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1/30/24 Capitalist Times Live Chat

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Roger Conrad

4:21

The owner of Cove Point is Berkshire Hathaway--as Dominion Energy sold its remaining ownership last year for cash. From all reports, the facility is running well with export capacity under long-term contract. It's the only major export facility for LNG on the Atlantic coast and it's a safe bet to remain so for the foreseeable future. Berkshire of course is a huge company so the impact on its returns is minimal--but it is another good example of a sound investment. I'm glad to have owned the B shares these past 30 years or so.

Elliott Gue

4:21

2. Does Biden's "pause" change your outlook and recommendation for our natural gas focus holdings such as Chesapeake and EQT?.....
Absolutely no change – it’s not going to change the supply demand balance for gas for years....if it ever does. I outlined my thoughts here just above.

Don

4:26

Hi Guys, Thank you for doing this very valuable monthly chat. I'm a bit overweight cash at 5% which may not last much longer. Looking to add some new names- any preference among, AEP, ES, WEC, ETR, AVA, D, WPC and O. Thank you.

Roger Conrad

4:26

Hi Don. I really like what WP Carey did refocusing its portfolio toward single tenant and industrial. I think we're going to see meaningfully faster FFO and dividend growth going forward off a yield of 5.5%. Q4 earnings and guidance on Feb 9 are likely to be lumpy due to the transition. But I think this is a good entry point--prefer it to Realty Income. Of the utilities, I've indicated in the chat that I think Dominion has a significant upside catalyst this year with the strategic review and assuming even a modest outcome it's very, very cheap. I like Avista as I think wildfire risk is overblown, though the stock is likely to trade at some discount because of it going forward. I've talked a lot about EverSource today--won't be hard to beat expectations on the offshore wind sale. AEP, Entergy and WEC are very solid utilities that will see upside from a Fed pivot, though they lack the immediate catalysts of the rest.

Elliott Gue

4:30

3. You once mentioned that Marathon Oil would benefit from the international price of LNG in 2024......... Does that raise your evaluation of Marathon Oil as an investment? Answer: Marathon is a disciplined producer and has returned free cash flow mainly via buybacks. They do have an LNG project in Africa that has now been repriced such that they receive prices for production tied to an international benchmark rather than US gas prices, which a much lower.
So, yes, it’s an interesting name. There are really 2 reasons we’ve held back from adding it to the model portfolio.
First, they have exposure to some mature basins like the Bakken Shale, where there just isn’t much growth.
Second, right now the market seems to prefer names that can scale – basically big companies that are doing M&A and cutting costs to boost free cash flow. MRO doesn’t really fit in there – Not sure they’re a likely target because most M&A focuses on the Permian. Also not sure they’d want to beef up their Permian output with M&A

because acquisitions there are just so expensive.

Thomas

4:31

With AI receiving so much hype, what are your thoughts on how AI might impact utility companies in terms of significant increases in efficiency and who are the best companies to benefit IF this does occur? Thanks

Roger Conrad

4:31

Hi Thomas. Thanks for your question. I think utilities are an industry where property applied artificial intelligence will provide a quantum leap for efficiency, and particularly the ability to respond to storms, earthquakes, severe weather and even intermittency/variability of renewable energy. It's also already a major catalyst for sales growth at several companies, as AI employed at data centers is a notorious power hog. I think the wildfire risk discount utilities are obvious beneficiaries and my favorites are Edison International (NYSE: EIX) in California and Avista in the Pacific Northwest. Renewable energy companies like NextEra Energy are also likely beneficiaries. But I think the entire industry is a real winner here. Thanks for the question--probably a theme worthy of more exploration in CUI.

Elliott Gue

4:34

1. What do you think is behind the recent lowering of oil prices by Saudi Arabia?........... I have to admit that I'm suspicious that the Crown Prince is trying to do Biden a favor before the election, for the promise of help with nuclear development, and a security deal....
Long term, the Saudis need $100/bbl + to fund their current level of spending. So, I suspect they’re more focused on cutting costs – such as with their CAPEX announcement I covered earlier – than they are with cutting deals that would result in lower oil prices.
Generally, despite all the talk about potential weakness in oil demand and excess shale production, all the leading indicators I follow – like prompt spreads, crack spreads, US inventories and corporate commentary re: activity – all suggest the oil market is tightening not loosening.

