JotCast | 4/28/21 Energy & Income Advisor Live Chat

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4/28/21 Energy & Income Advisor Live Chat

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Roger Conrad

2:02

Hello everyone and welcome to our monthly Energy and Income Advisor live chat. Starting with a few ground rules, there is no audio. Just type in your questions and Elliott and I will get to them as soon as we can concisely and comprehensively. We will stay until all questions are answered. And shortly following the conclusion of the chat, we will send you a link to the complete transcript of the Q&A, which will also be posted on the EIA website.

2:06

Here's one we received prior to the chat: Hi Roger and Elliott:
Thx for doing these chats so regularly. They are valuable and important and we all appreciate your efforts very much. For today's chat, I'd like to ask your views on the Canadian dollar. Where do you see the CD in a year or so ? in 5 years? further out? parity with the dollar?thx--Jerry F Thanks Jerry. As I indicated in the recent article about Canada, I'm pretty bullish on the loony long-term. One reason is of course the natural resource linkage and the fact that Canadian oil looks like it's going to be unlocked starting with the completion of Line 3 later this year by Enbridge and eventually by TransMountain. I think it will be a nice tailwind to boost the value of Canadian stocks as it was over the past year.

Barry J.

2:13

Gentlemen:

Any idea what prompted UTL’s 15% rise today?

Thanks

Roger Conrad

2:13

Hi Barry. My first reaction when I saw today's move was they must have received a high premium takeover offer, which is always a possibility for a well-run electric and gas distribution utility with a market cap under $1 bil. But from what I can see, it's the result of joining the S&P SmallCap 600--demonstrating the awesome power of indexation particularly with small cap stocks. I still like the company and believe it will fetch a takeover offer. But this usually isn't the kind of short-term gain that lasts so no change to the current advice in CUI, which is buy at 50 or lower.

Michael L

2:13

Would you please give us an update on your view of OXY's appreciation potential.

Also, I noticed XOM made another discovery off Guyana. What are your thoughts on XOM's appreciation potential?

Thanks to you and Roger for all the excellent work!

Elliott Gue

2:13

Thanks for the kind words about our work. OXY looks to be on track to me. With oil around current levels, they're in a position to generate $5 billion in free cash flow annually over the next few years which, when combined with asset divestitures, will allow them to bring down their debt burden over the next 2 to 3 years. That, in turn, will allow OXY to contemplate a plan to return capital to shareholders via dividends and buybacks. We believe you could see OXY get back to the $40 range this year and our longer-term target, based on the net present value of free cash flow is closer to the $70 to $80 area. XOM is one of our favorite integrated names and Guyana is certainly part of that. They continue to announce new field discoveries offshore Guyana and had the foresight to continue investing in that asset while most of the other majors were focusing on free cash flow. Now, they own a world class asset that will see production ramp up just in time to benefit from the new upcycle in oil.

Alan R.

2:22

GS came out today and is targeting $80/barrel in the next six months. What are your thoughts on the price of oil this year, especially given the various goals of the current administration?

Elliott Gue

2:22

Our view on crude oil prices remains constructive, driven by 3 main pillars: 1. Continued discipline by shale producers re: production growth 2. A recovery in demand as the world exits the lockdown recessions of 2020. 3. OPEC+ commitment to restrain output near-term, to keep the market balanced as the economy recovers. I think we're already seeing clear evidence of all of these factors. So, I wouldn't rule out a spike to $80/bbl in the next 6 months, which could happen if demand recovers more quickly than expected. However our view remains gainst that backdrop, we believe that the $50 – $55/bbl range should now be regarded as a floor for WTI oil prices and price can average closer to the high-$50s to low-$60s for the balance of 2021 and into 2022. Finally, I would say that I think the risk that oil prices exceed our target over the next 12 to 18 months is higher than the risk that they undershoot our targets.

Jack A.

2:27

I recently read an article in the Wall St. Journal that the Bureau of Safety and Environmental Safety may require closer inspection of the thousands of miles of active and decommissioned pipelines on the floor of the Gulf of Mexico. Currently, monthly inspections are carried out by observing the surface water for leaks.. There is talk of requiring subsea inspections..

