JotCast | 1/30/24 Capitalist Times Live Chat

Return to

1/30/24 Capitalist Times Live Chat

Prev Page View Full Chat Next Page

Roger Conrad

2:07

I do know that you have a standing buy for NEM in CUI+, but you have not suggested adding to the position. Many thanks, Jeffrey H.

A. I don't see any real problem with Newmont this year. In fact, there's considerable upside potential in my view from Newcrest merger synergies, which will allow the company to focus on its most efficient mines while selling non-core assets to cut debt and boost the balance sheet. It's also noteworthy that gold prices are holding up rather well over $2,000/oz despite the Fed not pivoting as yet to a looser monetary policy. That's a pretty clear sign the stocks are responding to negative investor sentiment. If companies like Newmont show results that should change quickly, particularly when the Fed pivots. My target is

still $100 plus for Newmont with a variable dividend 2 to 3 times what it is now.

Q. Can you explain the debt/capital calculations percentage (in the report card) and your thinking on that? Significance of high and low? And what would you consider high or low and does that change depending on the industry? Thanks—Mike L.

A. Hi Mike

I would view the debt/capital data presented as one element of our balance sheet analysis, which also includes factors such as the cost of longest maturity debt, maturing debt in the next two years,

credit ratings, free cash flow, etc. Generally speaking, lower debt/capital ratios are better than higher ones--as they indicate less debt relative to the company's size. But as you can see from the list, infrastructure companies tend to have higher debt/capital ratios than say technology firms because debt is fundamental to financing projects at the lowest possible cost. The more debt a company has, the more effective its treasury team needs to be managing it. But you really have to view the ratio in context with the other factors, which are summed up in our risk ratings and Quality Grades in Conrad's Utility Investor. There is no one size fits all ratio that indicates strength or weakness for all.

Q. I do not understand the business case for yieldcos such as NEP. The company’s return on assets is only 0.37 percent, well below current interest rates. At face value that would indicate that the company’s past investment projects have had poor returns. I don’t see how they can maintain their dividend when

2:08

their investments have such a low yield, much less increase the dividend over time. And with their outstanding debt almost 9 times operating cashflow, there’s no room for increasing leverage. By the way, this seems typical of yieldcos, a low return on assets coupled with high levels of debt. This doesn’t seem to be a sustainable business model, yet NEP is highly regarded; what am I missing?

A. Hi Roy

NextEra Energy Partners and the few remaining yieldcos (Clearway, Atlantica) is best understood as a funding vehicle for NextEra Energy (NYSE: NEE), which controls it and has a roughly 55% economic interest in the assets. The way it works is Partners purchases ownership in renewable energy assets operated by

NextEra Energy (drop downs) by issuing stock and debt to the public. The parent continues to control the assets and the public gets a share of the returns as Partners' dividends. This model has been extremely effective over Partners' roughly 10 year life, as NEP now has $22.5 bil in total assets. But when capital markets are prohibitively expensive--i.e. Partners can't issue debt at a low enough interest rate or equity at a high enough price to make a decent return on the investment--Partners loses its usefulness as a funding vehicle and drop downs cease. That's what happened early in Partners' life in 2015-16 and it's the case now. Last time around, NextEra the parent bided its time until capital market conditions improved and then it resumed drop downs. That's what I think will happen this time around.

I'm not at all sure where the numbers you quote in your question are coming from. The valid ones for Partners are EBITDA and distributable cash flow, which do cover dividends by a sizable margin. Partners

also expects to generate $2.5 billion in free cash flow this year on a reduced CAPEX program, which is enough to cover dividends as well as pay off all debt maturing the next couple years. EBITDA margin was 27.6% of revenue in 2023, despite spotty wind conditions for some of the portfolio. So the margin on investment was solid and cash flow is backed by contracts with an average life of 14 years to utilities, governments and investment grade corporations, so it's quite secure. The sale of the STX pipeline unit also provided cash to pay off outside loans due through 2026. And together with repowering of certain wind facilities to boost cash flow, that ensures the funding for 6% annual dividend growth through 2026.

The bet here is NextEra Energy Partners can resume drop downs by the end of 2026 and that NextEra Energy continues to support its prospects until it does, as it did back in 2015-16. I think both will happen.

And that's the basis of my recommendation to buy at 40 or lower.

