JotCast | 11/26/24 Capitalist Times Live Chat

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11/26/24 Capitalist Times Live Chat

Roger Conrad

1:54

Welcome to this month’s Capitalist Times live webchat. Elliott and I are looking forward to a lively and informative session and we thank all of you for joining us today.

As always, there is no audio. Just type in your questions and we’ll get to them just as soon as we can comprehensively and concisely. This chat will last as long as there are questions left in the queue.

We’ll start with some received prior to the chat via email.

Q. Do you think we’re going to see a short-term ‘buy the rumor sell the news’ sell-off in midstream and energy companies in January/February, as the new administration comes in? (I’m sitting on a more-than-doubled position in Kinder Morgan Inc (NYSE: KMI)….thanks to you!...and wondering about timing of taking profits.) I totally take your points from the most recent EIA, as well as the indications from Team Trump about increasing LNG export, so I definitely see the long-term bull case But it feels like the current rally is a bit frothy/overbought. As you said, AI fever.

Finally, will you do an updated look at Metals one of these days? Given both the collapse of the Chinese import market and the prospect for a reinvigoration of American manufacturing under Trump, I’m curious about your current views. (It seems like there is a Rebuilding American Manufacturing stock basket that lives within the CT family, from Prologis Inc (NYSE: PLD) to the right energy companies to select industrials. Just an idea.)

All the best for the holidays, and many thanks for the great service!—Mike C.

A. Thanks Mike. Hope you have a nice holiday as well.

I think you’re right to be concerned about how far and fast midstream stocks have come the past couple months, particularly the C-Corps like Kinder. It’s not as expensive as ONEOK, which we think merits taking a little money off the table from at this time. Earnings have been consistently solid the past few years with the company incrementally adding to valuable natural gas midstream assets. And I would argue Kinder has been unfairly discounted for years (as I did for years).

I also don’t think the midstream MLPs have nearly gotten their due and will go a lot higher by the time this cycle ends. The discipline of shale producers is definitely with the midstream companies—and they’re not building unless they have a very high level of confidence they’ll get permitted and until the assets are at least mostly contracted. That adds up to a long-term shortage of infrastructure

1:55

, which is starting to show up in stronger contract pricing.

In other words, the underlying fundamentals of this group have rarely if ever been stronger. But I would also agree they’ve come a long way in a hurry as a sector—and for what are likely to prove to be mostly short-term catalysts: Excitement about the incoming Trump administration, AI hype (though there is a real case for using a lot more gas to run it) and so on. These stocks would also be at risk in a full market washout, which while not probable now is certainly possible.

The way we’re playing it long-term. We’re not chasing the rally by pushing up buy prices. And we’re recommending taking a little off the table in particularly big gainers like ONEOK, with the idea of buying more at a lower price. In other words, we’re pretty much staying the course in pursuit of the big gains likely to appear later in the cycle.

We will have another piece on metals in the near future. In the meantime, as you note, we’re pretty high on the re-shoring theme—electric utilities are one great play as are selected REITs like Prologis, mining companies like BHP and so on.

Q. Did you notice that page 4 of the new Energy and Income Advisor issue has Pembina Pipeline (NYSE: PBA) as a buy < 35 but page 11 has PBA as a buy <42?—John A.

A. Sorry about that. The highest recommended entry point for Pembina is currently 42.

Q. What are your thoughts on Cheniere Energy Partners (NYSE: CQP)?—Judi D.

A. I think the shares are still suffering from the decision to pay a lower dividend this year to devote more cash to fund growth. But as I said at the time of the announcement, I think it was the right decision—given Cheniere’s lead over other LNG export companies in terms of permitting for new projects and the otherwise high cost of capital.

I think they will return to dividend growth in 2025 and in the meantime a yield of nearly 6% is attractive for a company in the LNG business. It is an MLP, so there is a K-1 to file but dividend is also tax advantaged.

