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Energy & Income Advisor Live Chat January 2020
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AvatarElliott Gue
2:04
Hello everyone and welcome to the EIA January live chat. We would be happy to answer your questions at this time. As a reminder, this is a text-only system (no audio). So, simply type your question into the box and we will answer each question we receive today. We'll also send a link to a transcript of the chat out (probably tomorrow) for those of you who want to peruse the entire Q&A at your leisure.
Ben F.
2:07
Good morning.

Any comments on the large, international oil companies - XOM, RDS, TOT, CVX? They keep going down. Are the dividends safe at $50 oil?
AvatarElliott Gue
2:07
Actually, we're looking seriously at the majors and eyeing some potential additions in the group over the next issue or two. Two points I'd note are that 1. the group is among the most defensive and conservative out there with a long history of surviving (and indeed thriving) through all oil price environments. 2. We don't think oil prices will remain around $50/bbl for long this year.
Rk
2:12
Thoughts on Mplx and Epd after there earnings release.
AvatarElliott Gue
2:12
MPLX earnings were solid with Q4 2019 distributable cash flow up 9.4% and a 1.4+ coverage ratio. We think it's wise that they cut their 2020 CAPEX plans in response to the lower CAPEX from customers. Enterprise was strong and consistent as always and we expect another year of steady, moderate distro growth this year mainly on the back of smaller, lower risk "bolt-on" growth projects. We will have a lengthier rundown of results from both MPLX and EPD, alongside several other portfolio recos that have reported in recent weeks, as part of the next issue due out over the next couple of days.
John C.
2:13
I may not be able to make it today for the chat. but would like you comments/outlook on:
CLB 
also on HAL and SLB - any chance they will make a comeback anytime soon?

thanks
AvatarElliott Gue
2:22
If history is any guide, the exploration and production (E&P) companies will be the first to benefit from a turn in the cycle for oil/energy with the services names including CLB, HAL and SLB coming along behind those. Of the 3 names SLB is our favorite as the international business is in good shape (majority of SLB's revenues) and I think there's room for stock specific upside catalysts under the firm's new CEO. HAL is the most directly impacted by cuts to US E&P CAPEX; however, I think they're dealing with those issues well, rejecting unprofitable business and right-sizing capacity to demand. I suspect HAL will remain range-bound until North America shows more signs of bottoming. Of the two majors, SLB offers a 6% yield compared to 3.3% for HAL so it's nice to get paid while you wait for the cycle turn to progress. CLB is a very cheap stock and, I think, undervalued. But it's a small company is a bad neighborhood so I think you'll see it recover after the giants (HAL/SLB) of the world.
Alan R
2:28
Guys,
 
Would you please comment on EPD and RDS.A earnings? Thank you.
AvatarElliott Gue
2:28
EPD I just covered in brief -- basically just solid and the story is on track there. I think the selling today has more to do with the broader market/energy than anything they've announced. We'll have a lengthier update in the next issue (out over the next few days). About a year ago, Shell had said that it would be able to "do it all" -- dividends and buybacks and investment -- but in their latest quarter they cut planned buybacks.  So, I think you're seeing some disappointment related to that. Shell isn't yet in the Actively Managed portfolio but we are looking at weakness in the supermajors as a potential opportunity to recommend buying names like Shell as we still think the group is poised to offer strong shareholder returns even in a moderate oil price environment.
harlanhorn
2:37
With the coronavirus development in China and the steady stream of headline news regarding it, it looks like China is shutting down based on clips from the news networks.  Obviously, oil is being negatively impacted and investors would be wise to not commit any further money until a solution is in place and we have turned the corner.  But if the situation continues to deteriorate with the major indices overbought, would it be more prudent to exit energy positions get into cash under the dust settles?
