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Energy & Income Advisor Live Chat March 2020
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AvatarRoger Conrad
1:59
Hello everyone and welcome to this month's Energy and Income Advisor subscribers-only live chat. We hope everyone is healthy and in good spirits, despite the challenges now facing us. And we're looking forward to lively discussion about what's still one of our favorite subjects, energy.Just to review a few ground rules, there is no audio on this chat. Type in your questions and Elliott and I will answer them as soon as we can completely and comprehensively. These chats generally
2:00
run for a while so if your question isn't answered immediately, please be patient. Rest assured, we will stay on the chat until everything in the queue is answered as well as what we received via email prior to the chat.
I'd like to start by posting answers to some of those pre-chat questions.
2:01
Q. Roger. Given the major disruptions and recession expected from both COVID-19 and the oil price war, some of our more solid holdings have current yields that in normal times would indicate risk of dividend cuts: Enterprise Products Partners (NYSE: EPD), Pembina Pipeline (TSX: PPL, NYSE: PBA). Keyera Corp (TSX: KEY, OTC: KEYUF). There are even extremely high yields at ExxonMobil (NYSE: XOM), Kinder Morgan (NYSE: KMI) and Chevron (NYSE: CVX), though not as much. Will you be including some of these in the Endangered Dividends List? Regards—Bill F.
 
A. I would certainly agree that these stocks are priced for some level of dividend cuts now. And given the North American energy business is being hit with both supply and demand shocks, I don’t think you can rule anything out entirely. But there are two major factors that set these companies apart from those on the Endangered Dividends List.
 
First, up until the COVID-19 hit to demand and the Saudi attempt to flood the market with oil, these companies had been covering dividends comfortably while successfully executing on new low-risk projects, self-funding rising portions of CAPEX and deleveraging. In other words, they’ve all adapted well to the lower for longer oil price environment we started talking about in EIA back in 2014, when oil was still over $100 a barrel.
 
It means, unlike many of the companies on our EDL, they came into this sector crisis with a cushion. And as a result, they have levers to pull with the business that will allow them to continue paying their dividends for the time being, and without sacrificing their long-term ability to grow or the strength of their balance sheets.
 
That’s now being confirmed in the updated guidance we’ve seen from several of these companies. Keyera, for example, has cut its capital spending for 2020 and 2021 but affirmed its intent to maintain its monthly dividend of 16 Canadian cents. Chevron will cut CAPEX 20 percent and won’t buy back stock, but its CEO says the dividend is it’s number one priority.
 
Pembina has cut the mid-point of its 2020 CAPEX guidance range by 45 percent, largely by delaying projects in progress. But it’s still maintaining its projected cash flows, the stable fee-based portion alone of which covered the 2019 dividend by 1.37 times. And management has affirmed its intent to maintain dividends this year.
 
Kinder, ExxonMobil and Enterprise have yet to officially update. But I expect them to announce much the same when they update guidance in coming days.
Obviously, these companies’ cushion eventually goes away if oil prices go under $20 a barrel and stay there indefinitely. We believe that’s highly unlikely. But the fact that so much depends on what COVID-19 winds up doing to human health and the economy—as well as energy politics—makes the timing of any sort of recovery highly uncertain.
 
That’s a good reason for investors have a little healthy caution here. But this is about as cheap as I’ve ever seen this group of high quality company stocks. And let’s not forget here that we’re talking about companies that dominate the business of producing, transporting and selling oil and natural gas—which are still vital commodities for a functioning global economy and will be for decades to come, even under the most aggressive assumptions for adoption of renewables.
 
2:02
Q. For me, it's hard to predict which oil companies will still be around in a year and a half when a corona virus vaccine is administered and people stop hunkering down. But one thing is pretty certain, and that is the price of oil will be higher at that time. What is the best way to play this? Are there future options for the price of oil? My guess is you will tell us to buy the large oil companies like Exxon. But these oil companies could still go lower in price. And it's hard to know where that bottom price is. It's hard to imagine WTI going much lower than the mid-teens, as you predicted. Companies could go out of business, but the price of oil doesn't carry that risk. What are your current suggestions for capitalizing on the eventual rise in oil prices, or is it just too early to make a suggestion? Thanks—Jack A.
 
