JotCast | 1/27/22 Capitalist Times Live Chat

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1/27/22 Capitalist Times Live Chat

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Roger Conrad

1:56

Hello everyone and welcome to the January Capitalist Times members only webchat. Elliott and I are looking forward to another robust session fielding your comments and questions. And this one will continue so long as there’s anything remaining in the queue, including from email we received prior to the chat.

As always, there is no audio. And we ask for everyone’s patience as we attempt to answer each query and concisely and comprehensively as possible. And it often makes sense to scroll the previous responses, since we often get asked about the same topic more than once.

We will be sending everyone a link to a complete transcript of all the Q&A, probably tomorrow morning. So if you can’t hang with to the end, you will be able to see your question answered then. The transcript is also posted on our company websites, as are those of every previous chat.

Thanks again for participating today. Let’s get started with a couple we received via email prior to the chat.

1:57

Q. Hi everyone – First, much appreciation for your team’s rock solid service and lucid, measured views. A few questions…
Metals: What are your thoughts on Anglo American Plc’s (OTC: NGLOY) prospects? I bought some a few years ago, and it’s up about 95%. I noted the stock is not included in your recent issue (#79) of Deep Dive Investing. Time to exit?
ExxonMobil (NYSE: XOM): I noticed a different buy recommendation in Energy and Income Advisor vs. Deep Dive Investing (<68 vs <75). I’m guessing you’re raising your recommendation to 75, but wanted to ask. And, do you think we’ll see a pause in the energy rally to provide another entry opportunity? (Not that I’m complaining about the rally!)
REIT Sheet Dream Buy Prices: Roger’s CUI Dream Prices are a fantastic tool…any chance of getting those for REITs? Many thanks!--Mike C.

A. Good questions Mike

Starting with the easier ones, I very much appreciate the suggestion for a Dream Buy feature in The REIT Sheet. As I’ve told members, this advisory has had some success, including roughly doubling the return of our primary benchmark the iShares US Real Estate ETF (NYSE: IYR) since we launched in early 2000. But it’s still very much a work in progress and adding a Dream Buy column to the recommended list is a very good idea. I will say that this sector has been very hot the past year, so there aren’t as many high quality REITs trading at extremely low valuations. But I’ve no doubt there will be some in future. I would also like to take this space to again ask readers to feel free to submit new REIT names for consideration in our now 82-strong coverage universe.

Regarding ExxonMobil, we’ve just published a new issue of Energy and Income Advisor today, “Q4 Earnings Bellwethers: What They Say About 2022”—and I hope we’ll have some robust discussion of our insights and recommendations there. In it, though, you’l

see that XOM is now a buy up to 75. And it’s trading below that level today in fact.

Finally, regarding Anglo American, kudos on your gain so far. But we believe the game is far from over for big mining companies, and that the bigger gains from this cycle are still to come. Our favorite in the sector at this time, as the report we recently published indicates, is BHP Group (ASX: BHP, NYSE: BHP), which we also hold in our Deep Dive Investing Income Portfolio—and offer on a standalone basis as CUI Plus. That’s mainly because it’s somewhat larger and has a stronger balance sheet, which makes it a better bet for income investors. But we’re still very bullish on Anglo long-term as well.

Q. I haven’t seen any webinars lately for CT Trader. Are you still doing them? Thanks—Steve J.

1:58

A. Hi Steve. Elliott and I will be hosting a CT Trader webinar in February, and plan to hold them on quarterly basis going forward. CT Trader members also have an open invitation to our monthly Capitalist Times web chats. And of course, you can write us any time with any questions you have.

Our trading business is through Alerts and the weekly update, which highlights our open position as well as commentary on the markets and strategy.

Q. Roger: Are there any “Dream Prices” for Enel SpA (Italy: ENEL, OTC: ENLAY) ORSTED A/S (Denmark: ORSTED, OTC: DNNGY) or Iberdrola SA (Spain: IBE, OTC: IBDRY? Why are these stocks getting hammered? Have their business fundamentals materially changed? My ORSTED is down 40% since its purchase at 59 in November of 2020. I’d be willing to buy more for a long hold, unless you think capital can be better deployed with North American renewable energy producers like Brookfield Renewable Partners (TSX: BEP-U, NYSE: BEP) and its C-Corp shares traded as BEPC—or even midstreams like Enterprise Products Partners (NYSE: EPD), Magellan Midstream Partners (NYSE: MMP) and MPLX LP (NYSE: MPLX). What are your thoughts? Thanks.—Barry J.

