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1/31/23 Capitalist Times Live Chat

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Jim

4:14

Could you go over some of the shareholder-friendly (mostly smaller) oil producers with the variable dividends you may favor?

Roger Conrad

4:14

Hi Jim. I believe I just answered your question in the chat. Like I said, we like several companies paying variable rate dividends as the cycle moves higher. It's likely many payouts will go lower in the near term due to the recent backing off of oil and gas prices. But you can expect us to continue recommending the best to you in Energy and Income Advisor--along with the best entry points.

Michael C

4:21

Hi guys, thanks for the chats, they are great! My question is PSX (Phillips 66), I noticed it is down 6+% today. Is this a good place to pickup some shares?

Roger Conrad

4:21

Hi Michael. The price of PSX came off sharply today following the company's release of Q4 earnings and updated guidance. I think that's basically a matter of investor expectations getting ahead of themselves for the company, as results were pretty robust for its most important operations in refining. And adding $5 bil in stock buybacks is not chump change at more than 10% of market capitalization. Neither is $4.5-$5 bil in projected free cash flow for 2023 after dividends paid, which is enough to pay off all debt due between now and the end of 2027. We're definitely taking a look at it, though Valero is our favorite in the refining space.

Guest

4:24

Gentlemen: 2 Questions about (i) conservative v. aggressive recommended companies and (ii) diversification. I have a lump sum of money to invest. I need income (not growth), have invested in your recommended "best in class" companies and hence have found the MLP sector very attractive for the last 10 years. Thank you again for your sage advice and astute analyses these many years. i subscribe to ALL of your newsletters!!!! I am contemplating dividing the money equally among the following 14 companies: ET, MPLX, EPD, MMP, ENB, PBA and TRP in the midstream sector; NEP and BEP in the renewables sector; MO in the consumables sector; VZ in telecommunications sector; BXP in the REIT sector, BHP in the minerals sector; and CHK in the oil/gas sector. 1. Which of these companies do you consider conservative? Aggressive? 2. Do you consider this to be diversified?

Roger Conrad

4:24

Thanks for your question. We definitely like all of these energy companies as long-term holdings, as our services indicate. And while you may want to consider a financial stock or a big pharma, this is a pretty diversified list, as well as a concentrated one in sectors that should outperform the next few years. By way of a breakdown, I would consider BXP, BHP, CHK and ET as more aggressive and the rest conservative.

Alex M

4:33

Hi Roger. As a San Diego resident, Sempra Energy is our local utility. They are attracting lots of news scrutiny due to dramatic increases in rates (gas bills for many in our neighborhood jumped over $100 even though usage barely moved). We already pay some of the highest rates in the country for electricity, and they just passed on another major increase in nat gas prices. I have to wonder if the regulators will start to crack down on their allowed returns in the near future... like what happened to PNW. Any thoughts on this front? Thanks.

Roger Conrad

4:33

Hi Alex. As in every state, the commodity price of energy is passed directly through to electricity and natural gas bills paid by consumers and businesses--with no earnings impact on utilities like Sempra Energy. And in California, there's an added degree of separation--as revenue for Sempra, PG&E, Edison International and others is "decoupled" from demand. They get paid a return on investment in their wires and pipes--that's the sole source of their earnings.

It's possible regulators could try to reduce the hit to consumers by cutting utilities' allowed returns. But the saved grid fees wouldn't amount to much relative to the commodity price pass throughs. And it would demonstrably hurt investment in grid upgrades, renewables adoption, EV stations etc that regulators believe will save consumers money in the long run--as well as leave systems more exposed to wildfire.

That doesn't mean California wouldn't make that move anyway. But Sempra's LNG and Texas operations would shield its earnings in a worst case.

Guest

4:36

Hi Roger: Sorry to ask a dumb question - but is TRP a midstream company or an E+P company like CVX and XOM?

Roger Conrad

4:36

No dumb questions. TC Energy is the second largest midstream energy company in North America, with extensive oil and especially natural gas pipelines. It also owns and operates the largest nuclear power plant in North America, Bruce Power in Ontario. I like it at USD50 or lower.