A. We are currently recommending a Portfolio position going the opposite way, ProShares UltraShort Bloomberg Crude Oil (NYSE: SCO). As you noted, we believe the price of benchmark West Texas I
SCO does have an analogue—ProShares Ultra Bloomberg Crude Oil (NYSE: UCO)—that does the opposite, i.e. rises two points for every one point rise in crude oil prices. That’s one way to play oil when it does start to rise again, and our intermediate term view is a return to the $35 to $40 per barrel range.
 
Those who subscribe to our trading service Pig Versus Bear will know that we’ve made a couple recent trades using UCO and SCO to capitalize on the wild volatility in oil prices. And we believe we’ll have the opportunity to do a lot more in coming months.
 
For longer-term bets on a recovery in oil prices, however, we believe stocks offer more leverage than the commodity and ultimately more stability, as well as dividends while you wait. Yes prices have come down a lot, even for the best in class companies’ stocks. But that to us is a buying opportunity for them.
 
We also believe that while nothing is certain, we can make very high percentage bets on the companies we believe will be around when oil prices recover. That definitely includes ExxonMobil—which after all is still Aaa rated by Moody’s, a very long way from vanishing I think you’ll agree. And it includes the stocks in the previous pre-chat question as well.
 
2:03
Q. Energy Transfer (NYSE: ET) is selling at a very low price, and there is a lot of insider buying. I'm tempted to buy for when this epidemic is over, I figure in about a year and a half, when a vaccine is available. But I'm frightened the company is not going to make it—i.e. go bankrupt. What are your thoughts? What is your estimate of the chances ET will still be a viable company in a year and a half? Thanks—Jack A.
 
A. Though the share price has come down sharply as you note, we think the odds of not filing Chapter 11 are very good for Energy Transfer. Before the COVID-19 crisis, their distribution coverage was extremely high (1.88 times in Q4) and they faced minimal near term balance sheet pressure, with just $175 million debt maturities this year. Fitch affirmed the company’s BBB- investment grade credit rating as recently as March 23, citing “large scale” and “diverse” operations and “a predominantly fee-based business.” It cited counterparty risk at certain pipelines and possible volume risk in 2021 a
2021 as concerns.
 
The company will have to absorb the loss of Royal Dutch Shell as a financial partner in a planned LNG export terminal in Louisiana. At this point, that probably means just shelving the project for now and the company has already asked federal regulators’ approval to extend the deadline for completion until 2025 to keep options open. But with the project still in pre-development stages, a final investment decision not to go through with it would hardly be catastrophic for Energy Transfer.
 
What we haven’t yet seen is a full-on guidance update in the wake of oil prices’ recent drop. There are indications management will have at least some positive things to say when it does, mainly the flood of insider purchases occurring this month as you’ve also noted. And a lot of that is from people besides CEO Kelcy Warren.
Given how large and complex this company is, its understandable investors are going to be nervous about the dividend until there’s something hard to go on. And that’s going to keep the stock volatile, particularly with so many other midstream companies going down for the count.
 
It is noteworthy, however, how little that nervousness seems to extend to the bond market. For example, the company’s bonds of May 2050 currently yield just 6.5 percent to maturity. Were Energy Transfer really in trouble we could expect this number to be well into double-digits.
Q. I assume you are discussing ET. I don't know when you made Delek Logistics Partners (NYSE: DKL) a Sell. It is very, very thinly traded and the price has cratered as people tried to get out of a very narrow door. Its yield at this price level is close to 40 percent. What are your thoughts?—Bud E.
 
A. Hopefully, my answer on Energy Transfer in the previous question will suffice. If not, I’m sure that name will come up again frequently in this chat.
 