A. Hi Barry. First off, I like every stock you’ve mentioned here for long-term investors. Judging from the last couple of webchats, I’m sure we’ll see more questions on midstream stocks today,

, so I won’t spend too much time on them in this answer. But while none of these three have reported Q4 results, Enterprise has more than doubled its previous rate of dividend growth, while both Magellan and MPLX have return to regular increases. That’s the best possible sign they’ve adapted to the current tepid volumes environment and then some. They’re returning more cash to shareholders and they’re still priced basically where they were when oil was $50 a barrel. I think there’s huge upside in this group as the energy price cycle unfolds.

I know a lot of people feel what’s good for fossil fuels is bad for renewable energy. But if you’ve read my e-book “Wealth from the Wind and Sun,” you know I believe investors are going to get rich betting on all things energy, provided you pick your own stocks and focus on best in class adopters—like these producers. And if you saw my piece to Conrad’s Utility Investor readers yesterday “NextEra Energy’s Results: Flashing Green for Renewable Energy Adopters,” you know

1:59

I consider this an especially good opportunity to pick up shares of a number of companies. It also went up on Forbes.com today.

I've set a Dream Buy price of $7 for the Enel ADRs traded as ENLAY, It seems crazy to me that it would get down to that level. But this is a market driven by momentum and that means stocks go a lot higher and lower than they have in the past. I haven't set any for Iberdrola or ORSTED because they haven't been Portfolio companies. But I think another 10% down in either would get us to extremely attractive levels for both of these companies.

Before NextEra Energy announced earnings this week, there was an emerging narrative that costs of deploying new wind and solar were moving into a potentially steep uptrend--due to the combination of supply chain disruption, higher commodity prices particularly for key metals like nickel, potentially rising borrowing costs and a shortage of labor. And the bet I was seeing was that this would squeeze margins at the same time rising electricity

costs (due to spiking natural gas and coal prices) would reduce the appetite for new projects from utility regulators and commercial customers.

That was fueled by the increase in Dominion Energy's projected cost of its Coastal Virginia offshore wind project--though the levelized cost of energy at the project remained pretty steady due to efficiency improvements and reduced costs within the utility's control.

What we didn't see in NextEra's earnings was any evidence of this in its renewable energy development pipeline. So while I think we could see some cost estimates adjusted higher for other offshore wind projects, I think the much greater probability is that other renewable companies will report similar resiliency.

In any case, as you point out, there's been a big selloff in these stocks, even from levels that looked cheap to me last year. And while companies like FuelCell Energy, Plug Power and the like literally have no earnings and therefore no clear way to be valued, the ORSTEDs and Enels of the world most certainly do.

As to your question about whether Brookfield or a pure North American renewable energy company like Clearway presents a better bargain now--I would say all of these stocks are now back at very reasonable valuations. And I expect all of them to report pretty solid Q4 results, particularly now that we've seen NextEra's results.

2:00

The US companies lack currency exposure. And the on-land companies like BEP, Clearway Energy (NYSE: CWEN), Atlantica Yield (NSDQ: AY), NextEra Energy Partners (NYSE: NEP) and others are not exposed to cost pressures from offshore wind projects that are related to the longer development times (3-5 years versus 12 to 18 months). But they also by and large haven't dropped as much. So I intend to continue recommend holding a basket from both groups in the CUI model portfolios.

Great question by the way. Again, I hope everyone has had time to read the article I sent to CUI members yesterday regarding NextEra's results.

2:13

One more from the email.

Q. Roger, a while back you gave us a buy under price for an Algonquin Power & Utilities (TSX: AQN, NYSE: AQN) mandatory convertible preferred stock at $52. I bought a bunch at $50. I still have 2.5 years before the conversion. Do you consider this a good buy at $46.85? The other days I did a primitive calculation based on AQN current price and found if it didn't move I would own $44+ in AQN stock at the conversion. What would your math say and do you still like this for income investors. You have AQN in the Conservative portfolio so I assume they are solid utility. Thanks—Jeff B.

