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Energy & Income Advisor January 2021 Live Chat
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AvatarRoger Conrad
1:56
Hello everyone and welcome to the Energy and Income Advisor live chat for January. The ground rules are the same. There is no audio. Just type in your questions and Elliott and I will answer them as soon as we can completely and concisely. We will hold this open so long as there are questions left in the queue. And we will send you a link to a complete transcript of the Q&A shortly after we wrap up. Thanks again for joining us
1:57
Let's start with questions submitted by email before the chat:Q. Does Brookfield Renewable Partners (TSX: BEP-U, NYSE: BEP) have the cash flow to cover expenses and dividends? Coverage ratio? The dividend still doesn't look bad for a growth company, but I don't know if they are "borrowing money to pay the dividend" as some people say. I say that a little sarcastic as when it was said about ExxonMobil (NYSE: XOM). Thanks for your service!—Eric
 
A. Thanks Eric. Brookfield’s basic business is producing electricity from mostly hydro but increasingly wind and solar facilities and selling the output under long-term contracts. That’s not quite a utility but has historically proven to be an exceptionally steady model for generating reliable cash flow needed to pay dividends. The company’s parent is Brookfield Asset Management, which has been extremely supportive of its growth.
I’ve covered this company for more than 20 years. Over that time, it’s steadily grown by acquiring and building new assets, usually financed with both debt and equity sometimes at the parent level and sometimes on a non-recourse project-level basis. In the early years, the company relied more heavily on outside financing for its growth plans and rarely generated enough free cash flow to cover dividends. That’s changed recently as it’s added scale and last 12-months free cash flow actually covered the payout by better than a 2-to-1 margin.
 
When some blog posts and investment media personalities have accused ExxonMobil of “borrowing” to pay dividends, what they’re referred to is the company is not generating enough operating cash flow to cover all CAPEX and dividends paid. One could just as easily say they’re using debt to finance a portion of their investment in the business.
In fact, our view is that would be the fair way to describe the situation. And that’s actually the way businesses are usually financed, except in extreme circumstances. But in any case, Brookfield is right now generating enough free cash flow to cover dividends and expected CAPEX. Our view is the share price has gotten ahead of itself as investors have poured into anything to do with renewable energy, which is why we currently rate the stock a hold.
1:58
Q. Thanks for conducting these very valuable live chats. My question relates to ESG investing, which has produced outsized returns over the past year. You have two superstars in your model portfolio, Northern Power (TSX: NPI, OTC: NPIFF) and Brookfield and both currently trade well above your recommended entry prices. The same story seems to apply to everything ESG: EVs, batteries, solar, etc. 
 
The question is whether there are ESG companies in the energy universe that have intrinsic values approaching their elevated share prices. For example, GM and Ford are a way to have EV exposure without paying TESLA prices? Specifically, do you have an opinion on Enel Spa (Italy: ENEL, OTC: ENLAY) or Iberdola SA (Spain: IBE, OTC: IBDRY). Both have run up, but not to the extent of some others.—Terry G
A. Thanks Terry. Yes we’re very happy with the performance of Brookfield and Northland Power, which is also primarily a power generation company selling output under long-term contract. Northern Power is also a major player in the offshore wind sector, with interests in three operating facilities in the North Sea as well as several projects under construction in Asia and Europe. We intend to continue holding both and believe they will eventually grow into their higher share prices.
 
There are plenty of renewable energy stocks like FuelCell Energy that have exploded to the upside the past couple months, despite the fact that they are basically clinging to life as businesses. They’ve squeezed the short interest against them because they’re part of what amounts to a Biden trade that’s brought a flood of money into certain stock indexes—FuelCell is part of 126!
I don’t know how high these stocks will go in the short term. What I do know is rallies like these tend to end very badly for investors who play them. And my advice is anyone who has held companies like these should take the money and run, no matter how bullish you might be on solar power or fuel cells. That would also apply to Tesla now trading at 25 times sales despite another quarter demonstrating the same reverse economics of scale—the more sales rise, the further margins narrow.
 