AvatarElliott Gue
2:37
We don't think the Wuhan coronavirus will have a lasting impact on oil markets. Mainly that view is based on the historic precedent -- outbreaks and epidemics can certainly case market volatility however history shows they don't drive prices over the intermediate to long term. A lot of the headlines re: Wuhan coronavirus have focused on a comparison between the SARS outbreak in 2002-03 and the oil market back then. Specifically, oil prices collapsed by a third between end-February 2003 and late April 2003, which roughly corresponds to the peak of the SARS scare back then.
AvatarElliott Gue
2:42
However, for the next issue of EIA, we just did a more dretailed deep dive look at oil back in 2002 and 03 and, specifically, news headlines on days over this time period when oil saw big gains or big falls in price. What we founf was that there was basically no mention of SARS through most of this period at all. Two factors realkly drove oil in 2002-03 -- a strike in Venezuela, which all-but-halted oil exports and, arguably more meaningful, the US-led conflict with Iraq which started in March 2003. In short, oil prices rallied from November 2002 to end-feb 2003 on concerns that Saddam Hussein would torch major Iraqi oilfields when the US invaded, causing permanent or long-lasting damage to Iraqi exports. The VZ strike started on December 2nd 2002 as well, causing a roughly 75% decline in the nation's production. Oil then fell sharply in March/April 2003 as it became clear there was no significant damage to Iraqi oilfield infrastructure and as the VZ strike ended.
2:45
In effect, the idea that oil prices reacted to SARS in 2003 is fallacious -- it wasn't on the market's radar screen. Looking at the fundamentals today, it appears the Wuhan virus is much less deadly than SARS and the Chinese govnerment has been quicker to respond. This will impact growth in the short run and, therefore, oil demand from China. However, as fears peak and subside ove the next few months I think we'll se ethe actual impact on global oil demand is small (maybe 250,000 or 350,000 bbl/day) ands short-lived. The long er term fundamentals -- OPEC's willingness to keep prices above the low $50s and slowing shale output warrant little change to our constructive outlook for oil prices outlined in December.
Rk
2:48
Will there be any recovery in nat gas prices this year?
AvatarElliott Gue
2:48
We're not bullish on US natgas prices and we haven't been for a long while (years). There's just too much supply and, while demand growth has been solid enough, it's dwarfed by US output. I think you could see  recovery into the $2.50 to $3/MMBtu range but I do not think that you will see a sustained recovery much above $3 except for occasional weather-driven spikes (very hot summer or very cold winters).
Steve
2:49
It is 2:10 and I see only one question answered so far. Is their a transmission problem?
AvatarElliott Gue
2:49
No transmission problems. I'm just writing long answers...We will get to all the questions posted today before concluding the chat.
Ron
2:50
Do you see any significant recovery in natural gas prices this year
AvatarElliott Gue
2:50
I think we covered this in response to a prior question but the short answer is No -- while I think you'll see oil back in the $2.50 to $3 range at some point, the supply demand balance is bearish.
Davis
2:53
Are we starting off with just questions or do you have some info to start?
AvatarElliott Gue
2:53
I'm just covering questions as the questions we've received pretty much correspond to the main items on my agenda re: oil and energy stocks at this time. Also, note that we have an issue due out over the next day or two which will address, among other things, the recent coronavirus news as well as earnings results from a long list of portfolio recos that have reported to date.
ted
2:54
What affect do you think the "Coronavirus" will have on oil prices
AvatarElliott Gue
2:54
I think we covered this earlier in the chat but to summarize: Basically, it's a headline risk short-term but I think the dust will settle over the next few weeks and the intermediate to long-term impact will not be significant for oil (or the stock market).
Victor
2:57
Why are companies like FANG, CXO, MRO OXY focused on increasing cash flow instead of increasing production? Is it just a strategy to attract investors?
AvatarElliott Gue
2:57
For many years, E&P companies were rewarded for boosting output. However, since 2014, investors have basically seen the US E&Ps dramatically increase production without generating any meaningful profits or cash returns for their shareholders. So, investor preferences have shifted to favoring profitable growth (or at least profitable stability). So, you could say that it's a strategy to attract investors but I think it's a long-term shift rather than a passing "fad."