Guest

4:38

Roger: Are ENB and PBA conservative midstream companies? Are they similar to MMP, EPD and MPLX in size and "best in class" status? Am wondering if I should diversify my holdings beyond ET, EPD, MMP and MPLX. Thanks.

Roger Conrad

4:38

Yes, I would consider them conservative midstream companies. Pembina is the 3rd largest midstream in Canada and has proven its conservatism and ability to weather cycles over the years. Enbridge is the largest midstream in North America--also a player in renewable energy. I think both are best in class midstreams as are EPD and MPLX. The key differences are neither is an MLP and both are priced in and pay dividends in Canadian dollars--which means ups and downs in the Canadian dollar will affect your returns.

Charles

4:44

Recently I have read that there is a lot of opposition from environmental groups and efforts to delay or cancel off shore wind projects. I have held dominion stock for several years and am concerned about this resistance and what effect it might have on dominion staock.

Roger Conrad

4:44

Hi Charles. I don't think environmental groups are a major factor affecting offshore wind development at this time. For one thing, the Biden Administration has gone all in to streamline the regulatory process, with the target of advancing 16 arrays to the construction stage by 2025.

What is happening--as I noted in an Income Insights last week for CUI readers (call Sherry at 877-302-0749)--is rising costs due to inflation, rising interest rates, supply chain strains and lately by competition for skilled labor/capital/materials from offshore wind projects elsewhere in the world. That's particularly true in Europe where the industry is far more developed and where governments are straining to quickly wean themselves off natural gas.

Dominion announces earnings and guidance on Feb 8 and the cost of offshore wind will be front and center--along with the strategic review. I think there's real potential for a beat of low expectations on both, which is why I've stuck with the company.

Charles

4:47

Recently I have had concerns about my D stock in regards to the rising concerns and opposition from environmental groups to offshore wind projects with some pushing for a pause or outright cancellation of these projects. Should I be concerned?

Roger Conrad

4:47

Hi Charles. Again, the challenge here isn't environmental groups--in fact, all of the important ones are pushing for more offshore wind to replace gas, coal and nuclear. The concern is costs. Dominion said it would lock in 90% plus of Coastal Virginia Offshore Wind costs by Q1--we'll see how well they did on Feb 8.

John P

4:51

Roger and Elliot, thank you for giving us good credible advice backed by data and historical records. I have two questions, the first is what does the data tell you about the timing of the recession? and when would be the best time to add to some of Rogers real estate picks? Thanks John

Roger Conrad

4:51

Hi John. One recurring takeaway from Q4 results and guidance is there is evidence of a slowdown in more cyclical businesses--and management is planning for it, which means best in class companies should be able to weather it. And looking ahead for REITs, it's more about how well those preparations match up to what actually happens. My view is rather than try to time when a recession kicks in, watch the prices of individual stocks. And if you can get them at a good level, start investing incrementally--one third of your intended investment now, one third in six weeks or so and another third sometime in Q2. That's basically the advice I've been giving in the REIT Sheet, which those interested can get a look at by calling Sherry at 877-302-0749.

Gary

4:53

what would be your top 5 holdings for 2023 if that is all you could select?

Roger Conrad

4:53

We highlight specific stocks in all of our services--and which you choose is really a matter of objectives, what you already own and how much risk you're willing to take in a market we think will go lower.

Elliott Gue

4:56

Question: I couldn't find any mention of how a subscriber would have done by
following your EIA portfolios for year 2022. I made the attached
spreadsheet myself to figure it out. I'm not sure I've got it exactly
right but it looks like the average gain of all the stocks in the
Actively Managed portfolio was +25% and +15% if following the share
allocation. This is really great compared to the S&P 500 (-19%) but
much less than XLE (+58%).

Can you provide a table that shows EIA performance over its lifetime?