As for Enel and Iberdrola, we do track them in Conrad’s Utility Investor, along with other similar companies. Both are combination utilities/contract power generators that I have recommended strongly in recent years and continue to at or below our highest recommended entry points. But if you’re looking for an area of renewable energy that has not yet caught fire, my best suggestion is to look at US offshore wind developers.
I wrote a Utility Roundup on them earlier this week titled “These Offshore Wind Stocks are Still Cheap.” We’ll be happy to send it to you or anyone else.
1:59
Q. Dear Folks. I know you are cautiously bullish on some mining stocks -- like BHP (NYSE: BHP). What are your feelings about Glencore (OTC: GLNCY), which also has a lot of metals and some oil exposure. It has pulled back about 15% recently. Is the company's jurisdictional risk and coal exposure too great? Is it a decent long-term play? Many thanks.--Jeffrey H.
 
A. It’s one we’ve definitely looked at for our mining stock coverage in Deep Dive Investing. The coal exposure is definitely a negative as far as ESG risk goes—environmental, social, governance. There is an argument to be made that the world will be using coal for sometime to come, especially for making steel, no matter what steps are take to control CO2 emissions. But it’s also true that coal exposure is likely to hold back Glencore and other mining companies, which is why BHP is scaling back and in fact looking at divesting operations.
Bottom line is in this sector we continue to favor BHP for its geographic reach, strong balance sheet and proximity to China’s market for iron ore and copper. The company’s ability to keep its mines open during the pandemic of the past year has also demonstrated strong and disciplined management at a time when rivals have performed less well. We rate the NYSE-listed ADRs a buy at 70 or lower
Q. How can all of the things that the new administration is doing and advocating be helpful to our economy and for the financial well being of our citizens? Such acts as letting unlimited numbers of immigrants into our country, not deporting illegal aliens, increasing corporate and capital gains taxes, obligating the US to the expenses incurred with the Paris Climate Accord, shutting down petroleum pipelines and activities on federal lands, etc. How should we successfully invest our assets in the face of this business unfriendly agenda?—Perry L.
A. Perry, our experience is politics always wind up mattering a lot less for investment returns than initially feared or hoped. As you note, the Biden Administration so far has announced a number of moves affecting the energy industry. Those include re-entering the Paris Climate Accord, revoking the presidential permit than former President Trump granted to the Keystone XL pipeline and at least temporarily suspending granting of new permits to drill on federal lands both on and offshore.
 
We’d also bet on tougher restrictions for permitting new energy infrastructure, including pipelines and LNG export facilities. We’re going to see tighter regulation of methane emissions from wellhead to burner tip. And there will likely be unprecedented efforts made to favor renewable energy, energy efficiency and electric vehicles as well.
On the other hand, as we’ve pointed out to EIA readers, there are limits to what the president can do without Congressional approval. That includes repealing current tax credits for oil and gas production. And clearing Congress will need support of seven Democratic senators from oil and gas states, including the likely incoming Senate Energy Committee Chairman Joe Manchin (D-WVA).
 
That’s not to say nothing is going to happen. It is to say that what does is still likely to be the result of compromise, which means it will be incremental in nature. And keep in mind that incoming administrations generally make their biggest moves in their first 100 days—when they have the most momentum behind them.
2:00
The most important point here is that energy follows a cycle. And after a more than six-year decline, all indications are we’ve hit bottom and the recovery has begun. At this point, government can accelerate that process by depressing investment longer than would otherwise have been the case, which will further compress supply even as demand recovers from the pandemic. But it’s the cycle that’s going to set our returns in energy stocks going forward.
AvatarElliott Gue
2:04
Hello everyonre and welcome. We look forward to answering your questions this afternoon.
Bups
2:12
How much is EOG negatively impacted by the ban on fracking on Federal land?
AvatarElliott Gue
2:12
A significant portion of EOG's leases and premium drilling locations are in Texas, where there are no Federal leases. Their exposure is via new Mexico and Wyoming where 49% of their premium drilling locations are located. But they've been preparing for years and have 2,500 permits either already approved on in progress, which is 4 years of inventory for these plays. Also, federal lands represent only about 25% of their net acreage, so they have significant scope to pivot to other areas.
David
2:13
Gentlemen,

As we speak, courts will challenge The Biden Regime’s ban on drilling on Federal lands and water. Do you think the courts will be able to prevail and protect us from these globalist powers.

Thanks
AvatarRoger Conrad
2:13
As I answered in a previous question, I think investors on the whole pay far too much attention to politics and not enough to economics--and certainly the investment media is guilty of that as well because it obviously gets interest.

