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1/31/23 Capitalist Times Live Chat

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Monroe J

2:52

What is your opinion of SWN as a long term play on natural gas?

Elliott Gue

2:52

I like SWN's portfolio repositioning in the Haynesville and Marcellus Shales and I think that if you use a long-term US gas price assumption of about $4/MMBtu, which is our assumption, then SWN can generate significant free cash flow. Last i checked, they do have a significant hedge book this year with close to two-thirds of their 2023 production hedged at $3/MMBtu or less, so this could reduce their near-term leverage to a recovery in gas prices. Also, they're viewed (correctly) as a riskier proposition because of their significant debt load; however, as an aggressive play on healthy long-term gas prices (again around $4/MMBtu) SWN is worth a look. Right now, in the model portfolio we've focused on the highest quality names (CHK, EOG being 2 wiuth gas exposure) due, in part, to concerns about near-term volatility in energy stocks.

Gerald L.

2:54

A couple questions for Roger today:

1) What are your thoughts on ARLP? Big dividend boost and solid results in the face of coal headwinds.

2) You've previously stated that when a company routinely reduces guidance and sees sequential declines in revenue, that is often a red flag for future performance. Doesn't Verizon seem to be falling into that category now considering the last several earnings releases?

Thanks

Roger Conrad

2:54

Hi Gerald. Basically, Alliance Resource Partners is making up for lost US demand by exporting heavily into a market greatly strengthened for coal by Russia's invasion of Ukraine. And higher demand and prices in recent months have enabled it to pay a much larger distribution this year--which actually should hold this year with 94% of expected 2023 coal sales volumes committed and priced by contract. If you're going to invest in coal, ARLP would be my favorite with its practice of sharing the wealth through dividends. But recognize that growing reliance on exports also means cash flow and dividend will be increasingly cyclical--as demonstrated by the omission of the dividend in 2020. And any number of factors can worsen the situation post-2023, from a recession to peace in Europe.

As for Verizon, as I noted in the update this week, Q4 results and guidance do demonstrate stability--they are still adding customers and revenue, while showing signs of monetizing 5G. And lower CAPEX is raising free cash flow.

Kerry T

3:03

Hi Roger and Elliott:

Thanks for holding these chats. I always learn a lot by reading the
transcripts.

1. Are any of the ETFs in this article suitable as a replacement for VMFXX?

https://money.usnews.com/investing/slideshows/best-money-market-etfs-t...

2. I just bought some Vermillion Energy (VET) at $15 this morning. Do
you still like VET? They are rated buy<25 in your Canada and Australia
portfolio. Your buy levels are in US Dollars, not Canadian correct?
VET got up to $70 back in 2014. Do you expect VET to get back to that
level as the energy cycle matures? Hard to resist such a bargain.

regards

Roger Conrad

3:03

Hi Kerry. Well the yields are lower than for comparable money funds, including both the Vanguard and the Schwab fund highlighted above in previous questions. The fees seem to be higher. Plus, you'll pay commissions to buy and sell, just as you would with any ETF. As for the idea you can sell and then use the proceeds to buy something else the same day, keep in mind that trades have to clear once an order is placed--and that may not happen as fast as you'd like depending on when a trade is executed. In any case, it's hard to see any advantage.

As for Vermilion, I think they're on the right track, demonstrated by the rising dividend (up 10% in Q1). The share price is going to be affected by oil and gas prices. And I think that will be a major plus as the cycle unfolds--no guarantee of a return to $70 but its possible certainly. Buy prices are in USD. I rate it a buy up to 25, though a recession could take it lower this year.

Mike C.

3:08

Happy new year to all at CT, including Sherry!
The two-part EIAs, with deeper dives into macro forces, are really useful for understanding this overall moment and the ‘why’ of what’s going on. Thank you!