You've mentioned that you believe the coming years should be great for
energy investors: far better than holding the S&P 500. I've looked at
10 year charts for the stocks on the Actively Managed Portfolio and I
can see that some of them would have to go up a lot to get to the highs
in 2014. Some have already approached or exceeded their 2014 highs. Is
it the stocks that still have a ways to go that will give us those
outstanding gains or do you think already expensive companies like PXD,

OXY, VLO, XOM, and EOG will go way beyond what they were in 2014?

Answer:
We’ll likely publish the full-year 2022 EIA returns in February and I’ll make a note to include the longer-term returns from the service there (or in a future “appendix” to an issue) as well for reference. I don’t have the final numbers in front of me, but the preliminary numbers I have are higher than those you referenced, mainly for two reasons:
Moves we made through the year (adding or subtracting shares) and, more importantly, the effect of dividends.
For example, since recommendation on March 31, 2022 Chesapeake Energy was up 8.5% in price terms through the end of 2022 but up 17.6% if you include dividends received, which is in line with the S&P 500 Energy Index 18% return over a similar holding period.

4:57

Pioneer Natural, which we held through the year, was up 25% or so in price terms, but up 39.8% inclusive of dividends paid.
Because energy is such a high-income industry group these days, those dividends can really change the picture.
Also, our Actively Managed Portfolio is a combination of energy stocks ranging from producers/upstream, oil services and equipment, midstream companies (pipelines/MLPs), refiners/downstream. So, since the model portfolio covers the waterfront of energy sectors, it’s not directly comparable to any particular energy index.
We tend to benchmark specific recos against their associated energy sub-sector indices.
For example, the S&P 500 Energy Index (and XLE) is mainly two stocks (Exxon and Chevron have a more than 40% index weight); it was up close to 65% last year on a dividends reinvested basis. XOM, SLB, and OXY were among the 5 top-performers in the index last year and are all in the model portfolio.

guest

4:57

Elliott: Your seeing significant new lows ahead for the broader market makes me wonder if we should not just sell into strength and wait on the sidelines-particularly if our stocks pay no more dividends than CD's. Thoughts

Roger Conrad

4:57

If you're looking for a unified portfolio approach--actively managed, cash component, specified numbers of shares to buy--we do have a couple of offerings you might be interested in, depending on what you want. CW/CT Growth is Elliott's total return portfolio. CUI Plus/CT Income is the income focused portfolio I manage. We think our strategies give us the ability to produce positive returns this year no matter what the market and economy do. And the income portfolio yield does top CDs. You can get a look at both by calling Sherry at 877-302-0749.

Elliott Gue

4:58

The SPDR Oil & Gas Exploration and Production ETF (XOP) is a second widely followed energy index that includes the big upstream names like XOM but is equal-weighted, so it holds a larger share of the smaller and mid-sized producers. It was up more like 40% last year; two of our top picks in this area were EOG and PXD, the first up about 56% on a dividends reinvested basis and the second up slightly less than XOP at 39.8%.
The oil services index (Philadelphia Oil Services Index) was up 61.1% last year – out top pick (SLB) was up 80%+, though one of our other picks here lagged (BKR, +26%).
Then, you have the MLPs, which don’t tend to generate the level of capital gains of the upstream names but generate most returns via income. The Alerian Index was up about 30% last year – we benchmark a num,ber of our recommendations against that index as well.
As far as future returns, I would say that energy markets have changed significantly since the peak of the last cycle in 2013-14.

So some market leaders from the last cycle – deepwater drillers and proppant sand miners among them will probably never regain their 2013-14 trading levels. Indeed, some of the leaders from that era don’t even exist today.
Others, like SLB for example, are still a long way off their peak. However, we believe they’ve adapted their business and evolved to the extent that they can ultimately regain or exceed their 2014 highs.
Then, there are names like VLO and XOM which have already regained their erstwhile peaks in price terms. However, these companies have also increased their profits significantly – even though the trading price is higher, they’re actually not as fully valued as they were in 2014.
Let me give you an example. In 2014, XOM generated $12.2 billion in free cash flow and had an enterprise value of $422.6 billion (market cap + net debt) as of year-end. This year, XOM should generate $40+ billion in FCF (that’s conservative) and has an enterprise value of just under $500 billion.