A. Hi Jeff.

2:14

Algonquin is another renewable energy adopter that ran up to a level last year that I thought was unsustainable, and has since sold off to a level I think is much too cheap given its prospects. In retrospect, I wish I’d taken downside momentum more into account and made the recommendation at a lower price. But I think at this price, the 7.75% Preferred of June 15, 2024 is a very attractive way to buy into Algonquin at a good price, while earning a dividend 3 percentage points or so higher than the roughly 5% the common stock does now. I think your math is basically right by the way, though it’s constantly changing along with Algonquin’s common stock price.

For anyone unfamiliar with this recommendation, I made it in the feature article of the September issue of Conrad’s Utility Investor “High Yields for a Zero Rate World.” It was one of a group of six utility convertible preferred stocks.

Joe W.

2:21

https://finance.yahoo.com/news/icahn-moves-remove-roadblocks-southwest...

Shares knocked down tonight post news, after dropping in late trading, then recovering.

I don't get the wild gyrations. Please clarify in member update.

Roger Conrad

2:21

Hi Joe. I'm encouraged by Icahn Enterprises' continued pursuit of Southwest Gas Holdings. My view is the most likely outcome here is Icahn winning seats on the company's board in elections this year, and thereby forcing management to spin off or sell the construction arm Centuri. The sum of Southwest's parts right now is I think worth at least $90, so the outcome should be very favorable to us eventually.

The problem is this is also an extremely messy situation, with Southwest's Board and Mr Icahn at war. And unlike other industries, there's never been a successful hostile takeover of a regulated utility. In this case, taking actual control would require approvals in Arizona, California and Nevada. Management knows that and it's one big reason they've dug in their heels.

I've said I thought Icahn's offer was low ball and I still believe that. But the only way we're going to win here is by being patient--though I do think Q4 results to be announced next month will be solid.

Jack A

2:24

Hi Guys:

With pressure for more LNG supplies to Europe, you would think the pipeline companies would be benefitting. Yet the price of KMI hardly moves, even with a distribution due very shortly. A CNBC program even recommended a short position in KMI, as KMI recently has had lower highs and lower lows. I read that more LNG export capacity will be coming on line later this year. What do you see in the future for KMI and EPD?

Also, does XOM hedge their oil and gas position? Besides PXD, which E&P companies will more directly benefit from the increase in oil prices, due to an absence or diminution of oil and gas hedges?

Thanks.

Elliott Gue

2:24

Roger covered KMI at some length in the most recent issue regarding our outlook for volume increases. I would say that while KMI benefits less directly from commodity price increases compared to, for example, a producer, the stock hasn't been a bad performer. Over the past year, when you include the dividends paid, the stock is up about 25%, which is considerably better than the 17.5% gain in the S&P 500. XOM has historically not done much hedging -- their view, like most of the supermajors, is that their business is significantly hedged due to their diversity of operations. For example, upstream might suffer from a drop in oil and gas prices but chemicals and downstream operations would benefit. Also, for example, many of their production sharing agreements provide for XOM to receive higher volumes when oil prices drop. As of the end of September, they were net long 37 million barrels equivalent of oil and short 60 million barrels notional oil products. This is insignificant relative to their daily

Elliott Gue

2:24

production of around 2.3 million bbl/day of oil. Most likely most of these positions related to XOM's energy trading business, which is ancillary to their other operations.

2:25

PXD was a standout in terms of the year-to-year change in hedge coverage...they're the one name I like fundamentally that will see the biggest cash flow upside from lower hedge coverage in 2022 compared to '21.

Hans

2:29

Any advice on PBR

Elliott Gue

2:29

Petrobras hasn't been among our top picks for a while for a variety of reasons including some specific to Brazil itself. Also, the very nature of Brazil's vast deepwater fields is that they made less sense in the context of low oil prices that prevailed from 2014-2020. So, our view was that investors were better off in a more stable, diversified name like XOM in the early stages of the recovery. Now, as I wrote in the last issue, this recovery is broadening out -- more stocks are participating -- and so we're now reassessing our advice on a whole list of names including PBR.

Joe W.

