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Energy & Income Advisor Live Chat November 2020
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AvatarRoger Conrad
1:56
Hello everyone and welcome to this month's Energy and Income Advisor live web chat. Elliott and I are looking forward to another lively session answering your questions, so long as any are left in the queue.
1:58
Before I download answers to pre chat questions, the ground rules are there is no audio. Type in your queries and Elliott and I will get to them as soon as we can in a complete and concise way. At the conclusion of the chat, we will send you a link to the complete transcript of all the Q&A, which will also be archived on the website. So if you have to leave before we knock off, you can see your answer there. So let's get started.
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Q. Guys. What do you think about ExxonMobil’s (NYSE: XOM) recent outlook on energy demand and prices? Thanks—Alan R.
 
A. We continue to see this as an historic opportunity to buy the company that continues to be the world’s premier super major. I don’t have a lot to add to Elliott’s outlook for the company in the Feature article of the current issue of Energy and Income Advisor. But I will highlight a couple points.
First, this company continues to demonstrate it has the financial power to defend its dividend and balance sheet strength in the worst of environments. During the most recent guidance update, for example, management stated that with a “modest” recovery in refining margins next year, operating cash flow in 2021 will cover the dividend and all CAPEX at a low 40s oil price. Our view is both are now very high probability outcomes pandemic pressures on the global economy continue to subside.
 
You can’t buy the stock with a 10 percent plus dividend yield at this time—and in fact that ship has likely sailed for this cycle. But you can still get it for a yield of nearly 9 percent, which will likely be increased as oil prices start to move higher.
Second and perhaps more important is ExxonMobil continues to advance projects that will bring new output on stream just as the cyclical upturn in oil and gas prices we expect kicks in over the next several years. The company’s strategy to push ahead with its plans this year has drawn a great deal of skepticism. Just 4 Wall Street research houses rate the stock a buy now versus 20 holds and 4 sells.
 
We think a lot of those on the fence will swing bullish as oil prices recover to the $50 a barrel range over the next year—and ExxonMobil stock starts getting credit for this strategy. The stock is up better than 20 percent this month. But we think it won’t be long before it’s back in the low 70s, a level the stock held as recently as January of this year. This is one to buy and lock away now.
Q. Hello. I am very seldom available to follow your Chats live but definitely pour over the transcript. Thank you so much.
 
My question for this month: I current hold nearly equal allocations in Occidental Petroleum (NYSE: OXY) ExxonMobil, Kinder Morgan Inc (NYSE: KMI) and Pembina Pipeline (TSX: PPL, NYSE: PBA) and am ready to add more to my energy holdings. Considering what I already hold, what do you suggest as the best place for new money? With the current upswing in the energy sector do you suggest waiting for a possible pullback or jumping in now?--Loralie T.
A. The best place to look for new energy stock buys is our Model Portfolio. For the past several years, we’ve positioned our holdings as only the best in class companies up and down the energy value chain. That hasn’t saved us from some steep losses on paper in what became a sector rout this year in the wake of the pandemic. But it has kept us in the game as all of our holdings as businesses have adapted to $40 oil, and are now leveraged to what we expect will be an explosive recovery.
 
As you point out, these stocks have been showing signs of life this month. In fact, some of the percentage gains have been extraordinary. Producer Concho Resources (NYSE: CXO), for example, is up by more than 50 percent since the beginning of November.
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But with the exception of Brookfield Renewable Partners (NYSE: BEP), Northland Power (OTC: NPIFF) and Texas Instruments (NYSE: TXN), most of our recommendations are still well below where they started the year—and even further down from where they were 5-6 years ago. And our view is they’ll make all that back and more the next several years as the leaders of a new energy price cycle that appears to have already begun.
 
The past couple issue of EIA have examined our model portfolio companies’ Q3 results and management guidance fairly extensively. Our suggestion would be to take a look at what we’ve said and pick 3 or 4 companies to take positions in, based on what makes you most comfortable
Really, any of the stocks that trades below our highest recommended entry point—which we show as “Rating”—is a suitable fresh money buy. And there are several stocks in the Model Portfolio and/or High Yield Energy List that trade in the neighborhood of “Dream Buy” prices, which we also now show in a separate table on the Energy and Income Advisor website.
 