Also mentioned was the possibility of requiring the raising of the 18,000 miles of pipelines no longer in use.. Which oil and pipeline companies currently recommended by EIA would be affected by tougher regulations on the pipelines currently used, or in the past used in the Gulf of Mexico? Thank you.

Roger Conrad

2:27

First of all, the government can accomplish some things by executive order but others take legislation and or can be litigated. The Biden Administration can certainly require greater scrutiny of pipelines and other infrastructure that's on federal lands and waters. But for something as dramatic as requiring 18,000 miles of unused pipelines to be pulled out, the path of least resistance is going to be through industry cooperation, and quite possibly financial assistance.

I will say that as far as EIA recommendations go, we are not exposed to undersea Gulf of Mexico infrastructure. One midstream company that could be is Shell Midstream Partners. They're also potentially affected by tighter regulation in general in the Gulf of Mexico, though during the earnings call the CEO stated no current production affecting its system has been impacted by the pause in permitting. We currently rate SHLX a hold in the MLPs and Midstream coverage universe.

Anne

2:29

Hello Roger & Elliot: I sent an email just before the start of the chat. So I am not sure if you received the question, but I will ask here again. I know DVN is not on the model portfolio list, but could I please ask what your current outlook is for the company, and whether it is still a good long-term investment opportunity. Thank you.

Elliott Gue

2:29

Thanks for the question. Yes, we have a positive view on DVN. Management has adopted the same basic "Shale 2.0" model that other producers like Pioneer (PXD) have. In a nutshell, that means they set their capital spending budgets based on the level needed to maintain current production. In DVN's case, they need oil somewhere in the mid $30s (roughly) to meet maintenance CAPEX needs and cover their base dividend. They then pay out a special dividend to return any excess free cash flow to shareholders. Generally, that excess free cash flow would be due to commodity prices above that breakeven level in the mid-$30s. With our view that oil prices near the $60/bbl level are sustainable for some time, the potential for total returns -- share appreciation and dividends-- in names like PXD and DVN drives our buy case.

Anne

2:30

Hello Elliot and Roger:
I was wondering if you could please provide some updated comments about DVN in regards to its outlook, whether it is still a good investment opportunity.

Thank you.

Elliott Gue

2:30

Thanks for the question...my detailed outlook for DVN appears just above.

John

2:33

Are there any stocks that we should take full or partial profits from?

Elliott Gue

2:33

AT this time, we're not recommending that. In fact, we see the recent pullback in names like PXD as an opportunity to buy. For a while, several of these names were above our targets.

We're also looking at some new names as potential additions to the portfolio over the next issue or two.

If we do get a big spike in oil prices and some of our names jump closer to our fair value estimates, we may well recommend taking some money off the table and/or switching into new names. However, at this stage of the cycle, it's generally best to focus on buying the dips and staying invested in quality names.

Cliff W.

2:37

if time permits, would appreciate thoughts and buy limits on:
CEQP, MPC, VNOM, and energy stocks that still offer both high, safe yield and still have room to run materially higher

Roger Conrad

2:37

Crestwood Equity Partners reported Q1 earnings earlier this week that were quite robust--EBITDA and DCF up 9% and 15% respectively from the year ago quarter. That was despite lower gathering and processing volumes in multiple basins outside the Bakken. That's pretty solid evidence it has adapted its business model to the current stage of the cycle. And it was also encouraging to see them able to dramatically reduce exposure to a possible shutdown of the Dakota Access Pipeline. We have a current buy up to target of 22, which we are evaluating in view of these results.

In the Marathon Petroleum family, our pick has been MPLX LP, which hit a new 52 week high today in advance of Q1 results (May 4). It's now a bit over our buy target of 25 and we want to see operating numbers before going higher. We consider dividends at CEQP and MPLX to be safe. In contrast, VNOM (Viper) pays a variable dividend that will fluctuate with oil and gas prices. We believe that will be a positive. But it trades above our buy target.

Roger Conrad

2:38

To finish on Viper, we will probably raise the target from the current 12 sometime after results May 3.

Mike C.