Q. I have large position in epd,et,mplx,pagp .What other mlp would be the best to buy currently. Best—Eric D.

A. Hi Eric. Those are all EIA Model Portfolio picks and they're best in class. As an addition, take a look at ONEOK Inc (NYSE: OKE) and Hess Midstream (NYSE: HESM)--the latter is likely to eventually be taken over by Chevron (NYSE: CVX) when it completes its merger with Hess Corp (NYSE: HES). And in the meantime, it just bumped up its quarterly dividend by 2.7% sequentially from the previous quarter.

Q. Hi Folks. Not sure I'll be able to get on the chat tomorrow so here's a question. In last month's live chat Roger made several positive comments on NEP. That convinced me to start a position which I'm still building. After last week's earnings report, is there any update on NEP? Still a buy under 30? To me, although they cut the rate of promised payout increases,

2:09

they are still planning increases. Doesn't this mean that for now at least, the payout is safe? With its very high yield, I can live with no price appreciation as long as the payout is safe. Am I missing something? Thanks.—Mack P.

A. Hi Mack

With the sale of STX Midstream to Kinder Morgan Inc (NYSE: KMI) closing in late December, NextEra Energy Partners (NYSE: NEP) has successfully arranged financing of maturing debt through 2026. The company's scaled down CAPEX plans are now focused on repowering existing NextEra wind facilities to improve output and boost cash flow, and the company now expects to generate enough free cash flow this year to cover the dividend by roughly 8-to-1. Cash flow is also from facilities under contracts with an average life of 14 years to utilities, investment grade corporations and governments so it should be secure, though wind conditions can be a factor.

I think Partners will continue to raise its dividend 6% a year through 2026 as promised. The potential challenge is 2027, when it will need to access capital markets on reasonable terms or else will have to consider selling assets. I think NEP is currently priced on the assumption it won't be able to access capital markets by then--which is understandable as it's how Wall Street always prices situations like this. But in my view, it's highly unlikely. In fact, Partners was able to execute a bond financing in early December--the rate wasn't great at 7.25%, but neither was it ruinous. And the bottom line is NextEra Energy would really like to have Partners as a viable financing vehicle as it executes a very aggressive wind, solar and storage buildout the next few years. That means support until capital market conditions improve--and dividend increases while we wait for those opportunities.

Guest

2:13

If Hess Midstream gets rolled up, will it be a taxable event for Unit holders?

Roger Conrad

2:13

That depends on whether Chevron offers stock or cash. If it's cash, then Hess Midstream shareholders would be taxed on the difference between the offer price and purchase price. If it's stock--which was the case when Chevron bought up the piece of Noble Midstream Partners it didn't acquire earlier this Noble Energy--it will not be a taxable event. Hess Midstream despite its name is not an MLP but a C-Corp, so it doesn't matter than the likely acquirer Chevron isn't one either.

Jimmy

2:18

Hi Elliott, can I get your initial reaction to Saudi Aramco announcement that they are canceling plans to increase oil production and how that impacts SLB, the business and the stock? SLB is getting hit hard today.

Elliott Gue

2:18

Generally, I think you're seeing a dramatic overreaction in SLB. Here are my thoughts in brief:

Most likely this isn't a cancellation but a delay of some planned projects -- their goal was to increase production capacity to 13 mil. bbl/day by 2027, I suspect they're going to push that back a few years to 2030 or so. The fact is that they're producing well under their 12 mil. bbl/day of capacity and probably will be through 2024-25 so they don't need 13 mil. bbl/day by 2027.

Saudi indicated they would not cancel any projects they've already made a final investment decision on (FIDs). So, that means most expected activity in 2024-25 is likely already locked in. This is more likely to impact activity in 2026-27.

The Saudi government is running some pretty massive deficits right now and Aramco is paying the gov't (royal family) dividends to fund it. So, my guess is that this is mainly a reshuffling of funds, probably from oil to natural gas investments. The latter is mainly aimed at transitioning the Saudi

Elliott Gue

2:18

economy away from burning crude to generate electricity, which frees up more oil for export. Last I saw, the government was estimating that the gas and renewable/solar investments they've been making will free up as much as 1 million bbl/day of oil, primarily crude now used in the domestic market, in favor of exports. So, even if their capacity is flat at 12 million bbl/day, they're actually growing export potential by 1 million bbl/day by 2030. Also note that SLB has exposure to gas and renewable related spending as well. Finally, this is generally bullish for oil -- if the Saudis have less capacity, they have less flexibility to respond to quell price spikes. It will also mean more of the supply burden falls on non-OPEC producers. Of course, SLB benefits from all that.

