JotCast | Energy & Income Advisor Live Chat January 2019

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Energy & Income Advisor Live Chat January 2019

Sherry Roberts

1:59

Hi everyone - thanks for joining us. You may notice that your chat window looks a bit different this month. We're using a new chat application that we hope will be simpler and easier for us all to use.

This is our first live run on it, so we appreciate your patience with us.

This is a text-only chat, no sound. Just click in the "Your Name" box and enter your name or nickname. Then click in the text box below it to type your question. Elliott and Roger will type their reply below your question when they put it in the queue.

You can also send your question to service@capitalisttimes.com and I'll be happy to enter it for you.

Of course you can call me at 877-302-0749 if you have any difficulty - I'm always glad to hear from you!

Roger Conrad

2:01

Hi everyone. We're just getting used to this new format so let me apologize in advance for any glitches. As always, we're in this as long as there are questions. Thanks for tuning in.

Sherry Roberts

2:02

Question from Lawdap:
I'm a subscriber to several CT pubs, and greatly appreciate these chats. You both seem pretty positive on energy, utilities, and the economy. I'm fairly well allocated in my investments, but see a lot of opportunities -- I don't want to be greedy.

My question is whether you are positive enough to advocate for an energy and utility "heavy" (say 25-30% each ... or combined?) allocation within the stock component of a growth and income portfolio?

Sherry Roberts

2:14

Question from Victor:

Guys great call on SLB and HAL! They are up about 20% since the last chat. Do you guys see more upside on these two names?

Thank you!

Answer: Thanks! We were early with both HAL and SLB; however, I do not think the late-2018 sell-off was justified by the fundamentals.
SLB actually broke down to levels unseen since the bottom of the 2007-09 Great Recession and financial crisis and, on a valuation basis, reached levels unseen in 30+ years on price/book. Yet, it remains the best run of the major services firms, management has reiterated its ability to return cash to shareholders and retains a strong balance sheet.
As we’ve written before, energy stocks can perform well in an environment of rising oil prices, flat oil prices or even a gentle decline in oil prices but they cannot withstand a big sell-off such as we saw in Q4 2018. We outlined our bullish case for oi back in the Dec 19th issue of EIA. Suffice it to say that we believe the Q4 decline was mainly a function of panicked hedge

Roger Conrad

2:15

Our general advice over the years has been to never invest more than 20% in a single sector. But success really is a lot more about stock picking than sector selection, particularly if you're using the definitions that Wall Street uses, which often really don't make a lot of sense. That said we are very bullish on the energy stocks we've recommended in EIA, as well as anything that's buy rated in CUI. Keep in mind that the biggest challenge in the utility universe has been valuations, which have been very high the past couple years particularly for the best in class like NextEra--which I just wrote about today. If you're buying now, it's as important to watch price as quality, if not more. In contrast, there are a lot more bargains in the energy space, though avoiding Endangered Dividends List companies for example is as important as ever. Dynagas LNG Partners is the latest to cut its dividend by the way--all the way down to 6.25 cents a quarter from a previous 25 cents and 42.25 cents a year ago.

Elliott Gue

2:19

I think some of my reply to the SLB/HAL question may have been cut off. Here's how I meant to end it: That panic trade is now reversing and we see more upside for oil and energy stocks this year. Longer term, major global energy producers will need to spend more on exploration and development if they want to replace their reserves and that will mean more revenue for SLB and HAL. Buying these stocks at such cheap levels is a good move even if the timing is uncertain given broader economic, commodity and stock market volatility.

Sherry Roberts

2:21

Question from Dave:

Gentlemen,
Retired…need income. Thoughts on my EQM position. With the near 10% yield, would think it should be belly up soon! Hold? Sell for tax loss and move into ETRN? Move onto better opportunities? (AMGP) Thanks.

Roger: Dave, there's no reason to expect EQM Midstream to go belly up. Management is doing pretty much what it said it would following the Rice Midstream merger. The general partner Equitrans Midstream (NYSE: ETRN) that was spun out of EQT (NYSE: EQT) appears committed to the MLP structure as a means of finance. And EQM has dialed back distribution growth to a sustainable level--demonstrated by the 1.5 cents per share per quarter raise announced January 16. The biggest unknown for the company is getting the Mountain Valley Pipeline built--the end of the federal government shutdown opens the likelihood that the company will get the needed permits to finish this project in time for next winter heating season. it's roughly 70% finished now. But the situation looks solid. The sa

Howard F

2:23

Where will the price of oil per barrel go to for CXO and CLR to really take off?

