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1/30/24 Capitalist Times Live Chat

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Elliott Gue

3:21

LNG export terminals take years to plan and build.
For example, the most highly anticipated new LNG export start-up in 2024-25 is Golden Pass, a $10 billion facility in Texas. Partners Exxon Mobil and Qatar Energy began the permitting process in 2012 and construction started back in 2019.
That means projects due for start-up between 2024 and 2028 received export license approvals years ago and are unaffected by Biden’s new policy.
If the new policy does result in the government denying export licenses to LNG liquefaction projects, that won’t impact the supply/demand balance in the US (or global) gas market until 2029 or so at the earliest.
More broadly, Biden’s LNG announcement on Friday represents classic politics – the politics of DELAY.
You see, the Department of Energy (DOE) and the Biden Administration would not comment specifically on how long this review of the export license permitting process might take...Only that the review would take “several months.”

3:22

You see, the Department of Energy (DOE) and the Biden Administration would not comment specifically on how long this review of the export license permitting process might take...Only that the review would take “several months.”
Translation: “After the November 5th elections.”
In other words, the Biden Administration has shored up support from environmental groups and climate activists through this year’s election cycle without making any actual decision on LNG projects that might be ready for service in 2029.
(Note that even if Biden were reelected, he would be out of office in January 2029, which makes that a problem for his successor).

Dan

3:26

Looking at Dominion Energy (D) it seems like the price is stuck in the $45 range. Is the catalyst for getting out of the range the Virginia Offshore JV partner announcement or the release of the final strategic business plan. If the JV partner is not found does the stock price take a hit, or is that scenario already baked into the current price range? Thanks for your thoughts.

Roger Conrad

3:26

Hi Dan. I think Dominion is right now being viewed as a show me story by prospective buyers. That means it's likely to stay in this mid to high 40s trading range until the strategic review is completed and management has re-issued multi-year guidance for earnings and the dividend. The company said a couple months ago when it announced Q4 earnings that finding a partner for the CVOW facility was the final step in the review. I think there's a probability that will be announced along with the strategic review results on Feb 22, when Q4 results are now scheduled to be released. And today, Dominion announced it has the last two needed federal approvals to start construction onshore, with offshore "on schedule to begin" in Q2. Management also affirmed the project is "on budget." That should be pretty encouraging news for a prospective investor. I think the current price reflects the possibility Dominion is having trouble finding a partner. But equally, they have a reputation for keeping things quiet.

Roger Conrad

3:27

Bottom line is I think Dominion is still very much worth betting on, especially at a price where few so far at least have been willing to give them any credit for progress.

Gina

3:35

What's your take on the environment for REITs this year? Both in terms of expected changes to interest rates and the economic environment for businesses leasing property?

Roger Conrad

3:35

Hi Gina. As I pointed out in this month's REIT sheet, long-term borrowing rates for healthy REITs have already come off 1-1.5 percentage points from the highs they reached back in October. That's without the Fed doing much of any pivoting. And I think it augurs much lower rates ahead, with the short-term the most likely candidate for a big drop. I think there is a risk of recession or at least slower growth that negatively affects rents, occupancy rates and possibly collection rates in some sectors. And in fact we've already seen weakness in areas like hospitals, as well as slowed rent growth and some vacancy increases even in residential. But I also believe many healthy REITs right now are priced for a 2020 style recession, despite the fact even a bad one would not include coronavirus protocols and that companies are arguably ready for one with conservative financial policies. So I think REITs that can continue to post steady results until the Fed finally does pivot are headed for a lot of upside.

Roger Conrad

3:36

I remain highly cautious on office--as I think the sector is still adjusting to a new post-Covid reality where tenants want to downsize space. But there are big time bargains now even there in companies that have basically shown no weakness.

Eric F.

3:41

First let me thank you for stopping me from catching the falling knife of IEP about 6 months ago. I owned it at 30 after dropping from about 52 thinking it was a good deal. You guys gave me some good advice and i actually listened. I owned it for less than a day thankfully, now it sits at 17 today.

Second, I really really appreciate your explanation on TLTW that you sent out. I had questions about it, and you really cleared up its relationship to TLT for me.

Elliott Gue

3:41

Thanks for the kind comments about the advice and the questions.

These chats are really very useful for us as well -- as they help quickly identify the need to send out special alerts to address common questions and concerns like TLTW.

Dan

3:44

Hi Roger, with respect to Equitrans (ETRN) MVP project, has there been any further information on the successful completion date, since the January 4th update? Thanks for your thoughts.