Jack A

2:24

Hi Elliott:

What do you make of the sharp fall in the price of SLB today? I read that Saudi Arabia ordered Aramco to cut production to 12 million barrels a day, and it is assumed they will reduce capex spending. Is that what is behind the move?. A Citi analyst said that the supply growth in oil production should exceed demand growth next year, and could bring down oil prices. Your thoughts?

Thanks

Elliott Gue

2:24

Just covered the SLB/Saudi issue in answering a prior question just above. Simply put, I think the market is overreacting re: SLB and the Saudi exposure, it will have minimal impact in 2024-25 and Saudi is likely to simply shift CAPEX to favor natgas from which SLKB also benefits. SLB's business is currently seeing broad-based geographic growth, so they have plenty of runway in other markets.

The idea that non-OPEC supply growth will exceed demand growth in 2024 has been bouncing around since last autumn. The IEA's forecasts envision such an outcome while OPEC's outlook is for a much tighter oil market.

In my view, the early read is that the IEA is wrong. We are seeing US oil inventories draw counter-seasonally, calendar spreads have turned bullish (rising backwardation) and crack spreads (refining profit margins) are also running above the average of the past few years.

I also continue to think US oil production is overstated due to EIA's revision of its monthly and weekly petroleum reports last year.

Jeff

2:27

Hi Roger, can I get your opinion on CQP

Roger Conrad

2:27

We rate it a buy at 55 or lower, which is about where Cheniere is trading now. It's covered in our "MLPs and Midstream" Energy and Income Advisor universe. The Biden administration's recent ruling on LNG export facility permitting should benefit this company. None of its facilities or permitted construction is affected. And there will now be less competition for business, as well as feeder gas and needed labor, components and financing. Cash flow is very stable, underscored by long-term contracts. And the dividend yield is solid around 7.5% after the recent increase. Earnings are expected in late February but this appears to be a good entry point.

Kerry T.

2:41

Hi Elliott:

You forecast the year end Stock market run. Congrats! You thought it might last through January. How's it looking to you now - about to run out of steam or will it continue for a while?

Several months ago you wrote about a lot of excess savings available: that it was delaying a recession. Any signs that excess is reduced yet?

Any color commentary you want to add about when a recession/bear market will resume would be welcome.

regards

Elliott Gue

2:41

Thanks for the kind comments.

I have a note coming out this afternoon which provides a bit more detail on my market outlook -- It'll also be up on my Substack (https://freemarketspeculator.substack.com/) shortly if it's not there already.

In brief, this week is a very big week for the market. We have economic news -- Treasury quarterly refunding statement and Fed FOMC tomorrow, Jobs and PMIs on Friday. Also 5 of the Magnificent 7 tech stocks are reporting earnings this week.

I'm a little worried about the stock market -- particularly the Nasdaq/QQQ through all this. The problem is that the QQQ is very overbought -- 14-day RSI recently popped over 93 -- right into the teeth of these major news events. That's just a long red carpet inviting profit taking in my view.

Beyond that though I think we could see at least a bit more upside in the next couple of months. The knee-jerk rection to any pullback in the market leaders will likely be to buy the dip -- after all, it has worked every time since late

Elliott Gue

2:41

2022 Moreover, while I think stocks are very expensive from a big picture perspective, you can make an argument that the Nasdaq 100 is actually "cheap" based on valuation norms since 2020 or so. One day that will end, and I think valuations have a lot of downside over the next few years, but I don't see any reason to believe it will end right now. So, I continue to like a barbell approach here with exposure to some groups and markets, like financials/small caps, that are showing some improving relative strength but I also have my eye on some tech names as I think we'll see an additional leg higher there as well. As far as the recession is concerned, the fiscal stimulus/excess savings from stimulus built up since 2020 has rendered the economy more resilient than in a normal cycle. However, the bill is starting to come due -- The government is going to need to shift some more of its financing needs away from Treasury Bills within the 6 months and that will start to draw down bank reserves. When that happens

2:42

I suspect the Fed will pivot and probably announce a plan to taper quantitative tightening. The risk then is either a hard stop for the economy or a reacceleration in inflationary pressures or, perhaps a combination of both.

Jeffrey H.

2:44

Dear Folks, At the risk of taxing your patience, I do have some more questions. First, do you believe the risks and rewards are the same for investing in NEE and its convertible preferred? What are the tradeoffs? Would it make sense to split the difference between the two equities for fresh money? Secondly, both Evergy (EVRG) and Eversource (ES) have been lagging -- neither one is in your portfolios, altho of course you do track them in your overall report card. Do you have preference for one over the other, or are the risk/reward profiles the same? If you are correct about utilities outperforming this year, do you believe these two equities will share in that uplift? Thank you.