Based on the four stocks you list, you would prefer a mix of producers and midstream companies and there are multiple choices there. The one note of caution would be not to wait too long to establish positions. It’s certainly possible that energy stocks will give back some of their November gains in the next few weeks. But these are still historically low prices for stocks of companies that dominate what’s still an essential industry.
Q. This is a repeat of a question submitted about 2 1/2 weeks ago. Since it is important and timely, I wanted to make sure you received it.
 
I read an article in the Wall Street Journal that approximately 25% of drilling for oil and gas in the U.S. is on federal land. As Biden wants to end drilling on federal land, I wanted to know which oil, and especially pipeline companies will be most affected by his policy. I'm assuming that energy producers have contracts for their federal land use, in which case it would be good to know when these contracts end, as I assume, under Biden's administration, these contracts will not be renewed. 
 
The article specifically mentioned Occidental Petroleum as one of the companies that holds a significant amount of acreage on federal land. As most of my holdings in the energy sector are in midstream, I am particularly interested in the pipeline companies that may be affected. Thank you—Jack A.
A. Hi Jack. The question of what happens to oil and gas drilling on federal lands starting next year is obviously a subject of considerable concern for the industry right now. And clearly there’s a lot of uncertainty about what a new administration may try to do.
 
As for what they can do, presidents without Congressional support can participate in global climate talks (i.e. rejoin the Paris Accord), set corporate average fuel economy standards for vehicles, regulate methane emissions, control federal procurement practices (require EVs etc) and set trade policy and efficiency standards. They also have a great deal of latitude over permitting oil and gas production on federal lands, including hydraulic fracturing standards and royalty payments.
 
Presidents need Congress’ buy in for anything to do with tax policy, including a possible extension of credits for wind, solar, storage, EVs etc. They would also need approval for any new national clean energy or carbon emissions standard or anything involving
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appropriations of federal funds.
 
Regardless of who wins the Georgia run-off elections for US Senate in January, party control of that chamber will be narrow. And in the event Democrats win both races to forge a 50-50 split with the vice president breaking the tie, any energy legislation would have to run through five Democrats in energy producing states—Colorado, New Mexico and Pennsylvania. It would also need a buy in from energy state Democrats in what will be a much narrower House of Representatives majority.
 
Solid blue New Mexico is by far the state with the most production on federal lands. In fact, it has almost twice the output this year of the rest of the country combined and is the fastest growing by far in terms of new investment.
That’s one reason we just don’t see anything so drastic as an outright ban on federal lands. It’s also worth pointing out that the idea Biden plans such an action was a charge leveled by the Trump campaign, not a position ever taken by the candidate.
 
In fact, it seems to us highly unlikely such a plan would even be considered at a time of economic weakness. For one thing, it would trigger an immediate spike in unemployment as well as gasoline prices. And it would rob the Treasury of billions of dollars at a time of record budget deficits. Far more likely would be charging more for leases.
 
If all of this doesn’t reassure you, consider this. E&Ps have been disclosing how much of their drilling is on federal lands for some years, mainly because they’ve been preparing for the risk of greater restrictions for about a decade now. Neither is state level regulation a new thing, with companies successfully adapting to changes in Colorado the past few years, for example. Bottom line is this industry is prepared.
As of most recent data, Royal Dutch Shell accounted for 23% of total Gulf of Mexico output (offshore federal leases). Chevron had a 15% share and Occidental 11%. GOM leases account for 14% of Shell’s overall oil and gas output and 50% for Murphy Oil. Companies with major onshore lease positions—mainly in New Mexico—include Concho, Devon Energy, EOG and Occidental. Pioneer has no New Mexico leases.
 
With the possible exception of Murphy Oil, these are all exceptionally diversified companies. Even in the unlikely event no new permits on federal land are granted for oil and gas drilling the next four years, they have plenty of places to deploy their capital on private lands, or elsewhere in the world. Meanwhile, their existing leases are contracts and could only be broken by extensive court action, if even then. That also goes for pipelines and midstream companies serving the Permian of west Texas and New Mexico, as well as the Gulf of Mexico.
Finally, as investors we say bring it on! There’s no better catalyst for $100 a barrel oil in the near term than the fear that would be unleashed by an attempt to ban drilling on federal lands. Mainly, it would dramatically increase the value of all oil and gas reserves everywhere else, as well as midstream infrastructure. In fact, even more difficult new permitting rules will increase the scarcity factor.
 