Q. Hey Sherry! Can you pass this on for the next monthly forum. First a suggestion: It would be helpful if you could add a Dream buy” column onto the portfolio columns in both the CUI and the EIA publications. It would save a lot of flipping back and forth (as I’m old school and print them out). Also, do you have any thoughts on Telus (NYSE: TU) and Woodside Petroleum (NYSE: WDS)? Just wanted to let you know that I enjoy my memberships as well as these monthly forums and the added interviews on the podcasts!—Mike

A. Hi Mike. That’s a good suggestion—and it would also eliminate the need to have a separate Dream Buy table as well. There may be some complication with swapping columns but we will take it under advisement.

1:56

Telus is I think going through much the same headwinds as BCE Inc (NYSE: BCE). That starts with a weaker Canadian dollar the past few months, which has driven down the US dollar value of both stocks. They’re also facing increasingly restrictive regulation in Canada, as the federal government seeks to advantage new entrants in wireless and broadband to the detriment of network owners. I think the worst case for this is definitely already in both stocks. And I think investors are ignoring the fact that both companies are still generating enough free cash flow to cover dividends and pay off debt, even at what are likely to be cycle highs for CAPEX. I like both stocks for patient investors.

The same goes for Woodside, which is trading near a 52-week low on extreme weakness in the Australian dollar (64.5 US cents), and possibly misplaced concerns about how much US oil and gas production might increase under the new administration. I think it’s a great time to pick up a few shares—the yield of almost 9% is base

based on what should be a cycle low for the semi-annual dividend.

Q. Roger. I have been following your comments regarding NextEra Energy Partners (NYSE: NEP) and have a couple of questions that I would appreciate your thoughts on.

I now have a substantial position in NEP that carries an average price of about $25. We both thought it had little downside left, but it still drifts lower. My questions are these.
·      If NEE absorbs NEP, is it likely that NEE will gain appreciatively in price due to the increased profits and cash flow from NEP operations?
·      In that event, is it likely that NEE will increase its dividend also due to the increased profits and cash flow from NEP operations?
·      If NEP stays public and reduces its dividend to retain more cash, is the market likely to gain confidence that NEP can meet its coming debt obligations and start to bid up NEP's price because its operations remain strong?

·
I know no one has definitive answers to these questions, but I value your option. I am fighting the urge to double my position and reduce my average price to $20.--Ron M.

A. Hi Ron

First off, there's been nothing really new to report on NextEra Energy Partners since the company and NextEra Energy released Q3 results and updated guidance nearly a month ago. A couple research houses have changed their opinion slightly, one upgrading to hold from sell and another cutting from buy to hold--leaving the overall count 12 holds, 3 buys and 4 sells. And those shifts have arguably caused some selling, along with the general turbulence in the stock market and some (misplaced I think) fears that Trump administration policies will negatively impact contract-anchored renewable energy generation. Neither has there been much to report at NextEra Energy, other than a sale of equity units that negatively affected the share price and arguably strengthened the case for restoring Partners as a funding vehicle.

1:57

To answer your questions, absorbing the ownership interests in operating power plants that are Partners' primary assets would be accretive to NextEra Energy at an NEP takeover price of less than $30. So very likely, NEE would increase its earnings by absorbing Partners. Whether there would be any upward action for NEE shares, however, is highly debatable. For one thing, NEE's market cap is roughly $160 bil--that's more than 100X NEP's $1.5 bil. So buying NEP would really be just a drop in the bucket.

The dozens of previous "roll-up" mergers over the past decade don't really give us much reason to hope for post-absorption appreciation either. So it's very hard to say if NEE's share price would see any permanent benefit from taking NEP private. I do believe there would be a lot more benefit to making NEP work again. Same goes for NEE's dividend--not much benefit as NEP assets just don't add that much to earnings. And again if NEP can be restored as a financing vehicle, NEE would be able to issue less stock

which means higher earnings per share all else equal.