A few questions:
First, natural gas….with the recent flash alert on natgas prices, and an options play in progress, are you contemplating a pure trade in UNG, as we plumb the depths of the natgas cycle?
And, what’s your current thinking for the bottom and the top of the natgas price range in 2023?
While oil and gas prices have corrected (as you note in the just-out EIA), I keep reading about how the US is below the five-year storage average for oil, and the SPR remains at historic emptiness. It seems like the commodities markets are pricing in a slowdown or recession already, while the stock market has moved on. What do you think catalyzes a move to the upside in oil? And related, does this bring another moment to take profits in names like XOM, if that occurs before a recession?
As always, many thanks

Elliott Gue

3:08

Thanks for the question and the kind words about the macro issue just released. We would definitely contemplate a long trade in natural gas for our CT Trader trading service. Generally, though, before we enter a trade like that we want to see some sort of near-term catalyst for a change of trend. While we definitely think gas prices are near the low-end of their range, apart from a potential cold snap I don't know what's going to cause gas prices to surge near-term -- it's quite possible they'll trade flat for a while and then jump in the spring when the market refocuses on summer cooling demand. With options, we can make money in a flat market by selling premium but just buying UNG and losing a bit when the ETF rolls exposure to the next set of futures means timing is critical.

Elliott Gue

3:08

I would say that, even in a recession, I don't see serious downside for either oil or gas from current levels. Spikes to the $60's/bbl for oil are possible in a deep recession, but I do think OPEC would react by slashing output. Gas near $3/MMBtu is unsustainable longer term because production would begin to fall from key basins like the Haynesville. Energy stocks are a different story -- even in a flat commodity price environment, energy stocks can get hit if the broader market is weak. Our concern remains that while the stock market has priced in the rise in rates to a great extent, it hasn't fully priced in deteriorating corporate earnings amid the (likely) coming recession. That's why we recommended raising cash via taking profits on some of our recommendations back in November and I'd say that we'd consider doing more of that should energy stocks rise further in the context of continuing weakness in the economic picture.

Clint W.

3:14

Roger/Elliot:
Please help me better understand the bull case for Plains. There are quite a few analysts bullish on Plains. However, I keep reading articles that make me concerned there is more risk this time that Plains will be unable to realize premium pricing like previous oil cycles. Here are a couple of examples:
M. Boyd: The big surprise from Kinder Morgan during the Q4 2022 conference call was their view that a new Permian pipeline was not needed until late 2026 or early 2027...[W]hat was new was their view on overall United States production growth being on the lower end of expectations.
Morningstar: We now do not think Plains has a moat. ... The biggest problem is that Permian takeaway pipeline capacity is closer to 8.5 million barrels per day compared with about 6 million barrels per day of current production. The overbuild is because several new pipes entered service in 2019 and 2020 just as COVID-19 destroyed demand. Now, with public oil and gas firms committed to shareholder returns... (cont.)

Roger Conrad

3:14

Hi Clint. I think their 5 cents per share per quarter dividend increase is a pretty good sign Plains has gotten its house in order the past couple years by cutting costs and debt and refocusing on stronger operations. The shift in credit rating outlook to "positive" from Fitch--also announced this month--also demonstrates progress made cutting debt. And progress appears set to continue this year, with Plains expected to generate $1 bil plus in free cash flow after all CAPEX and dividends paid. Q4 earnings and updated guidance are set for Feb 4. This is the most volumes-sensitive midstream we hold in the EIA portfolio--and our concern about a recession is why we pared back the number of shares we hold in December. But the dividend looks very safe. And I also notice there's heavy short interest against PAA that's in danger of getting squeezed--which makes me a little bit distrustful of bearish views, especially with insiders buying and 16 of 22 analysts rating PAA buy as tracked by Bloomberg Intelligence.

Clint W.

3:19

not growth at all costs, the oversupply issues become more of a long-term problem.

A little context to the pros/cons on Plains would be appreciated. Thanks for the very excellent service you provide.