In this case, what's happened here is not a total ban on drilling on federal lands. It's at least a temporary suspension of new permits. That won't affect wells that are already permitted, which of course includes anywhere there's drilling activity. And it won't affect the 90% or so of US oil and gas output that's not on federal lands.

I honestly can't say if lawsuits challenging the administration's actions will be successful. What I can say is to the extent they restrict what gets pumped, they will be reducing supply, which should increase the value of what does get pumped. But what's much more important to returns on energy stocks is the price cycle. We think we're headed higher.
Ken in Phx
2:18
While you feel politicians can do little to really harm to supply/demand balance in the short term, what about banks not renewing loans and pension funds selling energy stocks. Won't that hurt energy stocks?
AvatarElliott Gue
2:18
Most institutional investors are already underweight energy, most heavily so. So, there's limited scope for more selling and there's really only one way to go from here. In fact, we're already seeing that as institutional investors have started to cut their underweights in energy as commodity prices have recovered. Loans aren't much of an issue for the big energy companies, or for the E&Ps we cover, as most have far less leverage than the average S&P 500 company. Those that have needed to extend maturities on bonds -- even shakier credits like OXY -- have had no trouble doing so at near record-low interest rates.
Scott
2:20
Hi -

I have the following two question for today's chat:

1. Given that the world seems to be moving towards renewable energy at an increasing speed even if hydrocarbons will be with us for a long time, do you see any of the major mid-stream energy companies (i.e, EPD, KMI, WMB, ET, others) transitioning any significant part of their businesses to renewables over the medium or long term?

2. Any thoughts on MMP as a takeover candidate?
AvatarRoger Conrad
2:20
All of these companies have already been talking about how they're reducing carbon emissions. Arguably one of the biggest ways so far is pipelines built by Kinder and others that harvest natural gas that was previously flared at the wellhead. Kinder's opening of the Permian Highway Pipeline on Jan 1 is the latest example. They're also upgrading pipes and other infrastructure to reduce leaks, which does also boost volumes and therefore earnings. And they're talking about things like blending with renewable natural gas harvested from farms as well as hydrogen.

As far as transitioning businesses goes, I have a hard time seeing these companies for example investing in solar energy, other than as a way to reliably power facilities. But with even the most aggressive forecasts for renewables adoption including increased natural gas usage through at least 2050, the assets these companies operate still have a very long shelf life. And keep in mind, switching to gas is still a huge and growing trend globally.
Bups
2:21
Does SLB continue to be your favorite oil service play over the next couple of years?
AvatarElliott Gue
2:21
Yes, SLB is the only services name we recommend at this time. 80%+ of their business is outside the US, so the key catalyst for their stock will be a recovery in international markets. I had thought we'd begin to see that in the second half of this year and that the stock would rise in anticipation of that. However, based on comments from Halliburton, Schlumberger and others in their quarterly calls, it appears the trough for non-US markets will be Q1 2021, maybe 6 months earlier than I'd expected. So, I think this will be an upside catalyst for SLB sooner than I'd thought.
AvatarRoger Conrad
2:24
Continuing with Scott's question, I do continue to consider Magellan Midstream as a takeover candidate, in fact one of the rare companies that should eventually capture a high premium in a deal. Their assets are very well located--Texas is a good place to be now--and they have partnerships with a lot of best run players, including Enterprise. Most important, the balance sheet is very strong. I would look for a share-for-share deal, probably with another MLP to minimize taxation questions. But this is a very high quality name that matters in this industry. And at $10 billion or so of market cap, it's attractively small.
Jack
2:32
Hi:

EPD has recently fallen back significantly. Do you feel this is a result of people's concern about the future of their LNG export facility in light of the current Administration's hostility towards oil (and consequently associated natural gas) production?

I hold EPD, KMI and MMP - which if any of these midstream companies is most sensitive to the impact of the Administration's hostile policies towards oil production?

How much will Nustar Energy be impacted by the current opposition to oil production? I've noticed that their distribution has decreased over the past several years from $1.10 per quarter, to 60 cents and now 40 cents. What is the reason for this?........... What do you see in its future?

Pioneer Natural Resources has pulled back a lot recently............. Do they have any exposure to production on federal lands in New Mexico?.............. Which oil companies that you have recommended will be impacted?