I am not sure there's a specific level of oil that will drive energy stocks sharply higher. That said, I think that's mainly a sentiment issue and, in that regard, I think $65/bbl is a key level for WTI and around $70 to $75 for Brent. I would not be surprised to see oil get there before midyear, especially in light of recent developments in Venezuela and with OPEC-Plus.

Steve O

2:28

Do you see oil (WTI) continuing to hang out near $53/barrel for the next few months?

Answer: I believe we're seeing some bullish fundamental developments for crude oil. On the demand side, the market has started to "price out" the odds of a US/global recession in 2019 (as you know we have thought that recession this year is unlikely). Also, on the supply side, we have a very disciplined Saudi Arabia now getting some help from the (increasingly) chaotic situation in Venezuela. I think that will start to show up in US inventory data by next month and that this will power the next leg higher in Brent and WTI.

From a chart perspective, $54 - $54.50 or so is an important resistance level for WTI...let's call the equivalent level for Brent around $64.

My view is that we'll see those levels broken to the upside over the next few weeks followed by a rally to the low $70s for Brent and the mid $60s for WTI.

Sherry Roberts

2:29

Question from Mike C:

Are there any pipelines in OKL counties of Noble, Payne & Pawnee? Also, did the merger happen between Diamond S & CPLP?

Roger: The division of CPLP and subsequent merger of its liquids transport assets into Diamond S to form a new publicly traded company hasn't happened yet. This still looks like a good deal to us that will create two companies with scale in their respective businesses and give investors an opportunity to differentiate. This is not a very popular sector with all of the distribution cuts, etc so it's not surprising that CPLP shares can't seen to get going. We did recommend selling this name for the tax loss at the end of 2018. If you're still in it, the company does appear cheap.

If you're seeking midstream in Oklahoma, I would stick to a larger name like ONEOK Inc (NYSE: OKE) and Enable (NSDQ: ENBL). If your concern is the earthquakes we've seen in Oklahoma and the fact they've been traced to disposal wells for frac water, these companies are not in the line of fire a

Elliott Gue

2:31

Victor:
Gents, UNG went up to $30 just to come down back to 25 and change. Do you see UNG going back up?

Answer: We just closed a long trade in UNG in our trading service Pig vs. Bear for a small profit.

We had been bullish on gas because storage levels remain tight and we still have quite a bit of the winter heating season ahead of us. That said, gas just isn't acting "right" meaning that it's not rallying much even on bullish news such as cold winter weather. I don't want to trade a commodity from the long side unless it's responding to good news. So, we're going to sit out the long gas trade for the rest of the winter. And, longer-term, we're not bullish gas because the US looks well-supplied.

Sherry Roberts

2:35

Thanks everyone for being patient. Please rest assured that we have all your questions, and they will be answered. We're still learning the quirks of this service.

Victor

2:35

Gents, UNG went up to $30 just to come down back to 25 and change. Do you see UNG going back up?

Elliott Gue

2:36

See above for my answer to this question...As Sherry said, I am still figuring out this new platform for the chats.

Sherry Roberts

2:36

Question from Victor:

D and DM completed their merger. How do you feel about D? Do you see some upside from the current level?

DVN went up from the December lows but not as much as other names like CLR. What is your opinion on DVN?

Roger: I was pleased to see Dominion Energy successfully and smoothly complete its second major merger this month, with DM following SCG at the beginning of the year. The issue for the stock now is clearly the Atlantic Coast Pipeline, and concern that court proceedings and the need to get the federal government to reissue permits will trigger big delays in construction and raise costs. I believe these concerns are overdone and that the share price should be at least the mid-70s following the two mergers, due to the earnings power they provide and the elimination of uncertainty by getting these deals done. But until there's more progress on the ACP, the stock looks like it's going to languish in its current range. Earnings are later this week (Feb 1) and I expect to hear more g

Roger Conrad

2:36

more good news--finishing my answer.

Sherry Roberts

2:39

Question from Victor:

What is the criteria on the selection of the position size for each stock of the Actively Managed Portfolio?

I would like to import the Actively Managed Portfolio into Excel so that I can sort the Company Names in alphabetical order. Is that a feature to the service that you can add?

Thanks

Roger: It's several things really. First, "higher conviction" names are likely to draw a higher weighting. We will also leg into some names, rather than make the entire investment at once. And in other cases, we'll weight a more stable company more heavily than a speculative one.

Roger Conrad

2:40

I'm not sure about how adding a feature for alphabetizing would work, though it's something we will discuss. Thanks.

Sherry Roberts

2:41

Question from marilyn
how do we remove chat box so we can see the rest of your answer?