Jim N
3:03
What are you thoughts about PAGP?  I just noticed the price had a 4+% drop today.
AvatarElliott Gue
3:03
For the most part I think PAGP is following sentiment on energy and oil so with oil re-testing its 12 month lows in the low $50s you're seeing sell-offs in many of these energy stocks and MLPs. Plains reports next week (02/04/2020) so I think that's the next time there will be significant company-specific newsflow.
Guest
3:04
Thanx for continuing to hold these Live Chats... they are a "steadier" in times of doubt! I may be uncomfortable with the results but your guidance makes sense to hang in there.
AvatarElliott Gue
3:04
Thanks for the kind comments. We really enjoy doing these chats. It also helps us understand readers' key concerns and suggests topics for future issues.
Victor
3:07
How do you feel about DKL? The stock has been in a trading range between $28 and $35 for two years.
AvatarElliott Gue
3:07
It's a sort of steady-as-she-goes situation with DKL. Last Quarter (Q3 2019) they covered their payout by 1.11, which is reasonably healthy. And they double-digit yield has generated a solid total return despite the flat-as-a-pancake stock price. I do have some concerns about their parent, Delek (DK), which is why we prefer some other names to DKL.
ted
3:12
can you explain how to interpret the complete disconnect between weekly report figures of the API/EIA and what they mean for oil price movement
AvatarElliott Gue
3:12
There was an old joke out their that API is an acronym for Almost Probably Incorrect. While I wouldn't go that far, I would say that EIA figures are a more important mover of prices and oil prices tend to see limited moves off a big API number (bullish or bearish) until those figures are confirmed the next day by EIA. More broadly, I think that it's worth noting that both EIA/API numbers are probably wrong -- the emergence of massive US oil exports over the past few years has led to a near-permanent increase in the error term that EIA uses to make their weekly numbers balance. I actually produced a little YouTube explanation of this phenomenon if you're interested in more detail:
Victor
3:17
Elliott, midstream MLPs are affected by lower volume due to a decrease in production from producers. Is that going to be a long term situation or problem? How do you feel about SHLX and ENBL?
AvatarElliott Gue
3:17
Yes, it's definitely a problem for some MLPs. However, the better names have enough diversification into less volume-sensitive business lines that they can work through that headwind. Others have their assets booked under long-term contracts that insulate them from short to intermediate term swings in volumes.  I'd also note that I expect US production volumes to slow but not to be thrown into reverse, at least not in 2020 or 2021.  We still have SHLX as a buy though it's not in the Actively Managed Portfolio. We have ENBL as a buy (aggressive pick) in our High Yield Energy list.
Mack
3:20
On Jan 16, CEQP announced a payout boost to a new amount of $0.625 and the way I read the release, this will be the payout for the rest of this year, even though the coverage ratio is a health 2.0.  The stock has promptly fallen aprx 10% and the yield is now aprx 8.5%.  But with the payout frozen I don't see the stock going up this year.  So the main reason for holding CEQP is the 8.5% yield, assuming it's safe which it appears to be.  Am I missing something.
AvatarElliott Gue
3:20
Well, I think that there are other more important drivers for CEQP in the short term, primarily surrounding sentiment toward oil and energy stocks. Should that change, and as the recent virus-driven "shock" fade, we see no reason CEQP couldn't recover to the mid to upper $30's without a boost to the distro.
Lee
3:22
Re: PAGP being down today. Ex-div for .36!
AvatarElliott Gue
3:22
Thanks for pointing that out...my terminal automatically adjusts for dividends distros paid so I don't really see that until after the fact.
Victor
3:42
By the summer of 2018 we all thought that a recovery in oil prices was real. But towards the end of 2018 prices starting to go down again. Companies like CLR and DVN are now hitting lows that we haven't seen since 2016. Do you expect a recovery in those names this year?
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