Delek has not been a portfolio pick so it’s tracked primarily in the MLPs and Midstream coverage universe on the EIA website. We recently streamlined these tables to make them more accessible/legible to readers and I would love feedback on that change if anyone has some.
 
2:04
As for Delek, we made the decision several months ago to generally recommend pulling back to large, diversified midstream companies and MLPs as the best way to weather what we’ve called for many months a sector “stress test.” Delek had been an MLP that pretty much continuously traded above our highest recommended entry point, so it was a relatively easy decision given its small size, lack of scale and what had been increasingly thin distribution coverage.
 
At this point, it is looking more interesting on price alone. But what we’d like to see is an update on guidance in the wake of the coming drop in shale oil production before changing our recommendation. Certainly a dividend cut is priced in at this point, however.
Q. Gentlemen. Retired. I need income. I have invested heavily in majors and mid streams as you advise. Would like some positions in utilities, but no more big dollars to be had. When it comes to “safety” and “recession proof”, why not add to my positions in Williams Companies (NYSE: WMB) and TC Energy (TSX: TRP, NYSE: TRP). Heck, they sell NG to utilities. I get to have my cake and eat it too...big dividends and the safety of a natural gas and ultimately an “electric utility.” Do you agree or disagree?--David O.
 
A. We absolutely agree. Currently, TC is in the Portfolio while Williams is not currently. But as you point out, both companies’ pipelines service regulated utilities, which are among the strongest possible counterparties. Williams also issued guidance recently that not only affirmed previous projections but actually forecast stronger activity in gas-centric regions, as reduced crude output cuts down on associated gas output. And management affirmed the dividend is “extremely important,” and that th
the company is “extremely well positioned” to maintain it.
David S.
2:13
I believe Energy Transfer reported a reasonable quarter. They did indicate flat EBITDA as a result of sacrificing short-term margin for long-term contracts. Additionally they have maintained their DCF at a high level. With the crash in oil prices and the energy share deterioration Industry wide, energy transfer seems to be disproportionately affected. They are seemingly being priced for bankruptcy. Is this the buy of a lifetime or the value trap of a lifetime?
AvatarRoger Conrad
2:13
Yes, I thought it was a good quarter for Energy Transfer as well and the high distribution coverage (1.88 times in Q4) has been very consistent over the past year or so. I think it's definitely being priced for a distribution cut now, but that's hardly unique for midstream companies and particularly MLPs.

The dislocation in the bond market caused by forced liquidations and other liquidity issues got a lot of press until the Fed pretty much squelched it with its liquidity guarantees. What's been less reported--and frankly I made the mistake of discounting early on--is the effect of forced selling on midstream companies and particularly MLPs. My view is, that's had an outsized impact on ET, as it's been the largest piece of several MLP indexes along with EPD.
AvatarRoger Conrad
2:17
Continuing with David's question on ET and to repeat a point I made earlier in the chat, ET has yet to update its guidance. And while Fitch's affirmation of the credit rating, insider buying and a still bullish Wall Street consensus (17 buys, 5 holds) is encouraging--especially in light of what's going on with energy--are encouraging, there will be a lot of questions until management does. And that's especially true with Shell walking away from the LNG project. But until we hear more, we're inclined to stick with this one as a deeply undervalued stock. And again, the selling of the stock hasn't really extended to the bond market--which is generally where real bankruptcy risk is reflected.
Fred
2:18
Discuss the probability of President Trump brokering an agreement with the Saidi's and Russia that will return WTI to $50/barrel? If so, what do you think the time frame would be?
AvatarElliott Gue
2:18
We actually have a pretty detailed analysis of oil prices going up in the next issue of EIA (likely to be released tomorrow AM), so be sure to check that out. But I will summarize my thoughts on that here.  I think the probability of a near-term US-Russia-Saudi agreement is very low and, even if one were struck, it wouldn't change the near-term demand hit from coronavirus containment measures. In the next 1 to 2 months, the US is at risk of maxing out on storage, which would send WTI down to the $10 to $15/bbl range. In fact, several oil benchmarks -- LLS, WTI-Midland -- are already under $12/bbl and in Wyoming oil sells for $3/bbl. I think that the outlook changes in the intermediate term -- second half -- as both Saudi and Russia are in pretty bad shape at under $30/bbl and demand should recover in the second half as the virus outbreak subsides. Then, I can see $30 to $40/bbl ... $50+ will require a return to a normal oil market, which is likely a 2021 phenomenon.
Bill F.
2:18
Roger,