2:34

NEE might be promoting solar, as you see it and might be a better investment now than just months before. But, Florida and its utilities are pursuing the same bad solar take-aways that California is. https://www.savesolar.org/fl/.

The CPUC admin judge Dec 2021 proposals were to have been addressed by the commissioners this week, but that has been delayed into Feb. I believe Gov. Newsom -- who appointed several of the current commish -- might be working to get some modifications.

Roger Conrad

2:34

Actually, Florida and California have taken radically different approaches to solar energy and I don't see that changing anytime soon. The main difference is Florida's rollout is being managed by NextEra rather than by rooftop companies as is the case in California. The link you sent is from an advocacy group that would increase rooftop companies' role by implementing "net metering" in Florida as has been practiced in California--and which as you point out the state is now trying to roll back. Net metering efforts have failed in Florida mainly because rolling out solar as NextEra has--on a utility scale and using its advantages in procurement, financing etc--produces the same amount of power at about one-third the cost as rooftop. Utility scale solar in Florida actually reduces customer rates, whereas rooftop combined with net metering has raised them in California.

Roger Conrad

2:36

NextEra's outgoing CEO Jim Robo and his team really did change the game in solar. That's why California is now trying to be more like Florida than the other way round, when it comes to solar energy anyway.

John P.

2:44

Good afternoon, I was wondering what the plan is with ATT going forward. Thanks

Roger Conrad

2:44

Hi John. I continue to believe the sum of AT&T's parts--the soon-to-be-spun off and merged Warner Media (with Discovery) and the Big 3 US Communications company that's left--will wind up being north of $40 a share. It looks like that probably won't happen right away, given concerns about wireless growth that I believe are overblown. And I still think management has done us no favors by not clarifying what the dividend is going to be after the split--definitely a textbook case of how NOT to handle a spinoff. But what should be clear to anyone who actually bothered to read AT&T's Q4 results and guidance--rather than just rely on headlines and Wall Street opinion--is that both halves of the current company are healthy and have momentum hearing into the rest of 2022. My plan with the stock is to wait for the spinoff, see what the details are and wait for values to adjust.

Mary Anne

2:45

With alleged discoveries of a huge underground oil source in the Permian field, how will this affect Exxon and Chevron stock prices and how soon with this discovery start being extracted and sold? (this allegation came from an ad from one of your competitors).

Thank you!

Elliott Gue

2:49

I have a stack of ads and promos from various services on my deck that I haven't gone through at this time and that one might still be in the unread pile. So, I am not entirely sure what the ad is referring to. However, most of the reserves in the Permian are shale -- both oil and gas. There are two main parts of the play -- the western reaches known as the Delaware Basin (Texas and N. Mexico) and the eastern bit known as the Midland Basin, which is entirely in Texas. Under both the Delaware and Midland basins, there are multiple layers of rock that contain hydrocarbons and can be economically productive. However, exactly what zones are most productive, and the type of hydrocarbon contained therein (oil, gas, BGLs, etc) varies across the Permian. There really haven't been any new "discoveries" in either play. What does happen quite frequently is that a producer will drill in a particular area and test out new well designs. If those wells perform better than they expected, they may increase their estimates for

Ben F.

2:48

Good morning -

Thoughts on AT&T. I have held for a long time and the stock seems to be a serial underperformer. On the other hand, the stock is cheap.

Roger Conrad

2:48

Ben, I don't blame anyone for running out of patience with AT&T. But as you've said, the stock is certainly very cheap selling at just 7.7 times expected next 12 months earnings--a real bear market valuation for a company still solidly investment grade and let's remember is actually growing revenue and earnings. That means expectations are very low for the stock. And the upcoming spinoff and merger of Warner Media with Discovery (NSDQ: DISCA)--along with the dividend reset--certainly do offer an opportunity for the stock to break the definite cycle of underperformance. Again, I think the sum of the parts is worth far more than the whole. But unfortunately, the only way we're going to find that out and take advantage is being patient a while longer.

Elliott Gue

2:49

How much oil is under their acreage and how many potential well sites (years of drilling inventory) they have left. However, there's nothing really new or "disruptive" going on, it's just how the business evolves over time. Some producers, like EOG, are well-known for finding "plays within a play" -- highly productive areas within a broader acreage position. Bottom line -- it's not going to have any impact on a big producer like XOM, PXD, OXY or CVX...these companies will still basically focus on drilling wells that can produce profitably above $30 to $35/bbl. Because the industry is remaining so capital disciplined, what we're seeing is slow-and-steady growth from the Permian, not a "step change."