Again, we don’t see a ban on oil and gas drilling on federal lands as anything other than an extremely low probability event. But the possibility of one is ironically another reason to buy the best in class energy companies in our Model Portfolio—all of which are protected from such action by their financial strength, size and diversification, and highly leveraged to the spike in energy prices any such actions would trigger.
Q. I received about 50 warrants from Occidental Petroleum. Would OXY warrants be good way to buy more stock from a current price of ~4.90?--Richard W.
 
A. We would need a few more details to answer that. The current price of OXY/WS as of today is $5.38 per warrant. The strike price is $22 with an expiration date of August 3, 2027. Our view is Occidental will trade far north of that level by then. But it is worth pointing out that the current price of the warrants is purely time value now, since the stock itself is still trading close to $6 a share below the strike price.
 
There is leverage in these securities. They’ll roughly double in intrinsic value on a rise in Occidental shares to $28 or so, which would be a 75 percent lift in the stock. The leverage advantage over the common stock grows as Occidental rises from there. For example, if Occidental revisits its 52-week high of nearly $48—we think it will—that would be a near triple for the common stock. But it would be a nearly five-fold gain for the
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warrants.
 
In addition, the nearly seven years to expiration does give you a lot of time for that to happen. And in the meantime, there’s time value, which will likely expand the faster Occidental stock rises. So a big payoff could happen a lot faster than seven years.
 
We have a fairly extensive writeup of our view of Occidental in the feature article of the current Energy and Income Advisor issue. Our preferred way for most investors to play this will be the common stock, which also will pay a dividend that’s likely to rise with oil prices going forward. But if it works the way we believe it will, the warrants will certainly participate and again in a leveraged way.
Q. Hi Roger and Elliott. I know that NextEra Energy (NYSE: NEE) has been one of your ongoing recommended buys for some time. I have two questions: 
 
First, I keep reading about green energy firm Enel SpA (Italy: ENEL, OTC: ENLAY) in the Wall Street Journal. Is that the same firm or different company from what I own, which is Eni SpA (NYSE: E)?  I am so confused. Do you recommend we purchase Enel? If so, what is its symbol so I can look it up? At what limits?
Second, can you please share with us readers your thoughts, advice and buy limits about buying Eni SpA and Iberdrola SA (Spain: IBE, OTC: IBDRY) to diversify into renewable energy producers (less expensive than NEE)? I have previously purchased small amounts of your recommended green energy utilities from the November issue. Thank you. Sincerely—Barry J.
 
A. Hi Barry. They are two different companies, both former Italian state-owned entities. Enel began as a national electric utility and now operates generation and distribution assets throughout Europe and South America. The company is now ramping up its wind and solar generating capacity globally, both in rate base at its regulated utilities and as contract generation. It currently plans to spend $190 billion over the next decade for that purpose.
Eni SpA is an oil and gas super major with extensive assets in Europe and particularly Africa. It is also adding renewable energy to its business—both fuels and electricity generation. At one time, there was some talk it would try to acquire Enel as a way to speed up that process. With Enel’s market cap well over $100 billion—almost three times Eni’s—that seems somewhat less likely right now. Eni’s annual revenue is $50 billion, which is also less than Enel’s $78 billion. But there’s still the potential for collaboration between the two companies.
 
For super majors, we prefer ExxonMobil, Chevron and Total to Eni at this time for fresh money. But Eni has taken its lumps with the recent dividend cut and we think it’s greatly leveraged to an oil and gas rally going forward.
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As for Enel, it’s been a big winner for us at EIA’s sister advisory Conrad’s Utility Investor. We’ve liked it because there’s a clear path to rising real earnings as it adopts wind and solar technology that’s rapidly becoming cheaper. The share price right now is a bit above our highest recommended entry point of $9 for the ADRs—and we’re now looking at whether Q3 results justify raising that level. That’s also true for Iberdrola—which has a similar business model and has been a winner in recent years.
 