So, it’s producing a ton more cash than it was in 2014, but the total value of the company is actually not much higher than it was in 2014. Indeed, while XOM shares are up a lot in percentage terms over the past year, you could say the stock is still very cheap.

BKNC

5:02

Hi Roger and Eliot,

I just got on the chat, so hopefully this is not a questions which had already been asked.

As always, thank you for your insights over the years. Recently some of your recommendations have been going lower and are in the territory where I was looking at adding to my positions. Some are at or close to dream buy prices. Could you give us your present opinion on Dominion Energy, Brookfield Renewable, Kinder Morgan and NextEra Energy? Would you recommend one over another? Do any of them have things to be concerned about?

Roger Conrad

5:02

I like them all. Dividends are generous, safe and going higher this year, backed by steady asset expansion. I will have extensive analysis of Q4 earnings and guidance in the February issue of CUI, which posts Feb 8. Of the list, Dominion carries the most uncertainty now, as it's in the middle of a strategic review that's likely to include asset sales and is dealing with rising costs of offshore wind deployment in Virginia. As I noted earlier in the chat, NextEra Energy shares are under pressure due to what I believe are overblown fears of a negative shift in Florida regulation but is otherwise extremely healthy. Brookfield faces some skepticism about some acquisitions in progress I expect it to answer with Q4 results next month. But these are all solid companies and good buys at current prices, though I never recommend really loading up on any one stock even at a Dream Buy price.

AARON

5:03

Roger, is it safe yet to "get back in the water" with the Vanguard Tax Free Intermediate Bond fund ?

Roger Conrad

5:03

Hi Aaron. I still prefer the money market fund--it yields about 1.5 percentage points more and is not at risk to further interest rate increases.

jeff B

5:06

Roger, you state that in an up cycle MLP's are the last to run up. I own EPD and MMP. I would like to add a one more. I was thinking MPLX and ET. Which one would you chose, or would it be both?

Roger Conrad

5:06

I think either or both would be a fine addition. I picked Energy Transfer as my number one choice for 2023 earlier this year and it's already up about 12%, though still below my highest recommended entry point of 15.

Incidentally, the quarterly dividend is now back at the pre-pandemic rate of 30.5 cents per share, just as management promised more than a year ago. That's an impressive testament to this company's turnaround, which I expect Q4 results to reflect on Feb 15.

Victor

5:10

Your buy under price for ET is $15. In general midstreams don’t get so much attention by option traders However the open interest on the $15 call options out on Jan/24 is more than 100,000. I’m not sure what to make our of this. Are your expecting this one to move much higher?

Roger Conrad

5:10

In a word yes. As I noted answering the previous question, the dividend is now back at the pre-pandemic rate and the share price is still abut 10% below. I think that's a pretty good near-term target and we may see it next month following guidance. But longer-term, I think we'll see a return to the June 2015 all-time high of $35 and change--and possibly a lot more by the time the cycle downshifts. The dividend is 25% higher now than it was then and the company is much stronger and dominant in its space. Its just going to take patience for investors to ride it there, because again midstream is usually the last sector to participate in energy up cycles.

Guest

5:14

Jim T I am currently considering some changes;(1) lightening up on FANG and ERF and buying CHK, VET and TRP. Additionally, what are your thoughts on the future of Canadian Energy stocks with the new pipeline capacity to the Pacific and China opening up? Thanks for your advice.

Roger Conrad

5:14

The new pipeline capacity--when it arrives--has to be bullish for Canadian producers, which have been constrained since the Keystone pipeline to the US was stalled. TC Energy is a midstream company, while Chesapeake and Vermilion are producers. TC will benefit from new pipelines as an owner of infrastructure. And Vermilion will as a producer, though the bulk of its business is now in Europe. As indicated in this chat, we're bullish on all three.

Guest

5:16

Thanks for the chat.

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