If the result of the strategic review in January is for NextEra to keep NEP publicly traded, then how fast it can recover will depend on how credibly investors view the recovery plan. What we know is the following:

1. NEP's current cash flow is secured by contracts with an average life of over 10 years. And odds of favorable recontracting prices are quite good, with PPA rates rising and electricity demand growth accelerating.
2. NEP has opportunities to "repower" existing wind facilities to increase revenue and in fact added to that pool of project by almost half this year. These are opportunities for growth that are straightforward and don't require making an acquisition.
3. Starting in 2027, convertible equity preferred financing used to fund previous drop down acquisitions from NEE starts to come due. NEP will forfeit its ownership in the facilities to the private capital owners of the CEPFs if it can't pay them off, or otherwise satisfy them.

Again, with NEP such a small part of NEE, I would view not paying off the CEPFs and forfeiting ownership of assets as a very low probability--unless NEE decides it wants to jettison the assets entirely. I also believe there's too much long run benefit to restoring NEP for management to just roll it up and re-absorb the assets. So my view is they cut the dividend enough so NEP can self-fund the repowering and start paying down the CEPFs on its own. That in my view leaves enough to pay a very competitive yield at a low 20s price for NEP. And I would view that as a near-term target for the stock, as management clarifies its future plans.

That's my take and it's why I'm sticking with NEP as an Aggressive Holding. That said, I am not a fan of doubling down on a falling stock--particularly when there's so much we don't know about what NEE is going to do.

1:58

This is not a matter of correctly assessing what NEP's business health is. It's basically trying to guess what NEE is going to do. And I don't think I can make an intelligent decision about buying more until we see what that is.

Hope this helps.

Q. Roger, BCE has really been hurt since August due to the market's reaction to the purchase of Ziply vs paying down debt.
The purchase of Ziply at about 14 x does not make sense for a company with a 7 x multiple.
The interest coverage has been at or below 1 for some time.
You have covered BCE for some time. What are your current thoughts about BCE? Thanks—Ralph B.

A. Hi Ralph.

BCE is my worst performing stock this year. That’s partly because the Canadian dollar has weakened.

But shares have suffered on the home market as well from worries about its combination of (1) debt being higher than it’s been historically due to the cost of 5G spectrum and fiber broadband, and (2) pressure on revenue from Canadian regulators’ favoring new entrants—especially in fiber broadband where they’ve mandated network owners offer access to competitors at cut rates. That contrasts with MVNO agreements in the US allowing cable companies access to the Big 3’s wireless networks, but at a wholesale price that makes it a very profitable business.

That said, the company is still generating sufficient cash flow to cover CAPEX and dividends with funds left over to retire debt and buy back stock. I think investor reaction to the Ziply deal is in large part due to the expectation that BCE would use proceeds from the sports teams sale to cut debt—rather than make a US acquisition. The deal will be accretive to cash flow and earnings immediately—which in the long run should mean faster debt reduction. But when

a stock drops, an assumption is made by many that worse is ahead and they sell. As I highlighted in Utility Report Card comments, I think BCE’s Q3 results were steady. I plan to stick with it for now

1:59

Well that's what we have in the email queue. Let's get to some live questions.

Guest

2:13

1. Roger, BoA just put out a bearish research piece on AES valuing it $11/share. Have you had a chance to read this analysis yet, and if so what do you think?

2. Has the Trump administration made any mention to-date of rolling back solar and wind tax credits for power plants? What would that look like for the IRA?

3. BCE continues to drift lower. Any updates on what is driving this?

4. Regarding NEP, it has billions of dollars of CEPFs coming due. My understanding is that no interest is paid on them until time of conversion. Even with a 80% dividend cut, will NEP have enough cashflow to begin servicing this new debt? Any idea how much of the cash flow goes away if NEP turns these assets back over to the CEPF holders?

Roger Conrad

2:13

It's the negative views that get the attention--even though 11 of 15 research houses covering AES rate it buy (5 strong buy) verus one strong sell. Doesn't mean the sell isn't right. But at a price of 6.2X trailing 12 months earnings and a yield of 5.5%, it's really hard to get too bearish on AES, particularly after the solid Q3 earnings report and affirmed guidance just a few weeks ago--with the accent mark on 900 MW plus of new data center power sales agreements.