Hi Ms. Marilyn, you don't need to move anything. We're just running up against some character limits when we format our replies. We'll make sure everything is answered completely before we go.

Steve O

2:44

Thoughts on BKEP, Blueknight Energy Partners?

Roger: Blueknight is still on our Endangered Dividends List, even though it cut its quarterly dividend from 14.5 to 8 cents per unit in August. Consensus is management will cut the payout in half with the payment announced in April and we wouldn't argue with that forecast. The main challenge for this MLP is it lacks scale with a market cap of less than $100 mil. But it also stands to lose from the oil market's shift into backwardation--where current prices are higher than longer dated futures. And while there's no debt due until 2022, the credit line maturing then is $258 mil drawn--roughly three times market cap, with just $138 mil remaining.

Elliott Gue

2:45

Mary
What are your thoughts on B2Gold
Answer: I am bullish on gold prices for a few reasons. First, gold tends to perform well in the latter stages of equity bull markets.
Second, gold prices are sensitive to trends in real interest rates (nominal rates less inflation). If we use the 5-Year Treasury inflation-protected securities as a proxy for real rates, gold has faced a stiff headwind over the past 2 years – the yield on 5-year TIPs was around -0.25 percent in early 2017, rising to over +1.00 percent at one point in the second half of last year.
Yet, gold prices have bucked that headwind to trade sideways, part of a wide trading range from 1,150 to 1,360 or so per ounce over the past few years.
My view is that real interest rates in the US have likely peaked as either: The Fed nears the end of its hiking cycle or inflation perks up. In either event, I would see gold breaking above $1,360 or so and entering a more significant rally, possibl to retest its highs set back in 2011.
That would generally be go

That would generally be good news for gold stocks like BTG.
BTG is a small producer with a strong, experienced management team.

2:47

Howard:
On your old system I liked the clicking sound when you answered a question. I could be away from the computer doing something else in the office and I knew when the next answer was coming.

Answer: We liked CoveritLive also; however, they discontinued the service as of December 31, 2018 so we needed to find an alternative. Sorry for the "growing paisn" with this service; however, I think that we'll be able to work out the kinks over the next chat or two.

Barrgold

2:48

Are there any "good buys" in any quality mlps?

Roger: Absolutely. We've rarely if ever seen Enterprise Products Partners and Magellan Midstream Partners, for example, at such attractive valuations. And both of them have increased their market position substantially during the energy sector down cycle. I also think the Kinder Morgan earnings and guidance were stellar. The bottom line is these three midstreams are building critical assets that are lifting cash flows and allowing self funding and deleveraging--but they're in the ballpark of their early 2016 valuations when oil was roughly half its current price. That's an opportunity.

MartyR

2:49

are you transmitting?

Roger: Yes, and happy to take your questions.

Buddy

2:50

Elliott, Please give us you latest take on OXY. Thanks.

Elliott Gue

2:51

Answer: I still like OXY here. It’s a solid producer with good acreage in the Permian and that 4.6% yield looks attractive here My view is that it’s a company that could rally back to around $80 if oil recovers as I expect.

Buddy

2:53

With drilling activity projected to pick up internationally while slowing in the USA, do you now favor SLB over HAL? Judging from the conference calls of both companies, 2019 looks like another lost year for both of these oil service giants.

Roger: As Elliott noted just a while ago answering another question, we were early with both of these but both of them have perked up from their bottom in late December. Our bottom line with both of them is they're the bluechips of their sector and current prices are pretty much what you'd expect to see a bottom for the cycle, where there's not much remaining downside if any and there is a great deal of upside if you're patient enough to wait for it.

David

2:57

About a month ago, you recommended selling CPLP, in part to take tax losses. Do you recommend getting back in now?

Roger: We have not made that call yet, though as i pointed out above the merger/spinoff still looks like a value builder for anyone who resolves to hold onto their CPLP (bulk shipping) and Diamond S (liquids) after the deal. Both companies will have scale for one thing. The big challenge here is both bulk and liquids shipping are very weak markets right now. That means both CPLP and the publicly traded Diamond S could stay cheap for a while. This is definitely a situation we're watching but again not ready to recommend it as a buy yet.

Elliott Gue

2:57

Question: With drilling activity projected to pick up internationally while slowing in the USA, do you now favor SLB over HAL? Judging from the conference calls of both companies, 2019 looks like another lost year for both of these oil service giants.