Roger Conrad

3:19

The biggest pro would be that Plains--like the other large, dominant North American midstreams--has adapted its business model to a tepid volumes environment. The history of past cycles is that volumes do eventually increase/recover, and Plains has the capacity to accommodate without significantly ramping up CAPEX. Also, I would argue that systematic underinvestment is also systematically increasing the value of existing pipelines/energy transport infrastructure. That's amply demonstrated by the Biden Administration's shelving of efforts to shut down DAPL, Line 5, STL etc--as we noted in the first part of this month's EIA issue.

Again, we have to look at the numbers Plains reports next month along with guidance. But the dividend increase certainly isn't a bad sign.

buddy

3:27

Elliott, Over a year ago I asked you about FTI. The price was under 6 (now it is nearly 14). I asked you about it again at least two times and you had the same reply..too early for deep water and sub sea. FTI is signing several large contracts with companies like XOM and Petrobras. Blackrock just increased their large position in the company. Is it finally time to buy this stock? I also have the same question about NOV, which you have said was too early to buy for the last 18 months.

Elliott Gue

3:27

As I mentioned a little while ago in the chat, we will likely add to our list of recommendations over time as this cycle matures. And I/we like FTI in particular longer term. However, we haven't really given up anything by focusing on the bigger, lower volatility names this cycle. Our top services recommendation has been consistently SLB, which has been an outstanding performer over the cycle and more recently. Just consider that since the cycle low in mid-2020 SLB is up 223% compared to 168% for the SP Energy Index, 169.5% for FTI and 100.4% for NOV. Since the recent low on 09/26/2022 SLB is up 68.3% compared to 70.2% for FTI and 65% for NOV. Our view has been that, while we like names like FTI fundamentally, why run out the risk curve to buy smaller names right ahead of a potential recession and pullback from the group while the steady hands like SLB and XOM are providing such outstanding short, intermediate and long-term returns? My guess would be that as we near the mid-point of the cycle...

Elliott Gue

3:27

...similar to what happened in the last super-cycle names like SLB and XOM will be fully priced and we'll have to reach for some of the higher beta names to generate index-beating returns. But, that hasn't been the case to date.

Arthur

3:29

Gentlemen did you ever have a chance to investigate Diversified Energy Company PLC OTCQX International: DECPF https://ir.div.energy/us-press-releases/detail/145/diversified-energy-...

Roger Conrad

3:29

Hi Arthur. The dividend is certainly attractive on its face. But this is a very small company (market cap $1.2 bil, sales $1.6 bil) that's operationally based in Alabama but with a stock that seems to do most of its trading in London (London: DEC). it is pretty much universally liked by European energy analysts who track it. And they appear to be increasing production systematically with acquisitions--such as those in Oklahoma announced in October 2022. There is also the possibility of a US listing this year, which would greatly ease purchases for most investors in the US. Aside from the OTC listing, the main drawbacks here are cash expenses per barrel--which were up 31% in 2022 from a year ago, indicating acquisitions are not to date boosting economics of scale. Also revenue is likely to drop this year despite output increases, as oil and gas prices drop--which may mean the dividend increase is short lived. Bottom line--interesting stock to watch but going into a likely recession we like what we have more.

Jerry

3:36

Any new developments on AQN as they did cut their dividend as you suspected. Did they mention anything on selling their

Roger Conrad

3:36

Hi Jerry. There's nothing really new to report with Algonquin since they announced their strategic plan a couple weeks ago--the main goal of which is to reduce debt by saving cash with the roughly 40% dividend cut and $1 bil targeted asset sales. Ratings were shortly after affirmed at BBB by S&P (negative outlook) and Fitch (stable outlook). But the key now is execution on the plan, including the forecast April close of the Kentucky Power acquisition from American Electric Power. Management has now affirmed it will hold its Q4 earnings and guidance call on March 17 before the open. That timing suggests it expects to have something to say about Kentucky Power and/or a major asset sale--with the 42.49% ownership stake in Atlantica Yield (NSDQ: AY) a good candidate. This is a watch and wait situation now--though the Jan 12 declaration of the 96.875 cents/sh dividend on the AQNU preferred we hold is paying us to do so.

John r.

3:36

Please update your comments regarding the timing, length, and depth of the upcoming recession vs your comments of 6 months ago.