I have to admit, the current Administration's negative attitude toward fossil fuels h
AvatarRoger Conrad
2:32
I honestly don't think any of these companies' results will be much affected by Biden Administration policies. For one thing, their infrastructure is heavily concentrated in Texas, which is not only unlikely to put new restrictions but is a safe bet to actively fight them. Throughputs are also not dependent on production on US government land, and any restrictions placed there will mean more activity on private lands they do serve. It is likely we'll see tougher permitting on new facilities built for LNG and NGL exports--which are Enterprise's main focus now. But keep in mind that most actions are going to require approval of Congress and those 7 Democrats in the Senate from oil and gas producing states.

I don't doubt that there's some selling going on in response to concerns about what the new administration might do. But again, anything that happens to restrict investment in new output will only keep shale oil supplies lower and global oil and gas prices higher than they would have otherwise been.
AvatarRoger Conrad
2:35
Continuing with Jack's question, that's more a reason to be bullish than bearish, especially on the best in class companies you own. To answer the rest of your questions, Pioneer has no licenses on federal lands currently. NuStar cut its dividend last year because of pandemic related pressures--it would actually stand to benefit if producers refocus on privately held lands in the Permian Basin after withdrawing from federal lands.
Ed@dvco.com
2:37
Is there a screaming buy for a 12 yr old's college?
AvatarRoger Conrad
2:37
I think there are any number of them in the energy space. I've personally done very well the past 30 plus years buying DRIPs of major oil companies like Chevron. But best in class midstream companies like Enterprise are quite cheap now.
Steven
2:42
Two questions: 1) Is there significant danger of PAGP cutting payout? 2) I saw a headline today the KMI is looking to purchase assets; are there utilities or traded companies looking to sell assets?
AvatarRoger Conrad
2:42
Not at this point. Plains cut its dividend in half last year to bolster cash reserves as the pandemic started to take a whack out of volumes. They showed in Q3 that they had enough surplus to initiate a $500 mil stock buyback program. And based on drilling data we have, volumes likely continued to rebound in Q4. Marketing is always a wildcard for results and we won't know for certain how they did until Feb 9. But the company has already declared its quarterly dividend at the same rate of 18 cents per unit. That's a pretty strong declaration of confidence that they cut enough the first time to weather the pandemic environment.

Kinder Morgan's President Kimberly Dang mentioned during the earnings call that it might be more economic to purchase pipeline assets held by utilities than trying to build. That to me is a good argument for why we're going to see a shortage of pipes in the not too distant future. For Kinder, one likely potential target is the 50% of the system serving the Southeast US they sold
AvatarRoger Conrad
2:43
Continuing my answer to Steven's question, Kinder sold half of a large pipeline serving the southeast to Southern Company in the previous decade. Pipelines now appear to be outside Southern's key spending goals going forward so this would be a potential candidate for purchase--especially since Kinder operates the asset now.
Hans
2:45
Future sanctions relief by the Biden administration on Iran and Venezuela could that not flood the market with oil
AvatarElliott Gue
2:45
Venezuela doesn't have the capacity to increase oil production significantly from current levels, even if sanctions were lifted, due to the damage to their facilities. I don't think they're going to be in any particular hurry to lift sanctions on Iran but in a more normalized oil market (from a demand standpoint) I don't think incremental barrels from Iran are likely to have much of an impact given the decline in US oil production and OPEC+ capacity to keep barrels off the market.
AvatarElliott Gue
2:47
I am not sure if I forgot to answer this when answering a prior question, but just to clarify, PXD has no federal leases or acreage. Their producing assets are all in the state of Texas.
Ken in Phx
2:49
I am putting aside dividend paying shares for my wife after I am gone. Of the 3 energy stocks I own (EPD, KMI, CVX) which are the safest from the point of view of their likely ability to maintain dividends for the next 15-20 years?
AvatarRoger Conrad
2:49
That's a very good question. Of those three, the only one to cut in the past 15-20 years is Kinder Morgan, which did so in late 2015 in response to a cash crunch. That action has made the company basically bullet proof ever since, freeing up enough cash to fund significant debt reduction as well as a large CAPEX program in natural gas pipelines. Enterprise's ability to hold it dividend and now return to growth is the best possible sign of its high quality. And super oils like Chevron have proven their ability to withstand virtually everything thrown at it. If what worries you most is CO2 reduction efforts, Kinder may be your best choice, given its diversification of operations and the fact that natural gas is going to be used for a long time to come. But I'd really take any of those three as a longevity play.
Hans
2:50
Any advice on CPLP
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