2:40

Gentlemen (and Sherry!) – Thanks as always for rock-solid analysis, insight, and service. I would love to hear your thoughts on the XOM vs Engine No.1 proxy fight, and its implications for XOM value ahead.

Many thanks

Elliott Gue

2:40

Thanks for the kind comments. Generally, I think a company's best defense in proxy battles like this is performance and XOM is shining in that regard up about 40% over the past year, well above CVX, its closest US peer as well as all of the major European majors. Also, at XOM's recent investor day they outlined a number of climate and renewable energy initiatives, which should help address some of the concerns the activists have raised. And then you have Guyana, which is emerging as a world class resource, which XOM has been able to dominate because they had the foresight to invest counter-cyclically even when so many pundits and activists were pushing them to cut debt and focus on cash flow.

Pat M

2:42

Hello Roger and Elliot, I would really appreciate it if as a regular part of the EIA portfolios, that you included pricing for dream buy, buy and partial sell info. It’s sometimes a challenge for me to find all this essential information.
Many thanks for all your efforts!

Roger Conrad

2:42

Thanks Pat. We have been featuring a table in every issue for Dream Buys. That's somewhat less useful than it was last year, when so many stocks were trading below those levels. Now that so many picks are rising above buy targets I think it does made sense to address the partial profit taking issue--though we are pretty early in this energy cycle. Thanks for the suggestion.

Michael L

2:44

Hi Roger, From among the conservative and aggressive portfolios in your Utility Product, which positions have the most price appreciation potential over the next 12 months? Thanks for the great work.

Roger Conrad

2:44

The two best buys in Conrad's Utility Investor every month are going to be the Focus stocks--one Conservative and the other Aggressive. Basically, I look for high quality companies with discounted stocks I believe are likely to get investor attention in the next 12 months or so. In the most recent issue (April), they were Edison International and Kinder Morgan--which for EIA readers we also highlighted as April 23 Energy Commentary, which is posted on the website.

Mack

2:51

Here's a blast from the past. A stock trading service I sometimes follow recently recommended SLCA (U.S. Silica Holdings.) We haven't talked about fracking sand companies in a while. Wondering if you still follow this one and what you think. Thanks.

Elliott Gue

2:51

Yes, frac sand is so 2014...In all seriousness though, I did see that name pop up on a momentum screen I perform regularly and I'll have a closer look. I think the big issue though is that US service and drilling activity should slow as we move through 2021. The US needs about 200-225 frac spreads and an active rig count of 500 to maintain current oil output (no growth, just steady). Last year we had a low of under 40 frac spreads and 244 active rigs; today, we're at 217 and 438 respectively. HAL comments last week were pretty conservative on the North America outlook and management was clearly more excited about international growth. So, while I have no doubt frac sand demand has surged from last summer's lows, the growth is going to slow markedly this year and that's trouble for sand producers as well as other companies that have hefty focus on North America like PTEN, HP, NBR.

Jack A

2:54

I've read reports that pipelines from the Permian are expected to be approximately only 57% filled by the end of this year. Do you agree?.
If not fully utilized, are you expecting contracts to be renegotiated at a lower price, or are you expecting oil production to pick up?.. Could that explain the continued lower valuation of the pipeline companies (for example, KMI and EPD) compared to their pre-pandemic prices?

Roger Conrad

2:54

Hi Jack. What you're reading is actually from a report by industry research firm Wood MacKenzie. We addressed its implications in the opening article of the most recent issue of Energy and Income Advisor.

The study is based on real interviews with companies up and down the value chain so there's no reason to doubt its findings. But there are two meaningful caveats. First, it's a snapshot of where we are in the cycle now, and how far the sector has to go before full recovery/boom phase. But it's based on information that's well known to market participants and investors. Midstream companies have adapted, as the robust Q1 results we've seen so far also indicate.

As we've said here, our view is producers are going to keep focusing on free cash flow rather than output. That means pipelines aren't going to be as full as they would be if producers were more aggressive. Ultimately that will change and output will rise again. But until then, midstream companies will have to adapt as they are doing.

