power & Utilities won't announce Q4 earnings and update guidance until March 4 after the close. I continue to like the business plan, which combines regulated utilities with contract renewable energy (the company's real roots) and now some international infrastructure, chiefly owned through the interest in yieldco Atlantica.

My view since the stock went above my highest recommended entry point of 14 last year was that investors without positions should be a little patient to buy. I thought the price had been caught up by momentum in a rush by late comers to buy renewable energy stocks. And we're now seeing some of the resulting pullback. I will have an updated view after the Q4 results and guidance for 2021. Management is estimating a 5-6% hit to EBITDA this year from the storms, particularly what happened in Texas. Until then, I rate Algonquin effectively a hold, and a buy on a dip to 14 or lower.

Eric

2:43

Thanks for holding these sessions! Given how much excess oil production capacity exists with OPEC+ and shale, how will that overhang affect future oil prices? In the mid-1980's, what was the excess capacity when oil prices bottomed? Are there examples of sustained oil price increases in an environment of substantial excess capacity?

Elliott Gue

2:43

You're welcome -- we actually find these sessions very useful as well because they help highlight issues of importance to readers. To answer your question, the amount of excess production capacity and current level of demand are related -- right now, for example, I'd argue that most of the excess production capacity is transitory, a function of the still-depressed level of global demand. As the global economy continues to recover from the coronavirus containment recession, I see OPEC needing to return volumes to the market just to keep up with demand -- arguably, right now, they're tighter than they need to be since inventories are contracting counter-seasonally. Second, production capacity today is vey different than it was 40 years ago for the simple reason that short-cycle shale is a far more important component of supply than it was back in the 80's. I'd argue that shale supply is likely chronically impaired from a growth standpoint given the industry's focus on returns and free cash flow and their

Elliott Gue

2:43

reluctance to drill more aggressively and grow volumes even with oil prices above $60/bbl. Finally, oil prices bottomed in 1986. The story back then is reminiscent of today because OPEC/Saudi maintained high oil prices through the first half of the 80's, which led to a proliferation of non-OPEC production capacity enabled by those high prices (Mexico, Alaska, North Sea, etc...) and non-OPEC output continued to grow into the 1990s. Saudi, much like in 2014, pushed OPEC to dramatically ramp up output in late 1985, which led to a huge amount of excess capacity in early 1986 and plunging oil prices. While the extreme sell-off bottomed in early 1986 the long-cycle capacity hangover persisted until the late 1990s, when oil finally took off on its next supercycle higher. This time around, as I said, I think the supply adjustment process started in 2014 and has now ended with the collapse of the shale supply growth bubble last year.

Ed@dvco.com

2:48

Any thoughts on Diamondback Energy?

Elliott Gue

2:48

We like FANG. It's a low-cost producer in the country's lowest cost oil shale field, the Permian Basin.

Ken V.

2:50

Hi Roger:

Questions for today’s chat:

   What is your latest thinking on Enviva (EVA)? They seem go from strength to strength. However today’s WSJ had a long article about lumber difficulties in the Southeast. I am wondering whether any of it affects EVA???
   When the hubbub about the cold snap is over, how do you see things shaking out in TX? Will the net result be positive or negative for pipelines?

   An interesting article popped up on my ipad this morning about a tanker company that has the unusual facility to regassify LNG at the delivery point. Sounded very interesting, and they have a preferred issue that yields 8.4%.Coverage on the common and preferred was 2.5x. Unfortunately, it disappeared from my screen before I could note down the name. There can’t be that many tanker companies. Any idea who it is, and do you cover it?

Thanks as always,
Ken

Roger Conrad

2:50

Enviva's process basically uses wood waste, so all of the ruined timber from storms actually could increase its available feedstock. During the Q4 earnings call this week, there wasn't really any mention of this. CEO John Keppler did answer a question regarding supply--commenting that there was "no direct impact" on its price of fiber from the underlying commodity price of timber--as what they do fundamentally is "pick up leftovers." But the fundamental driver here is new contracts with generators in Europe and Asia. One interesting topic in the earnings call was the company's pledge to go "net zero" CO2 with its customers by 2030. They've laid out some plans to get there that their current drive for greater scale should make easier. But the important issues for EVA shares are still distribution coverage and revenue reliability--both of which are pretty high,

As for tankers in general, we remain pretty cautious at this stage of the cycle. Demand is rising but the sector including LNG still has a glut

Roger Conrad

2:50

of supply and contracts are expiring. And while a preferred stock's dividend is senior to a common stock, it will still be cut if a company needs cash.

2:52

We do cover a large number of tanker companies in our MLPs and Midstream coverage universe. And this will be an area we will explore again at some point. But at this point, we don't have any tanker recommendations for you, common or preferred stock.