Answer: International oil producers of all sizes have been slow to boost spending following the 2014-17 bear market. My view remains that the current level of spending is unsustainable as base decline rates from existing fields will lead to falling revenues and the need to invest more to replace reserves. In short, I think we’re at the bottom of the investment cycle internationally and that the stocks’ valuations reflect that.
I suspect that the catalyst for a turn will be when analysts’ earnings estimates bottom out and stop falling. My view is that will happen this year.
International trends support SLB more than HAL; however, I think that investors sometimes ignore the fact that HAL also has a large international operation.

Howard F

3:03

What does 2019 hold for AT and AY

Roger: AY (Atlantica Yield) is likely to continue raising its quarterly distribution to the 43 cents per share it paid in December 2015, before its former parent Abengoa SA declared bankruptcy. At that point, we'll see distribution growth throttled back to a more modest but long term sustainable mid to upper single digit rate, which is still a strong value proposition off a yield that's now close to 8%. Atlantica has a visible pipeline of new projects, long-term contracts that extend past debt amortization schedules at its various projects and a committed sponsor/parent in Algonquin Power & Utilities, that's stated its desire to own up to 50% of shares. This growth should translate into share price gains as well this year.

As for Atlantic Power, this looks like another year of grinding it out with debt and cost reduction, and increasing efficiency/production at individual projects. That may not excite anybody unless there's a high premium merger offer. But the recovery is

Buddy

3:04

When the time is ripe (obviously not yet) do you see RIG as the best play in the offshore drilling sector?

Elliott Gue

3:04

Answer: RIG is probably one of the more financially stable names and a survivor in this beaten-up industry. However, as you said, I caution that it's just too early for the stock to work. I also think SLB would benefit from a deepwater turn with less downside risk that the deepwater drillers here.

Herm

3:09

With the changes made by ET as to structure and diversification, do you feel that the stock now has better growth potentials. Also do you have any concerns as to the stock's continuing its very good yield payout?

Sherry Roberts

3:10

Question from Michael L.

ENLC is currently a hold in your portfolios. Now that the simplification transaction has occurred, what are your thoughts?

Thanks for all the great work over the many years I have followed you guys!

Roger: Thank you for following us! We recommended swapping ENLC for ENLK as a tax loss move at the end of 2018. Those shares have now been converted back to ENLC, with a final return from the point of sale of about 13%. Now we again hold ENLC and again recommend shares as a buy up to 12. We explore EnLink's prospects in great detail in the EIA issue you'll be receiving later this week. The gist of it is that we believe management has a sustainable plan to self fund capital spending--avoiding having to access capital markets--and to increase dividends 5% a year while paying off debt. The assets are solid and there's considerable room to grow them as demand for midstream infrastructure is very strong in US shale country. The yield is very attractive and we believe safe, even at 10%. it's

Roger Conrad

3:11

to finish my answer a great way to capture very high yield in a stock where investors are pricing in far too much risk in our view.

marilyn

3:14

how do we remove chat box so we can see the rest of your answer?

Roger: We're still working our way through a lot of these issues. I'm having trouble showing up under my own name, for example other than as "Roger:" Please bear with us. I can promise you we'll be more adept at this system next time. As Elliott said, we would have been happy sticking with Cover It Live were it still offered by that company. But this new system actually appears a lot more interactive and easy to use--once we figure it out.

Mary

3:19

Thoughts on ARREF as a copper play?

Roger: It's not one that we've looked at closely, but to be honest it looks like a whole lot has to go right here for Amerigo Resources to stick around. That starts with the company being able to execute on mine development. But it's also going to have to stay in good stead with the Chilean government and hope copper prices can arrest the downturn they've been in since early 2018. This has been a tough market even for giants like FCX. I think most people are better off in a stock like BHP, which actually pays a generous dividend while you wait on rising production to pay off.

Dan

3:19

I saw an article indicating that some MLP distributions may get a better tax treatment under the new tax act. True? If so, does it cause a major impact for stock prices or for your focus list?

Elliott Gue

3:19

Yes, MLPs benefit from the tax cuts. MLPs don't pay corporate tax, so they don't benefit from the cut to corporate tax rates. Instead, the benefit comes from the fact that MLPs are pass-throughs and each individual unitholder pays taxes at personal income tax rates. Importantly, the final version of the tax bill does give a 20% deduction for certain qualifying pass-through business income including income received from MLPs. As for the question of whether it changes our outlook for individual MLPs, the answer is not much. When evaluating the decision to buy or sell an MLP, we look at the underlying business and distributable cash flows, not how the distributions are taxed to the individual buyer. In short, it's a benefit for investors but doesn't change our view of the relative merits of MLPS we cover.

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