Roger Conrad

2:44

Always happy to field them Jeffrey. Thanks for joining us today. The convertible preferred is basically just another way to own NextEra Energy--paying a higher yield than the common until the mandatory conversion. The convertible typically trades at a premium to its conversion value, so you'll want to check where prices are when you buy. For example, the convertible right now is at $37.60, while conversion value is $33.42--based on the maximum number of shares in the conversion at 0.56 NEE (minimum is 0.45 with a target value of $50). I look for both the common and convertible to be at much higher levels long before the 2025 conversion date. Regarding EVRG and ES, I think ES has more uncertainty but also a real potential upside catalyst if it can surprise on the upside with sales of its offshore wind facility interests. In any case, both companies' dividends are safe and headed for increases--with ES likely the next couple days. Both should finish 2024 on higher ground.

Regarding

Barry

2:46

Do you have any insight on why SLB is down over 7.5% today on heavy volume? Thanks for your great advice!

Elliott Gue

2:46

Thanks for the question. Yes, SLB is down because Saudi Aramco, the national oil company of Saudi Arabia, announced that it would not expand its oil production capacity from 12 to 13 million bbl/day as previously planned. SLB performs a lot of service work in the Middle East and Saudi, so the knee-jerk reaction is that this means a slowdown in their business there.

I believe the reaction is overdone. I outlined all of the reasons in response to a prior question. The bottom line is that this won't likely impact Saudi spending in 2024-25 because most of the activity relates to projects already underway. Also, Saudi isn't really canceling spending but likely diverting CAPEX from oil to natural gas and maybe some renewable projects. Of course, SLB performs work related to natgas Saudi natgas projects are basically aimed at reducing the country's reliance on oil for power generation, freeing up more high-value crude for export.

Chris E.

2:52

Greetings Gentlemen,

I would value your opinion on a couple of stocks that I’ve been holding for a few years and plan on letting go by the end of 2024 for a large purchase I’ll be making for my family. Hercules Capitol (HTGC) and Viper Energy (VNOM). I’m up 82% and 305% respectively and would like your opinion if it would be better to sell now or wait until the end of the year.
Cheers!

Roger Conrad

2:52

Hi Chris. Viper is a royalty company tied to Diamondback Energy. Its variable dividend will follow its parent's production success as well as oil and gas prices. We see a bright future for both and would look for future strengthening in VNOM shares as well as dividend increases over the next few years. Hercules Capital is a business development company--success depends on finding investments with the best combination of low risk and high reward, and access to capital to fund them. Based on recent activity, management still seems to be finding new opportunities. But BDCs in general are always a black box--you really rely on management to keep making all the right moves. And prices can be very volatile. I don't have a timing recommendation on the sell. But as the more complicated of the two by far, HTGC is the stock I'd be least comfortable holding onto.

Tom

3:00

Hi guys, What is your current take on a recession in 2024?

Elliott Gue

3:00

Thanks for the question. My view is that the end result will be a hard landing. Normally, Fed tightening would have pushed the economy into recession long ago but there is a lot of excess fiscal stimulus/savings from 2020-21 still supporting the economy. So, you basically have the fiscal and monetary sides of the economy pushing in opposite directions. However, the US government's eye-popping funding needs are starting to have an impact, and I think there's rising risk deficits begin to crowd out bank reserves. There's a pretty strong correlation between reserves, the economy and the stock market. This will also put pressure on the Fed to pivot on rates and wind down quantitative tightening this year -- the government's interest costs are ballooning and easting up a larger portion of the budget. The risk there is that you could also see a re-acceleration in inflation. The timing is a bit difficult to sort out, but I think we'll see some pretty clear signals that a downturn is imminent such as a resteepening

Elliott Gue

3:00

of the yield curve. Contrary to popular lore, an inverted curve is NOT a harbinger of recession, it's a sign the market sees the Fed as "tight." What is a good signal of an imminent downturn is when the yield curve regains a positive slope after a long period of inversion. That hasn't happened yet, but it's likely to happen in the first half of 2024 in my view.

Eric F.

3:03

Hey guys, has your view brightened at all on MPW? Through all my research they look like they will survive, am i missing something?