Barry J

2:58

Gents:
2 questions:

How high can we purchase MPLX? The “dividend” is incredible – 11.15% as of today, but I am worried about purchasing it for its yield and then it drops in price again from its current $24+. I bought it 4 years ago at $35 and then also in 2015 at $45 without exceeding your limits. Your thoughts and advice?
How high can we buy MMP? I thought I read a cap of $75 on your last newsletter issue but thought it was a typo. Please advise.

Thanks.

Roger Conrad

2:58

Our highest recommended entry point for MPLX is 28 and for Magellan Midstream 75. We've talked a lot in EIA about how long this bear market has lasted for North American midstream--really since late 2014 when oil broke for the last time under $100 a barrel. Both of these companies though have remained solid on the inside. And at this stage of the cycle, they're among the handful of companies in this sector that still matter.

One of the first questions I fielded in this chat concerned why these midstream stocks were trading so far below where they were a year ago when oil prices are now actually higher than they were then. And as I said there, the primary reason is investors still aren't believing in sustainable $50 oil, much less $60. We think the cycle is in a different place than it was a year ago--with pandemic fallout really speeding things up particularly as far as investment in concerned. The focus on free cash flow is very conservative--and a reliable signal of a bottom as well as protection

Roger Conrad

2:59

against a future relapse. In any case, our advice is to stay with both of these very high quality midstreams--collect the dividends and wait for the recovery. They've been through the worst.

Mack P

3:04

Question for today in case I don’t get ‘on’ before you sign off.

Re: ENLC – What are your thoughts on the recent earnings report. I thought it was OK. Seemed noteworthy that they reduced debt a good chunk. Coverage ratio OK but we’d all like it to be higher. Would you buy at this point? At what price?

Thanks

Roger Conrad

3:04

Enlink Midstream appears to have done what it needed to to weather the current stage of the energy cycle. There's still the matter of major customers retrenching--particularly former parent Devon Energy, which has now merged with WPX. But leverage was down to 4.1X EBITDA in Q4 and there was about $92 mil in free cash flow after all CAPEX and distributions as well--which will help put downward pressure on debt.

We really believe the midstream companies we've identified in the Model Portfolio--and if you're more of a risk taker the High Yield Energy List--offer a superior risk/reward at this stage of the cycle. So consequently we're rating EnLink a hold. But it does look like they'll be able to hold the dividend this year. And that means it's likely to come off the Endangered Dividends List in the next issue, pending a more robust review.

Fred

3:08

If you had limited funds left to invest OVER the next few months, would you buy KMI or EPD?

Roger Conrad

3:08

My standard interest to that question is both. But late last year, I chose Enterprise Products Partners as my top midstream pick for 2021. I'm staying with that after a 15% gain so far. I continue to like Kinder and believe it's cheap at the current price. But Enterprise's return to a policy of sequential distribution increases and continuing focus on the NGLs export business I think could provide an edge this year.

Roger Conrad

3:09

Kinder of course has a pretty much identical return year to date.

Fred

3:14

Do you plan to start covering any Green energy plays, ie, Batteries,EV's, etc, especially considering the amount of Government stimulus that will probably be heading that way heading that way?

Roger Conrad

3:14

We cover electricity stocks extensively and on a global basis in Conrad's Utility Investor. Our view is the best way to play the growth of this technology--and the spending on it--is agnostically, that is betting on companies that can most effectively and profitably adopt it. That definitely includes utilities, many of which have the added advantage of a guaranteed return on whatever they spend.

We see three huge problems with buying the more conventional "renewable energy stocks" now, including the seemingly never ending supply of ETFs being launched to hold them. First, we've already seen a big run in many of them since the results of the presidential election were known. We've shared in some of these gains with adopters like Brookfield and Northern Power, as well as Texas Instruments. But prices are not cheap.

Second, many of these companies lack earnings, meaning current prices have no real floor. And that's been a reliable formula for big investor losses, particularly anyone who chases these stocks.

Roger Conrad

3:17

to finish my answer on green plays, the third reason to be very cautious is that so many of these companies are treated by investors as though they're revolutionizing technology, when they're really manufacturers--governed by manufacturers' economics. Companies that make solar panels, for example, are effectively in a race to the bottom with Chinese giants to develop cheaper and more efficient solar panels. Their margins are always under pressure--and their efforts decrease costs and boost margins for adopters like utilities.

Steve

3:22

After riding down the quality names (EPD, KMI, MMP, OXY) and adding along the way the past couple of years what would be your sell strategy. Even with the big recent run I am still in the red on these investments. Thx

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