Roger Conrad

2:56

Continuing on Jack's excellent question, our view is energy stock valuations are where they are now--really up and down the value chain--because investors still don't believe oil will hold over $50 a barrel, let along the current range in the $60s. And as a result, they're pricing producers and midstream companies at levels they would at $40 oil. We don't expect this to last forever. But so long as it does, investors will have a great chance to buy KMI, EPD et al cheaply.

Guest

2:58

Your thoughts on the OXY Warrants that were issued to holders some time ago?

Elliott Gue

2:58

I believe those are the OXY 08/2027 warrants with a strike price of $22. They trade basically like long-term options and they're currently in-the-money on the order of $5 but trade for $11+, so, there's quite a bit of time premium in there. Bottom line, they will give you more upside leverage to a rally in OXY near-term, but that time value will also erode over time, especially as we get closer to 2027. Generally, for long-term investors we recommend just buying the common stock since you don't have to worry about that theta decay. And when it come to trading OXY with options, EIA's sister publication Income Options has done that in the past around OXY's earnings releases, but we generally use shorter term options to trade stocks.

Guest

3:02

What's your outlook for the oil service sector, SLB in particular? Thanks.

Elliott Gue

3:02

SLB is out favorite name and it's a model portfolio recommendation. We favor the names, like SLB, which have exposure to international drilling and CAPEX activity, which is turning higher. On its call last week, SLB expressed greater confidence in the strength of the international cycle and guided to double-digit year over year revenue growth in H2 2021 vs H2 2020. We'd generally avoid services names with concentrated exposure to North American, especially shale. In answering a previous question I explained why we expect the pace of new rig additions and well completions to slow in 2021 as activity reaches a "maintenance" level. That's a headwind, particularly for the contract drilling names and even for HAL, which still has hefty focus to US shale. SLB is now (almost) a pure play international.

Guest

3:04

Thanks for holding these chats ... good place to get questions answered and also see what other investors have on their minds. What is your mid term price outlook on BP? Price appreciation and dividend safety. Thanks again.

Roger Conrad

3:04

For all of its moves to decarbonize, BP is going to fundamentally be an oil and gas producer for the foreseeable future. That much was pretty clear from Q1 results, the headline number of which was a $3.3 bil profit, up from a loss a year ago. The company also generated nearly six times as much cash as it did in the year ago quarter, which it used to cut its debt $5.6 bil to $33.3 bil. That resulted in the company meeting its debt reduction target a year early, and the announcement of a $500 mil Q2 stock buyback.

That was all possible because of higher oil prices in Q1, which BP was able to benefit from with sale as well as gas trading operations. We've rated the stock a buy up to 27--going back to pre pandemic levels would take it over 40, dividend is likely to stay the same at a 5% yield.

ron

3:15

As many energy stock prices have improved, I am wondering about the shares of MRO which was once a favorite. Is this one that could be in the early stages of interest?

Elliott Gue

3:15

We're not as excited about MRO. Clearly they will benefit from higher oil and gas prices; however, their production breakeven costs and free cash flow outlook over the next few years isn't as good as a name like PXD or EOG. If you're looking for a higher beta play on oil -- more upside if oil prices remains higher for longer as we expect -- we like OXY more.

Elliott Gue

3:16

MRO is not terrible, it's just that we prefer others.

Bill F

3:23

The Toronto Globe & Mail reported yesterday that "On the weekend, the Regional Municipality of Wood Buffalo, which encompasses Fort McMurray, declared a state of emergency
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as the coronavirus spreads out of control in northern Alberta.”

Apparently workers flying in have contributed to the spread of the coronavirus, which has the potential to adversely impact operations in the oil sands. There were production lows a year ago as the virus impacted demand and prices, but with the U.S. economy gearing up and Canada making some progress on vaccinations, it would appear that this will be localized and hopefully have a shorter impact.

You cover CNQ as a buy and CVE as a hold in your Canada & Australia listings, but I am more focused about potential impacts on midstream companies serving the oil sands E&P companies, like PBA and TRP in the Actively Managed Portfolio and ENB in the High Energy Target List. These companies have sufficient diversification and take or pay contracts on most pipelines to weat

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