Roger Conrad

3:03

Hi Eric. As I noted in this month's REIT Sheet, Medical Properties' principal challenge right now is the financial health of its medical building/hospital tenants. Last week, for example, its largest tenant by far Steward Health was reported hiring restructuring advisors. Steward has informed MPW that its "liquidity has been negatively impacted by significant changes to vendors' payment terms" and has only been making partial rent payments in recent months. A restructuring would potential further undermine its ability to pay rents. And while MPW is trying to diversify away from Steward, several other tenants appear to be in nearly the same boat. I think the stock is pretty well pricing in suspending the dividend this year. But there is also $6 bil plus debt maturing from 2025-27, so there's not much margin for error here. I'm still covering MPW in TRS with next earnings in late February. I think management is solid and is doing what it can. But so much of this REIT's fate is really beyond their control.

Roger Conrad

3:05

As I also said in the latest TRS, other REIT owners of hospitals are also under strain--costs are rising, particularly for staffing at many facilities and that's really narrowing rent coverage. It's a REIT sector I'd generally avoid, especially when so many best in class with no real pressure on dividends and balance sheets are so cheap.

Elliott Gue

3:12

I'd like to take a moment to address a couple of very common questions I've received over the past week. Let's start with bond ETFs and, in particular, the iShares 20+ Year Treasury Bond BuyWrite (NSDQ: TLTW) ETF. Most of the questions center on the performance of this ETF -- if you pull up a price chart of TLTW you'll see that it trades at $26.91, which is actually below where it was in mid-October. But, Government Bonds have rallied over this time frame. The problem is that price charts of TLTW you'll find on brokerage websites or Yahoo Finance, stockcharts.com, etc EXCLUDE the benefit received from any distributions paid by TLTW. And TLTW pays large distros -- some $1.72 per unit since early November 2023 alone. So, the bottom line is that if you include the benefit of distributions paid, this ETF is up significantly (about 7%) since October 19th, 2023, the bottom of the bond market sell-off. I explained the situation, and how I handle evaluating these bond ETFs in a flash alert to readers of all

Publications in which I’ve recommended TLTW. If you did not see this flash alert and have more questions about TLTW or other bond ETFs I did post a detailed article on my Substack here -- https://open.substack.com/pub/freemarketspeculator/p/bond-etf-q-and-a?... -- where you can read it for free. If you have any follow ups, I’d be happy to respond via e-mail or on the February chat.

Harvey F.

3:15

Many Thanks to Roger & Elliot for their 'on time/On the spot' advise during several Recent company meltdowns (i.e WPC, Verizon & NEE/ NEP) to name a few. It took calm heads to think rationally and see through the smoke (it wasn't as bad as it appeared, it provided some of us with an entry point + you were correct, so we are much better off). Again, thanks!

Question: as to 'Petroleo Brasileiro' (PBR) which historically has provided a higher yield distribution. Some of the Review services
question this holding because of the New government in power, ect yet it seems to be a major player - is the concern here justified... Could this be a short or long term holding ?
Kind Regards.

Roger Conrad

3:15

Thank you Harvey. We'll continue to call them as we see them. I think Lula's government has been far more benign regarding the energy sector in Brazil than most people thought. But they've definitely pushed Petrobras' investment in a different direction than the previous government--which makes sense since its fundamentally a state owned enterprise. I think the impact on shareholders of the policy changes has been generally positive--dividends are higher so far this year, And while the company is now investing in renewable energy with an initial goal of 2 GW of generation, it's also now drilling exploratory wells in the Equatorial Margin, while actual oil and gas output hit a record in 2023. And the government has been OK with buybacks as well. Obviously politics is changeable and I think the government has a clear desire for oil and gas to be affordable to Brazilians, even if it costs shareholders. That's one reason I prefer the US majors, which are not government owned. And PBR is also at a new 52-week high

Roger Conrad

3:15

But I think PBR is definitely at least a hold.

Elliott Gue

3:21

The second issue I've had questions about is the Biden LNG "freeze." (It must be top of mind for a lot of people because I even fielded a question about it while getting a haircut a few days ago). Basically, the Biden Administration announced that the government would halt approvals of liquefied natural gas (LNG) export licenses to scrutinize the impact of these projects on the climate. This move got a ton of play in the mainstream and financial media and many of you wondered what impact it might have on our positive thesis regarding names like CHK, which we outlined in a flash alert early this month.
The answer is there is no impact – it’s basically meaningless at least for years.
Read the fine print and Biden’s decision has no impact on liquefied natural gas export facilities that are already operating or those that have received approvals and are currently in various stages of construction and start-up.

Connecting…

Your current subscriptions

None

E-mail Address	Chat Owner	Status	Remove

Enter your email address to be notified when Sherry Roberts hosts a chat