Roger Conrad

3:44

Hi Dan. There's been nothing from Equitrans on the Mountain Valley Pipeline since the January 3 Form 8-K was filed. At that time, management reported 0.9 miles of pipe remaining to be welded, 935 remaining "tie-in welds" left, 49 crossings including major boring operations, 29 segments to be hydrotested and one compressor station to be commissioned. They also stated they would be downsizing the work crew to 1,000 (currently 2,000) by early February and to 500 in early March. And they reaffirmed a Q1 in service date. I will say the region has had some snow and power has been an issue in some areas. But at this point, it looks like there are progressively declining hurdles to this pipeline coming into service--and at the most recent cost estimate. I think the stock price right now reflects a lot of skepticism and we'll see it move to a new level when MVP is on line. They expect to update guidance in late February.

Don C.

3:48

Gentlemen—do you have an opinion on BCX (Blackrock Resources & Commodities Strategy Trust? It seems to have a nice mix of energy and natural resource stocks and sells at a discount to NA

Elliott Gue

3:48

Glad you enjoy the chats and thanks for the question. Generally I'm not a fan of ETFs and Closed-end funds because they tend to hold the good the bad and the ugly of the industry. Also, by picking your spots and individual names I think you can outperform over time. However, just scanning the list of names in BCX, there are a lot of names we like and names I cover and recommend in various publications including XOM, CF, WPM, EOG, SLB HES. So I do think the holdings look reasonably solid and it seems the fund uses a covered call options strategy to generate a bit of additional income -- covered calls can be a useful strategy in volatile markets like this.

Scott D

3:49

Hi Roger, By my calculations the CUI Conservative Income Portfolio has out performed XLU in both the past 5 year ans

Roger Conrad

3:49

Hi Scott. I think that's true. It was last year as I reported in the January issue of CUI. To be sure, we had some unexpected red ink, especially from NextEra Energy (NYSE: NEE) that I look to be reversed this year as the company sticks to guidance and executes its investment plans. And it was a negative year for utilities and dividend stocks in general. But by and large, the winners more than outweighed the laggards. And that's the benefit you get by focusing on individual stocks, rather than passively run ETFs and the indexes on which they're based.

Sohel

3:59

Hi Elliot, There seems to be a lot of confusion re. when fed starts dropping rates. What's your view about when they start and how much you think they drop in 2024 vs later? Thanks!

Elliott Gue

3:59

The market has priced in about 40% chance the Fed cuts in March (the meeting is 03/20/24) and a cut in May is fully priced in with a 21% probability the Fed cuts 50 basis points total by May 1, 2024. The market sees basically six 25bps cuts over the next 12 months (by the time of their January 29, 2025 meeting). Timing of the first cut -- I'd actually put a March cut at a bit better than 50/50 probability economic data over the next few weeks should settle that debate.

That said, I think the bigger issue is when then start to wind down QT -- I think tapering QT (reducing the speed at which the Fed lets assets roll off its balance sheet) could start as soon as April and be complete by the summer or early autumn.

In my view you can't justify a cut in March or May -- certainly not 6 cuts over the next year -- based on the economic data. The economy is slowing, but has undeniably proved more resilient than expected. And while inflation has moderated, it's hardly been "whipped" and it's just as easy to make

Elliott Gue

3:59

the case it'll reaccelerate as to make the case for a steady glide back to target. So, my guess is that the real issue is that the Fed is going to need to cut/end QT because Treasury can't continue to finance the US deficit with rates where they are. I mean, they're already above 20% in terms of T-Bills as a % of outstanding debt and the Reverse Repo facility on the Fed's balance sheet is close to exhausted. Once that's empty, issuing Bills won't be so easy and will tend to reduce bank reserves. So, I think the Fed pivot and QT tapering is more about the Treasury, deficits and bank reserves than it is about the economy and inflation. If that's true then I think the Fed Funds market is about right in pricing in cuts through 2024.

Hans

4:02

Elliott, SLB drop of 7.5% today, any reason?

Elliott Gue

4:02

Thanks for the question. Yes, it's down to the Saudi Aramco announcement re: pushing out their capital spending aimed at increasing oil production capacity. I covered it as some length in response to an earlier question in today's chat, which is just above.

The bottom line is that we think SLB stock is overreacting -- it won't have much on an impact on growth for them over the next 2 years and, if Saudi is just shifting CAPEX in favor of natgas, SLB will still benefit.

Jim D

4:02

Roger - apologies if this has been asked already- just logged in. What are your thoughts on ADM? Dream Buy or falling knife?

Roger Conrad

4:02

Hi Jim. It has not. Archer Daniels Midland is a company that's always in our sights as still the US agribusiness leader with extensive links overseas where some 55% of its sales are now. The 11.1% dividend increase announced last week still appears to be well backed by underlying earnings. However, ADM also announced a probe of its accounting particularly regarding sales, putting its CFO on "leave" and prompting both Moody's and S&P to put the company on review for downgrade depending on the results. Given this company's long-term success, the big drop in the stock on the news looks like an overreaction--and there's a great deal of CYA going on among the analysts covering the stock. I don't have an opinion for you today. But we are looking at this stock closely, as it's now less than 10 times expected 12 months earnings and the issues here don't appear to merit the reaction.