Jeff

4:39

Can you give me a opinion on HCA?

Roger Conrad

4:39

Hi Jeff. HCA Healthcare is the best in class REIT owner of medical buildings including hospitals. And their Q4 results released today proved the benefits of scale, including that 10% dividend increase. That said, the stock just hit its highest point since last July and the yield is less than 1%. So if you're investing for income I think there are better choices.

Roger Conrad

4:39

I do track it in the REIT Sheet BTW.

Roman M

4:47

Hello all... Chevron was recently lowered from hold to sell by Schwab Equity Ratings, although recently it bumped it back up to hold. Then ET and PAA and PAGP and MPLX
just hit a 12 month high... In last month's chat, you said that the MLPs were usually the last to the party ....
Could that be what’s happening here?

Roger Conrad

4:47

Hi Roman. I actually have no idea what Schwab Equity Ratings bases its recommendations on, so I really can't comment on those changes of advice. I will say we've had a pretty consistent Buy<150 recently in CUI and EIA for Chevron. And worked pretty well as an entry point for this super major--which if anything can be considered a real forever stock I would say it is. The Hess Corp merger faces some regulatory scrutiny. But at the end of the day, there doesn't appear to be much grounds for a successful court challenge--so my guess is it goes through with some conditions. That deal gives the company co-ownership of ExxonMobil's Guyana find, which is one of the most valuable oil and gas assets in the world--ensuring strong production in combination with Texas and Bakken assets. I think there's considerably more upside here longer-term. I also think there is for midstreams--which despite a now three year uptrend are still lagging far behind levels they hit at the peak of the last cycle despite higher dividends.

Clint W.

4:53

’m trying to make a decision on whether to move on from Vermillion Energy. It is trading around $11.00 with a Buy < $25.00. It does appear to be trading at an extremely low cash flow multiple but the stock price is trading just a fraction of what it was in 2022 and significantly off its 12 month high of $15.98.. European gas prices have fallen dramatically. Europe is in a manufacturing recession. The company boasts about buying back a large number of shares but the number of outstanding shares have barely declined. What is your basis for believing it has substantial upside and what catalysts do you believe it will take for it to reprice meaningfully higher?

Roger Conrad

4:53

Hi Clint. One reason is we continue to believe we're in the early stages of the energy upcycle, as levels of investment continue to lag well behind previous cycles, development is being restricted by governments and there's still an expectation in prices that oil and gas are phasing out when demand is still rising globally. European gas prices coming off their peak are noticeably weighing on VET shares. But the impact on earnings appears far overblown, with the company raising the dividend 20% last month and issuing a bullish 2024 outlook. I also don't believe the stock is pricing in the potential for Canadian oil and gas exports, as new pipelines and export facilities come into service.

Clint W.

4:58

Roger/Elliott:

Thanks for the live chat! Regarding NEP, what do you think the catalysts are that will be required to substantially lift the stock price? Is it all or primarily about interest rates? What metric in particular do you think will be most correlated with a rise in stock price? For example, the 10 year treasury rate?

Roger Conrad

4:58

I think they're going to need to do a drop down transaction with NextEra Energy (parent) for the shares to really move. Borrowing costs have already dropped meaningfully. And demand for capital hasn't slowed at NextEra Energy--recent guidance affirmed very aggressive renewable energy installation targets--so management is definitely motivated to do a drop down when it's feasible. But I think we're probably going to need a couple more good quarters from NEP and NEE and the Fed to at least start pivoting on interest rates for the share price to start approaching where it was. I don't think the exact level of 10-year Treasury bond yield is as important as just the action of starting to pivot, which will drive down interest rates even more across the board.