But whether we do or not in December, these stocks and NextEra Energy have real, quantifiable and sustainable earnings and growth on which we can base our investment decisions. The same can’t be said for the vast majority of “renewable energy” stocks—which frankly have not proved their have viable business models and are likely to never see a dime of hard earnings. That’s something all investors should be aware of before reaching for any of the renewable energy ETFs that have gained so much popularity
Q. I received an email message recently concerning a recent statement from Tesla’s (NSDQ: TSLA) CEO Elon Musk. Apparently, he’s made what the author calls a “strange confession” that the purpose of his “electric car empire” is to bring free electricity to “nearly 90 million homes and businesses in America in the coming months.” Should I sell all utilities and buy this? Please advise—Frank J.
 
A. Thanks for sending this along Frank, which is actually an advertisement for an investment newsletter. I’ve never been a fan of this type of approach of attracting subscribers. But the fact that publishers continue to use it is a pretty good indication that generating fear is still an effective marketing tool.
In any case, what we’re talking about here are Tesla batteries that can recharge electric vehicles and in turn draw their energy from solar panels. It’s the latest attempt at a business model for Tesla Energy, which used to be known as SolarCity before the parent basically bailed the company out with a merger.
 
SolarCity still has bonds outstanding under the name Tesla Energy, which are basically securitized rooftop solar contracts. The fact that these currently at sizeable discounts to par value despite maturity dates within five years speaks volumes about how poorly that company’s previous business strategy has fared. So does the fact that “Energy Generation and Storage” barely turns a positive gross profit.
 
The $21 million in Q3 was 3.6% of revenue. That’s versus $88 million in the year ago quarter, or 21.9% of revenue. More alarming, that big drop in margins comes despite a 44% increase in sales year-over-year. As was the case with the old SolarCity, the more Tesla Energy sells of its solar plus
AvatarElliott Gue
2:03
Good afternoon everyone. I'm looking forward to answering your questions this afternoon as well.
AvatarRoger Conrad
2:03
battery systems, the more money it loses.
 
Such perverse, reverse economics of scale aren’t much of a formula for taking over the world, no matter how much money investors are willing to lend cash-burning Tesla to execute its plans. But the real reason you shouldn’t sell your utilities, they’re actually making money adopting the same technologies for homes and businesses—much of it in rate base. In fact, rooftop companies are increasingly partnering with utilities in states like California, rather than trying to compete with them.
 
Finally, if you’re interested in making money off of renewables adoption, I’d like to get a little promotional here myself and strongly urge checking out Conrad’s Utility Investor. Check out the website at www.conradsutilityinvestor.com and download a sample issue—or call Sherry at 1-877-302-0749, Monday through Friday, 9-5 pm ET.
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Q. Good Morning Roger. Thanks for the recent CUI chat last week. As always the transcript was very useful as are your Email updates. I took your advice earlier this year regarding Centerpoint Energy Preferred (NYSE: CNP P) and have a nice gain to show for including the dividends I have received so far.
 
I have attached a recent energy related article that I would ask you to provide some feedback to what extent you agree with the author’s remarks. As the article appears to be a macro assessment of the energy space it gave me some optimism that my demolished oil stocks—Total SA (NYSE: TOT), Occidental (NYSE: OXY) and Royal Dutch Shell (NYSE: RDS)—may someday recover to the point I will at least get to break even status. Happy Thanksgiving.—Jim C.
A. Thanks for sending the article. It always amazes me when I talk to people about energy, particularly when it comes to its ongoing evolution. There’s no doubt in my mind that the cost of wind, solar and battery storage is going to keep going lower and adoption will continue, and that we won’t be using much if any coal to generate electricity 10-15 years from now.
 