Elliott Gue

3:36

Generally, my view hasn't changed a great deal. I think the timing of the recession is a bit later that I expected back in the middle of last year -- maybe Q2/Q3 start now vs. Q1/Q2 2023 -- because consumer spending held up a bit better than I'd expected for a little longer than I'd expected. If anything, my indicators suggest a deeper downturn than I'd have guessed in the middle of last year, but it's not a significant change. Every economic cycle is a little bit different; however, what's most unusual about this one is the timing of it. So, normally, the stock market doesn't peak more than 12 months before the start of a recession -- this time, the market peaked in January 2022 but I doubt we'll be in recession before Q2, so the peak of the bull market was "early" relative to historic norms. My best guess as to why is that stocks have priced in the rise in rates to date but have not priced in the likely decline in corporate earnings once the recession starts. So, my guess remains that this bear market in

Elliott Gue

3:36

the S&P 500 will be unusually long even if the recession is of average length and duration. Further, I still see significant new lows ahead for the broader market.

buddy

3:46

Elliott, EPD just raised the payout again (great news) yet the stock price sold off. Of all the MLPs I own (7), this one acts the worst by far, yet you and Roger claim it is the best in the class. Can you comment on why this high quality MLP is so hated. Thanks.

Roger Conrad

3:46

Hi Buddy. I wouldn't call Enterprise Products Partners "hated" exactly--for example, it did return 18.6% in 2022, when the S&P 500 was lower by -18%. And the total return for this year so far is 7.7%, which beats the S&P's 5.6% as well as the producer-laden S&P Energy Index' 2.7% and even the Alerian Midstream Index' 6.1%. It's also recommended buy by 21 of the analysts tracked by Bloomberg Intelligence versus 3 holds and no sells. We've seen a lot of insider buying recently as well--and short interest at 1.48% of float is pretty low relative to other midstreams, for example Plains, which as I mentioned above has 7.49% short interest.

Enterprise shares are, however, right now about 39% below their high of the previous energy cycle ($41.38) in Sept 2014, while their never-cut dividend is 36% higher than it was then. That may seem like a head scratcher until you take into account midstream always lags the cycle. In this case, you have a dividend of nearly 8% growing 5% plus yearly as incentive for patience.

Jerry

3:48

AY stake

Roger Conrad

3:48

Hi Jerry. Continuing your question--Algonquin has not mentioned specifically that a sale of Atlantica is in the works. but we have seen some speculation of that affecting Atlantica's share price this month. I'm comfortable AY either way, though I think a sale around the current price would be a huge plus to AQN and potentially set up a full buyout of the yieldco at a premium price.

Gene H.

3:52

If you were going to buy SO, would you buy now? after Unit 3 comes online or wait for unit 4?

Roger Conrad

3:52

Hi Gene. My advice on Southern is for those without positions to buy at 70 or less. As I noted in yesterday's CUI update, it's clear the stock is trading at less than 70 pretty much entirely because of concerns the startup of Vogtle unit 3 will be delayed past the current projection of April--and that the one month estimated expense of $15 mil will increase. But I consider the lack of news since the delay announcement on Jan 11 to be good news. Q4 earnings and guidance update is Feb 16--and we should find out a lot more then.

Alex M

3:54

Hi Gentlemen. May I please get your opinion on ARLP after the recent earnings release and dividend boost? Thanks.

Roger Conrad

3:54

Hi Alex. I answered that question at length a bit earlier in the chat. Short answer is ARLP is capitalizing well on higher coal prices outside the US, which are offsetting the loss of stable contracts with US utilities as coal plants close here. That means cash flow and dividends should be considered volatile--though they appear to have contracts to lock in prices this year.

3:58

Hi, Roger. I have a tax free Schwab money market fund SWWXX, When I make a withdraw the funds are immediately available. My question is, do you still like KREF?