Roman M

5:04

What is your current outlook for Baker Hughes? I was expecting them to do a little better in the last year but they are actually down in price from a year ago

Elliott Gue

5:04

Because the company is such a strong player in the gas/LNG market, I think the stock suffers a big when gas prices are weak. However, it's pretty clear Europe/Asian need more supply longer-term and short-term weather-related weakness in gas prices doesn't change the outlook for LNG from a growth perspective. So, we're pretty bullish on gas long-term and generally see short term weakness as a reason to accumulate names like BKR as well as producers like CHK/EQT.

Sohel

5:05

Hi Roger, Thanks for holding these chats and doling out your expert advice. You rate NNN in REIT sheet as aggressive. Would you rate is slightly more aggressive than O or substantially more so? I have O and am thinking of switching based on NNN being in your recommended list vs O which is not. Thanks again!

Roger Conrad

5:05

Hi Sohel. I do rate Realty Income Trust as a buy up to 70, which is somewhat higher than where the REIT trades now. I think the dividend is safe and will continue to grow at a low single digit percentage rate. And I think the company will report solid Q4 results and guidance on Feb 20. I did say earlier in the chat that I preferred WP Carey, which I think has more upside catalysts this year. As for NNN, I prefer it as a bet on resilience of shopping centers this year, and I think the current price reflects widespread expectation of a highly unlikely 2020 magnitude recession--with no recognition of how much better REITs like NNN are prepared for one. Earnings are on Feb 8--and I expect the solid momentum of Q3 to show up in Q4 numbers. I rate it buy up to 50.

Randy D

5:06

What do you think of Occidental OXY in the present environment? Thanks

Elliott Gue

5:06

They just made a major acquisition in the Permian of a private company called CrownRock, which was a $12 billion deal. It's supposed to close early this year and I think that once the deal is done and they update their guidance, that could be a good upside catalyst for the stock. Until then, names like OXY are sort of drifting basically on sentiment toward oil prices. We are bullish crude short term, so I think that could help too, but the big mover is their soon-to-close deal and updated guidance re costs, free cash flow and CAPEX.

Sohel

5:12

Hi Roger, How does this LNG export ban effect our MLPs such as KMI, ET, EPD etc?

Roger Conrad

5:12

It shouldn't affect Enterprise or Kinder Morgan at all. The midstream infrastructure they've built or are building for energy exports is all contracted. And remember that none of the currently operating LNG export facilities and those with permits to build are not affected by this ruling. These companies will have all the LNG business they can handle for the next few years. And in fact, because of the holdup on permits, they'll see less competition for sales, feeder gas, construction labor and components, you name it. Energy Transfer LP has potential exposure at its Lake Charles LNG export expansion project, as the DOE had previously refused to extend export authorization to reflect construction delays. We'll hear more about what they plan to do Feb 14 with earnings and guidance. But they too have plenty of places to invest to grow. So I think no real effect on them either.

Sohel

5:16

Hi Roger, What is your outlook on ET stock price? It finally made it past the $14 hurdle ... do think this holds up now or are likely headed for another significant dip? Also, what would be a good price to consider selling ET?

Roger Conrad

5:16

I'm positive on Energy Transfer LP, which is still my favorite midstream for 2024 as it was for 2023, with a growing dividend that's still pretty close to 9%. I don't think you can ever rule out a stock getting sold off near term, especially in a sector as volatile as energy. But I see every reason to expect solid results on Feb 14 including guidance, in large part as the result of successful acquisitions. And I think acquiring NuStar--which has good assets but a weak balance sheet--cheaply and using the currency of its Sunoco LP affiliate is brilliance that gets 2024 off to a very good start. This stock is still trading at 42% of its peak price in the previous cycle despite paying a dividend that's 52% higher. i think it has a lot further to go if we're patient and ignore the bumps.

Hans

5:27

Roger, ENB today informed investors that it will reduce their workforce by 5 % will this influence their stock.