Given the major disruptions and recession expected from both Covid19 and the oil price war, some of our more solid holdings are displaying current yields akin to expected cuts in dividends: 13.1% for EPD, 10.4% for PBA, 16.7% for KEYUF. Even yields at 9.3% for XOM, 7.5% for KMI and 7.2% for CVX are elevated but not as much.

While these high yielders were not included in the March 23rd issue and alert, will your next EIA issue include some of these in the endangered dividends list?

Regards,
Bill
AvatarRoger Conrad
2:18
Hey Bill, I just answered your question in depth from the earlier email--was the very first one in the chat. But let me know if you'd like me to elaborate more.
Charlie
2:20
What is the bottom price of crude?  Will it hit 15?  Also would this be a good time to nibble on UCO or GUSH?
AvatarElliott Gue
2:20
We think it's too early to buy the bottom in oil. In the last issue we started up a recommended hedge using SCO actually (which is the 2x short WTI ETF).  If we max out storage at Cushing this spring as we have in other parts of the US, you could easily see oil in the $10 to $15/bbl range.
jay
2:27
What to do with Oxy, SLB, BP, AMLP? Also - are you saying to buy such names at these depressed prices?
AvatarElliott Gue
2:27
We still have OXY and SLB in the portfolios as buys here. I would say that SLB is the best of breed oil services name but that oil services will be a tough neighborhood this year...I like the valuations over the next 5 years but over the next 6 to 9 months, you could easily see more downside. OXY needs $30 to $35 to work longer term...I see it a s a survivor but it's one of the riskier E&Ps we still have in the portfolio. We have XOM and CXO, CVX as among the highjest grade energy stocks to own right now...I think all three ultimately benefit from this 2020 collapse as they'll be there to pick up choice assets on the cheap (XOM, CVX) or are a possible takeover target (CXO)
Barry J.
2:28
Gentleman:
1.     What is going to happen to ET and MPLX? Will they be rolled up into a “C” Corp? Or what?
2.     Is EPD the only MLP which will survive? The other ones like PAA are just getting hammered. What will happen to the less established ones?
3.     What will happen to OXY?
AvatarRoger Conrad
2:28
Hi Barry. The biggest development for MPLX was general partner Marathon Petroleum completed its strategic review and decided to maintain the current relationship. That was probably the best case outcome, as there will be no "reverse drop down" of MLPX' more stable assets back to MPC. It does appear that management is going to look for a way to convert MPLX to a corporation--the preferable way would be as Hess Midstream did last year, which was tax free. I think if they do that, it will be a very positive event and should long-term help them attract capital at a lower cost. Of course right now is a tough time for the business. We need to see the guidance update. But the franchise is solid and there was a pre-COVID-19 cushion for the dividend as well.
DRG
2:32
Based on some of your recent comments in EIA, you seem to favor XOM over its fellow major – CVX despite 1)XOM having higher dividend break-even oil price than CVX and the highest among the majors 2) aggressive CAPEX spending plan despite the supply shock driven collapse in oil price (have been back-pedaling after the outbreak of the pandemic and downgrading of its debt) 3) continuing for a while to finance its dividend exclusively with debt, which certainly is not sustainable long term despite enjoying investment grade credit rating for its debt. Can you please explain your rationale? Thanks.
AvatarElliott Gue
2:32
We like both XOM and CVX. XOM has a long history of counter-cyclical investment, which I see as an appropriate strategy for a supermajor given their low cost of capital. There's too much oil in the word today amid depressed demand conditions and OPEC's pump-at-will strategy but in 1 to 3 years that won't be the case -- OPEC+ can't really work with oil sub $30 and US shale supply is going to come down hard this year. I think that ultimately, XOM will look smart for going against the tide and investing in long-cycle supply while everyone else is retrenching. In the short run, they have considerable flexibility to cut CAPEX on US shale and through delaying final investment decisions on projects like Mozambique. They're not really borrowing to pay dividends, they're borrowing to fund CAPEX, which will, at normalized prices result in higher free cash flow.