But I also have absolutely no doubt—and the article makes the point well—that oil and natural gas usage hasn’t peaked yet and that we’ll be using it in some form for decades, and for many reasons. Most important for investors, big financially powerful energy companies will be able to tack to dominate the energy we do use.
The fact that so many people have counted them out—mistaking a pandemic slump for long term decline—has I think created an historic opportunity to buy the companies that matter in the business, such as those three you mention. And our view is the share price recovery we’ve seen recently will continue, especially as more people realize energy transition means decades, not tomorrow, no matter who is president.
Ok that's it for the pre-chat questions. If yours wasn't answered, we apologize. Please type it in again.
Fred
2:07
Hi Roger
AvatarRoger Conrad
2:07
Hi Fred.
Keith from Canada
2:18
What do you think of enbridge and the posibility of line 5 being Shut down. How will this affect the dividend
AvatarRoger Conrad
2:18
Hi Keith. I don't think shutting down Line 5 would have any immediate impact on Enbridge's dividend, which is backed by cash flows from multiple sources--some of which (the now fully approved Line 3 project) could arguably benefit from the lack of shipping capacity this kind of drastic move would cause--i.e. 14 million fewer gallons of gasoline and transportation fuels to a four state region including two Canadian provinces. The order from the governor is to shut the pipeline by May 2021 because the company has allegedly not made the needed investment. For that to actually happen, the  court will have to uphold the governor's ruling, a potentially heavy lift. I think it's more likely the company will reach a deal with the state beforehand--and there is a plan to redirect the pipeline to improve safety.
Ryan
2:28
I wanted to get your opinion on two undervalued/unloved companies, ARLP and USDP who are both trading at historically low valuations but have weathered the storm this year as shown by their good 2nd and 3rd quarter results. Do you have any comment on USDPs new process that will give them an advantage in shipping Canadian heavy crude?
AvatarRoger Conrad
2:28
We're not big fans of either MLP. Alliance Resource Partners is on the losing end of what appears to be an accelerating phase out of coal-fired electricity in the US. Utilities can raise rate based earnings by retiring and replacing their coal power plants, and so can companies that generate and sell into wholesale markets. The phaseout will take time but contracts are already being cancelled, forcing Alliance to sell output overseas into far less predictable or manageable circumstances. That's not a formula for long-term business sustainability, let alone reinstating/maintaining a dividend with any assurance. Why buy it when there are so many companies like MPLX yielding 13%? Enterprise at 9% plus?
AvatarRoger Conrad
2:31
Continuing on with USDP--it's a small company with a singular niche where earnings have been volatile over time. Sure it yields nearly 12%--but it cut its dividend by 70% just a few months ago. I have met management and am impressed by their ability to survive a tough market so far. But again why am I tying up money in the stock of a company that may still prove to be too small to survive when there are big high quality companies yielding in the same range that don't carry those risks?
Joe Humphreys
2:39
Any thoughts/recommendations on CVI? Thx
AvatarRoger Conrad
2:39
This is not one we'd want to touch either. As a small and specialized refiner, it's facing a lot of headwinds now--which is pretty clear from the fact they've eliminated their dividend and saw their credit rating cut to even deeper junk (B+) at S&P (negative outlook still) this year. I see CVR has received some support in the blog world--not in the analyst world with 0 buys, 5 holds and 2 sells, nor among its insiders. This one does always get some attention because Carl Icahn owns 70.82% of it. But he's been crushed along with everyone else this year with the stock down by nearly two-thirds. We could make a bullish case for refiners and even this one. But again why buy it when you can have Valero in the mid-50s with a sustainable dividend north of 7%?
Michael L.
2:41
Hi Elliott,

 With today's recommendation to buy DIG, should we get out of SCO?
AvatarElliott Gue
2:41
SCO is a short oil ETF (the commodity, not energy stocks) while DIG is a leveraged energy stock ETF (mainly CVX and XOM). We originally recommended SCO back in the spring as a hedge against more downside in oil prices and we recommended taking profits on it over the late Spring/summer when oil prices spiked lower. We did recommend retaining a  small position in SCO because we saw the potential for one more downside spike in oil. I believe the risk of such a move is fading , so I suspect we'll recommend bailing on the last shares of SCO soon though we haven't yet.  I recommended DIG in EIA's sister publication Deep Dive Investing (DDI) as a means of getting some quick exposure to energy stocks, most of which we already recommend in EIA. So, as an EIA reader you probably already have plenty of energy exposure to individual names...DIG was really intended as a way for those with minimal energy exposure (non Energy and Income Advisor subscribers) to gain some exposure quickly.
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