Sohel

4:05

Hi Elliot, Between Exxon and Chevron which one would you prefer at current prices as long term hold for a dividend investor?

Elliott Gue

4:05

Generally I like both US majors though I prefer XOM marginally given its superior production growth outlook. I would say, however, that I think CVX's deal to buy HES addresses some of my concerns about their growth outlook (basically they are now partnered with XOM in Guyana) and the stock does have a somewhat higher yield.

Sohel

4:06

Hi Elliot, What is your outlook for BP? It recently hit a 52 week low and seems to have been one of the worst performing majors - it's got a pretty high yield at current prices - would you recommend taking a position or suggest sticking with US oil majors?

Elliott Gue

4:06

I definitely prefer the US majors. BP has made some positive moves in terms of targeting a bit more oil/gas production CAPEX. Still, however, the US majors just have much better production outlooks.

Scott D

4:08

Hi Roger, Could you kindly share the CUI Conservative Income Portfolio annual performance, including dividends for each of the past 10 years. It would save me a lot of work. Thanks

Roger Conrad

4:08

I haven't put a table together of that nature lately but I will take the suggestion. In the meantime, yearly returns for the Conservative, Aggressive and Top 10 DRIP holdings are presented in January issues of CUI, which are archived on the website. I will say, though, that I think the stock by stock returns shown in every issue are probably going to be more helpful for most people, as they are more attuned to our strategy of building positions in stocks with rising dividends over time. Also, the annual returns I present do not include the recommendations I've made to take profits at times, or Dream Buy entry points that would obviously yield a better result. And I don't utilize a cash component either officially--though I have given that advice to hold cash frequently.

Sohel

4:09

Hello Elliot, What is your outlook for refiners such as VLO through the rest of winter and into summer? VLO seems to have suddenly picked up a lot of steam and I was wondering if it's time to take some off the table?

Elliott Gue

4:09

Good question that -- I was actually recently thinking about VLO in light of the recent surge.

I think the interesting thing though is that amid all the talk of weakening global oil demand and US oversupply, crack spreads (refining profit margins) have been very strong. That's the market's way of telling refiners it needs more supply of gasoline and diesel.

In my view that bodes well for oil prices and refiners like VLO, so we're watching it, but think it's worth holding in there for now.

Don C.

4:09

Gentlemen—do you have an opinion on BCX (Blackrock Resources & Commodities Strategy Trust. It seems to have a nice mix of energy and natural resource companies and sell at a discount to NAV. These chats are so very helpful to me.

Elliott Gue

4:09

Thanks for the question -- I covered BCX a bit earlier on in today's chat.

David

4:17

If the Fed indeed does begin to pivot this year, should not Muni Bond funds be attractive now?

Roger Conrad

4:17

Hi David. I think if you have a relationship with a broker who's familiar with muni bonds and has access to inventory, now is a good time to buy near-term bonds (1-2 year maturities) as a good parking place for cash. I would be very wary of ETFs as well as most mutual funds, as you have no control over what's inside. One good reason to look carefully at what you own is new water regulations--for some municipalities, this is going to be a financial bridge too far, as they simply lack the funding now to make the needed upgrades in pipes and mains, etc to ensure safe drinking water.

Jim D

4:18

Elliott & Roger - your recent articles addressing the LNG projects review; attributable to the "old guy who thinks local gas stations are to blame for high gasoline prices at the pump; was successful in relieving my concerns over the Whitehouse & staff running without restraint and contrary to agreements with European Allies and commonsense energy & business policy.

Roger Conrad

4:18

Thanks Jim.

Elliott Gue

4:19

1. Baker Hughes fell after its most recent earnings report, despite beating on earnings... What do you make of that?........... What do you expect going forward, especially in light of Biden's "pause" in new LNG export terminals in the United States?
I think the market was disappointed by their revenue growth in their business segment that handles LNG projects coupled with the recent slide in gas prices. While orders there are definitely slowing a bit, that was expected. I don’t see short-term weakness in gas prices having any impact on LNG demand longer term – Europe and Asia still need that gas and new projects are coming onstream over the next 3 years that will almost double US LNG export capacity.
I covered the Biden pause a bit earlier on in the chat. It has zero impact on my outlook because he didn’t really change anything. The “pause” doesn’t apply to any facilities in operation or to facilities that already have export permits, which covers all plants the market was expecting through to about

4:20

2029.
Basically, the Biden Administration was getting lobbied hard by environmental/climate activists and so he issued that press release to appease them. Since it’ll take several months to create and communicate a plan for export permits going forward, he’s basically kicking any decision on export approvals out past the elections this year. Pretty standard political strategy of delay there used, to be fair, by both sides at various times.

Jim D

4:21

hit send too soon. With the above LNG comment in mind - who are the owners of Cove Point LNG and what is the project's current status.?

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