AvatarRoger Conrad
2:38
Continuing with Barry's questions, I've hopefully answered everyone's questions on Energy Transfer by now. Regarding part 2, our view for some months has been to focus on the larger established midstream companies and MLPs, and to generally advise clearing everything else out. The rationale before COVID-19 was that the bigs (EPD, PAA etc) are generally dealing with the sector stress test well and would eventually be rewarded in the market by their resilience. The stress test of course has since gotten a lot tougher and many companies haven't yet updated guidance. But the bigs are still the companies with the best chance of making it through--in fact, they have to as oil and natural gas remain essential commodities to a functioning economy. I also believe its dangerous to read too much into a falling share price.
2:42
Finally, regarding Occidental. we continue to believe this company will find a way through--the asset are just too vital and well located. The path management is apparently charting does involve a lot of cost cutting, CAPEX roll backs, debt reduction and almost certainly asset sales. There's a lot of work to be done. But we continue to see a great deal of upside when the cycle turns--and recent moves to go to ground should ensure they make it there.
Frank
2:45
Accidentally sent questions before finishing - 1) How far out does the virus and OPEC situation push your original theory on rising oil prices or is he whole theory dead? 2) Will ET, EPD and KMI have to file a "force majeur" as to unending supply out of the shale area and severely depressed demand - what do you see for EPS/FFO  reductions in the year ahead. Frank
AvatarElliott Gue
2:46
Thanks for the questions, here are my thoughts. 1) The best way to think of that is that the supply/demand shock currently hitting oil compresses and intensifies the reckoning in crude but doesn't change the long-term picture appreciably. As I will lay out in the next issue of EIA (likely out tomorrow) I think you could see sub $15/bbl in Q2 due to the US running out of storage capacity amid what could be a spectacularly weak US and global economic backdrop in Q2 2020. Ultra-low oil prices, however, will ultimately accelerate the supply reckoning underway since late 2018 -- US shale supply is going to fall more sharply than anyone expected a few months ago and you're not going to see much investment in long-cycle projects over at least the next 2 years (with possible exception of XOM). I don't know when we're all going to be able to emerge from our homes and resume something like a normal life but I suspect it will be at some point over the next 3 to 9 months and that people are still going to need energy.
AvatarElliott Gue
2:46
...When that does happen we'll face a step-change in supply due to the loss of significant shale volumes. Over the long haul, that will tighten balances and send oil higher.
Charlie
2:47
Would this be a good time to double down on ET?  My present cost is 18?
AvatarRoger Conrad
2:47
I've given a number of reasons during this chat for investors to expect Energy Transfer to survive and come out the other side of this as an industry leader. And if management can do that, the share price should move a lot higher from here. There's also the possibility of a full on management buy out--insiders are big purchasers as has been pointed out--which if made in next 3 to 6 month is unlikely to be as high as 18 but would probably be a lot closer to at least 10. I think that's more than enough reason to hold on.
AvatarElliott Gue
2:49
2) There is potential for some issues in terms of pipeline operators asking producers to voluntarily curtail output. In fact, we're already seeing that from Plains. That said, I think the question is, how long do those issues persist and which companies can drag themselves through this near-term oil collapse to benefit from at least a partial normalization of supply nd demand in the second half. We see EPD, KMI and ET being among the names that can do that.
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