Roger Conrad

3:58

Hi JT. I think KKR Real Estate Finance Trust is well placed to be a rare exception in the financial REIT sector to avoid a dividend cut this year. That's primarily because it's an arm of private capital firm KKR, which has deep pockets and expertise in the markets it operates in. As I noted in the latest REIT Sheet, I'll be especially interested to see if management's projection of rising profits from increased short term interest rates pans out. And if it does, now relatively tight dividend coverage should improve greatly. That will be Feb 7. Until then, however, I consider KREF a solid holding for more aggressive REIT investors.

Elliott Gue

4:02

Gentlemen, I read an article in the Wall Street Journal today about new Gulf of Mexico drilling being done by Transocean (RIG) that suggests the possible start of a trend that could enhance the future prospects for drillers. When seeking your current position on drillers, I could only find one-line summaries on HP, PTEN and NBR -- all of which you rate a "Hold." How about RIG, RES, HP or OIL? Are any of these possible "Buys?" Do you have any macro-level thoughts about drillers in general? Thanks for your advice on this question, along with your continuing guidance.

Contract driller can be divided into two main “camps,” the land-based drillers like NBR, PTEN and HP and the offshore names that would include names like RIG or NE.
Offshore rig utilization collapsed during the energy bear market as drilling activity collapsed and there was an oversupply of rigs. Lately, it’s been tightening and day rates – the daily fee paid to drillers to lease their rigs – have been on the rise, particularly for capable deepwater rigs. GOM is part of that but there’s a lot more, including drilling operations underway in places like Guyana.
My biggest concern with RIG has been their leverage/debt, which is impeding their ability to generate free cash flow as rig utilization picks up. I have been looking at NE closely in the past few months as they recently closed an acquisition that doubled their size and I think that could be a boon to their free cash flow and potential to initiate a dividend.

Guest

4:02

Could you go over some of the shareholder friendly (and mostly smaller) oil stocks with the variable dividends?

Roger Conrad

4:02

We have done that in the past in Energy and Income Advisor, though I would say as a rule the larger companies that pay a portion of variable dividends like EOG and Pioneer have been as shareholder friendly as anyone could expect. By way of a smaller producer paying variable dividends, we've recommended Black Stone Minerals LP (NYSE: BSM) in Energy and Income Advisor as an aggressive play on our High Yield Energy List. Not surprisingly, they've been increasing their payout robustly recently in line with higher natural gas prices. I think we can probably expect a lower payout at some point this year, given the drop in gas, which is why I've held the highest recommended entry point at 14. We would also expect other variable rates to drop temporarily before the next upleg of the cycle.

Elliott Gue

4:03

Our main reason for not wading into names like RIG/NE is we felt that we had good offshore leverage from a name like SLB with less risk, particularly ahead of a potential pullback in the energy patch as a whole.
Onshore rig demand is driven primarily by shale drilling activity (though some of them also have int’l exposure). Frankly, we’ve been a little worried about a slowdown in US shale drilling activity driven by a combination of producers’ desire to maintain positive free cash flow alongside labor and equipment shortages.
Generally, HP is probably best of breed in this group given its cleaner balance sheet and high quality fleet.

Alex M

4:11

Major moves over the last few days in SJIJ, the baby bonds for utility SJI. Is this because of an upcoming delisting of the bonds so all of the funds have to sell because they can't hold pink sheet securities or something? Thanks.

Roger Conrad

4:11

The latest news for South Jersey Industries is New Jersey regulators have at last approved the takeover of the company and the deal will close on February 1. The 8.75% mandatory convertible preferred will pay off at that time. that time, SJI common will cease trading, and management has also said it will "voluntarily" delist its 5.625% junior subordinated notes due 2079 from the NYSE.

The company's new owner privately held Infrastructure Investments Fund will still have to pay interest on South Jersey's bonds and preferred stocks. But anything that's delisted will be much more difficult to trade and even to get a price on. And it's likely some institutions have to sell. I'm also fearful that some brokerages will simply start accounting for them as worthless--which will entail investors having to fight. We should be able to get an OTC quote for readers through Bloomberg. But the easy way here is to sell and move on as many are doing apparently.

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