Roger Conrad

5:27

Hi Hans. Well investors love cost cutting and that's what Enbridge is doing as it restructures into basically an integrated natural gas company. This move should be viewed as part of the adjustment needed to complete with $14 bil acquisition of Dominion Energy's natural gas distribution utilities in the US this year. The company has also announced several asset sales to secure funding. I still think Enbridge is a cheap stock with a solid future, though TC Energy probably has more upside catalysts this year with the liquids pipeline spinoff.

Hans

5:34

Roger: any opinion on NPIFF

Roger Conrad

5:34

I think Northland Power is succeeding where other offshore wind developers--most much larger companies--have floundered. The ability to fund projects in the North Sea (Poland) and Taiwan on economic terms in recent months basically means it just has to execute on project development, which it has a long track record of doing. Q4 earnings released Feb 21 are going to reflect weather related factors, which would appear to be positive in Europe but are something of an unknown elsewhere at this point. But the management of operations, development and financing is conservative. And I think NPI has a lot of upside at this point, though the dividend isn't likely to be changed until more projects come into operation.

5:34

Does ET issue a 1099 or K-1?

Roger Conrad

5:34

Hi JT. Energy Transfer LP is an MLP, so it sends a K-1 at taxtime.

Clint W.

5:43

Roger/Elliott:

What catalysts would it take for the stock price of PAA/PAGP to move substantially higher over the next few years. (assuming of course, no acquisition.) I’m trying to understand how a pipeline company that is volume sensitive has the potential to raise its revenue significantly in the age of capital discipline by the E&P companies. Would moderate growth in oil production in the Permian make a substantial difference in PAA/PAGP’s revenue? Are higher oil prices necessary for increased revenue? I can understand how the share price can increase through lower debt, higher distributions, etc., which they are guiding towards and I can understand how a rerating of their multiple over time may push it up. What other catalysts do you anticipate over time?

Roger Conrad

5:43

It's really all about where your assets are. And over the past five years, Plains has rapidly transitioned to a Texas/Permian Basin midstream company, with operations in the rest of the country generally throttled back as far as CAPEX. That's provided them a great deal of opportunity for incremental CAPEX to expand capacity without much risk. I think the growth we expect in the Permian will definitely support that. And of course, debt reduction is boosting free cash flow after dividends, which makes those massive dividend increases possible (18.7% announced this month). Higher oil prices are a plus for Plains to the extent they encourage more production. But I think the catalysts here are basically volume growth by being in the right places, lower debt, higher dividends and most probably a takeover offer.

Randy D

5:48

Capital Products Partners CPLP has been on a strong uptrend lately. Do you think it's time to sell, or would you expect this to continue (especially because of the tensions in the middle east)?

Roger Conrad

5:48

Hi Randy. As you know, we've been generally cautious on tankers for some years, mainly because old tankers stayed in service while news ones were commissioned, which meant oversupply. Our more recent view is the market has tightened. But up until the Red Sea attacks on shipping and the Panama Canal being affected by drought, companies were still having trouble locking in long-term contracts at good rates. Capital Products Partners appears to be in better shape than most thanks in large part to scale. And earnings in Q4 to be released Feb 2 should show some firming of rates. Shares are still well below their peak of the previous cycle, which split adjusted was $150 plus! But the spike we've see since Jan 1 is the kind of move that frequently does get reversed.

I've said before we need to do a piece on shipping in EIA. And readers can expect one soon--though there are other sectors we like better at this point.

Jon B

5:53

Interesting story today in WSJ about electricity requirements in Permian. Seems like AEP, SRE and XEL are all involved. Will Texas move the needle for any of these utilities? Any other way to play? Thanks.

Roger Conrad

5:53

Hi Jon. Texas is definitely a state where regulated utilities like to operate. Not only is the economy growing but regulation tends to be pretty much hands off as well. And in the aftermath of Winter Storm Uri, all the utilities were made whole relatively quickly. The thing about Texas, however, is regulated utilities do not own power plants--just the transmission and distribution networks. So while these companies will all benefit from customer growth and rate base expansion to accommodate them, they don't benefit from actual increases in demand. That's more producers/retail marketing companies like NRG Energy and Vistra Energy--which is a CUI recommendation though effectively a hold at the current 52-week high.

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