Quint D.

2:57

Gentlemen
I’ve been buying BEP as it’s trading at a dream price and is a recommended holding in Conrad's conservative list yet you’re recommending selling BEP here. Can you clarify you’re thinking.
Thank you

Roger Conrad

2:57

Hi Quint. I tried to explain our reasoning for these moves in the Portfolio section discussion, and I apologize if what I said it wasn't clear enough. Removing from the EIA Model Portfolio the other half of the Brookfield position we didn't sell last year--as well as Northland Power and Texas Instruments--doesn't really have anything to do with our opinion of these companies. BEP and NPIFF particularly remain solid long-term investments for income-focused investors. And as power companies, we continue to track them in Conrad's Utility Investor as buy recommendations. But we want to position EIA's energy-focused model portfolio against the benchmarks we measure performance on as we move higher in the price cycle, basically the S&P 500 Energy Index and the Alerian MLP Index we cite in every issue. And while BEP and other renewable energy adopters are cheap now and still very high quality companies, in the EIA portfolio they were performing a defensive role as countercyclical to everything else.

Elliott Gue

3:05

rate hikes in 2022 and now some are looking for as many as 5. The problem is that the ultra-low interest rate environment of the past two years has inflated the valuations of these long duration stocks so much, they have a long way to fall. So, I don't think they're finished correcting yet -- in my view the Nasdaq could have already peaked for this cycle. At the same time, short duration stocks are holding up remarkably well -- since the end of November, the Russell 1000 value is up about 1.5% while the Russell 1000 Growth has collapsed more than 12 percent. So, in our trading services we remain focused on trading long duration/growth names on the short side and trading more short duration/value on the long side. Energy is actually one of the shortest duration groups for example.

Sohel

3:05

Thanks for holding these very useful and informative chats. I have more of a market question. At this point in the correction is it time to start buying quality names (generally speaking not specific to utility or energy) or do you expect shocks and declines to continue? For example will the much anticipated first rate increase in March result in another set of lows or are those getting priced in at this point? Would be interested in your viewpoint. Thanks.

Elliott Gue

3:05

Thanks for the question -- let me put forward a few points we've been focusing on in our trading products lately. First, rising interest rates impact long duration stocks more than short duration stocks. What I mean is that some stocks -- take XOM as an example -- are generating copious free cash flow right now and you can make a valuation case for these stocks based on their current profitability and profits over the next few years. Other stocks -- what we call long duration stocks -- have limited near term earnings and free cash flow but high expected long-term growth. These stocks are valued mainly based on profits they won't produce until 5 or 10 or even 20+ years in the future (like TSLA for example). So, when rates rise these long duration stocks -- growth stocks -- see a big hit to the present value of those distant future cash flows. And that brings me to my second point: It's these long duration stocks that have been hit lately, mainly because just two months ago the market was looking for around 2

Gary

3:07

Any recommendation/comments on Phillips 66?

Elliott Gue

3:07

We like PSX and remain bullish on the big refiners as we see US oil demand coming in strong next summer and driving margins towards mid-cycle levels. Our favorite name, however, is Valero given its asset concentration on the US Gulf Coast.

Roy W

3:08

Hi Roger. First, I would like to thank you for your excellent advice over time in CUI. That said, I have some concerns on the outlook for AQN. A first glance reveals a fairly low return on assets; in particular, adjusted net earnings divided by total assets for Q3 2021 was an annualized 2,3%. Of course, quarterly fluctuations can be material, so I also checked full year results which have also been low recently. For example, in 2019, the last year before the pandemic, ROA was 2.9%. Taken at face value, these numbers suggest that management has made mediocre investments in the past that return less than AQN’s current borrowing rate. And that’s not a sustainable way to grow earnings and dividends over time (and earnings have been uneven lately). It’s possible that future investments will be higher yielding, and as always any one statistic can be misleading when looking at a complicated company. But I’ll never forget passing on Enron due to its extremely low ROA. So I wonder, what am I missing that indicates th

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