The Trump administration won't be able to unilaterally roll back wind and solar tax credits--but will need Congress to go in and either repeal or amend the IRA. I don't see that as a sure thing--repeal without replacement basically means the end of any nuclear power renaissance. And the wind/solar credits have a lot of Republican support, just as they did the last time they tried repealing them. I think we will see more difficult permitting on federal lands.

Roger Conrad

2:19

Getting to the rest of your question, I answered pre-chat questions on BCE and NextEra Energy Partners at length and they're posted just before your questions. Bottom line is I think NEP is likely to cut its dividend in January as parent NextEra Energy attempts to revive it as a funding vehicle for its massive renewable energy buildout. I don't see the CEPFs as make or break, since NEP is essentially an appendage of NEE. And I think the dividend cut will free up cash to pay down the CEPFs as well. As for BCE, at least some of the weakness is the Canadian dollar. But I do think it will weather the headwinds it currently faces and keep paying the dividend. Sticking with both.

Jack A.

2:22

Hi Elliott:

What energy companies do you feel could benefit the most from a Trump presidency? If he is successful in raising production, it could put downward pressure on the price of the commodity, but companies that benefit from a volume increase, such as pipelines, could do well... I am also assuming that he would try to increase the export of LNG, which would also help the pipeline companies. Your thoughts as to which pipeline companies could benefit the most....

Thank you

Elliott Gue

2:22

I think the whole concept of "Drill, Baby, Drill" is widely misunderstood. Shale is basically a manufacturing business -- companies with decent acreage in the core of a particular field like the Permian don't have significant exploration risk. Once they've defined a good well design, producing more oil and natural gas is largely a function of capital spending (CAPEX), where more CAPEX = more volume. Therefore, a producer's decision on whether to spend more (increase CAPEX) and producer more is solely a function of commodity prices. If a producer spends more and produces more at current prices around $70/bbl oil, for example, that would likely lead to lower free cash flow and their stock would be punished. The Trump Administration will not be able to change the basic economics of the shale business so I don't see any impact on produced oil and gas volumes, or oil/gas prices, as a result of the recent US election. In my view "Drill, Baby, Drill" is more about removing regulatory obstacles for the oil and gas

Elliott Gue

2:22

business. For example, easing the permitting process for federal lands would facilitate more drilling in a rising commodity price environment. That has zero impact on the Texas portion of the Permian, for example, because Texas has no federal lands. However, in New Mexico's portion of the Permian it could have an impact. I'd also assume the LNG permitting pause Biden announced in January will be lifted on Day 1 of Trump's term; this won't impact the picture for US LNG exports over the next 3+ years as those facilities were already permitted and under construction. Facilities due for start up in 2029 or later, however, are more likely to go ahead, which increases visibility on US LNG exports towards the end of the decade. Overall, I think it's fair to say the incoming Trump Administration provides more visibility for the business and will probably lower "discount rates," a fancy way of saying that oil & gas companies could start to see an upside valuation rerating. But, I see little or no near-to-intermediate

impact on supply or commodity prices.

Guest

2:25

Just one follow-up question, some analysts clearly don't believe the guidance being provided by the CEO and CFO of AES. I presume that you've met with these people in person at conferences. What is your take on their credibility?

Roger Conrad

2:25

I do know the analyst you're referring to. As I noted above, the vast majority of research houses covering the stock don't agree with her arguments. But different opinions are what make a market. And in my view, the only way for companies to answer their critics fully is to keep delivering on guidance, as AES has continued to do consistently. No guarantees they'll continue to do so--and there are some headwinds, notably still elevated interest rates, the possibility IRA tax credits are repealed and currency weakness in countries where the company has assets that could outweigh management's aggressive hedging. But they have delivered on an investment grade credit rating at the parent level the past few years. And as I said, they've consistently made their guidance to date.

Dennis H

2:33

Roger, Elliot,
Do you have an opinion on:
Cheniere (CQP)
Americold (COLD)
Old Republic Insurance (ORI)
Thanks

Roger Conrad

2:33

Hi Dennis. I answered a pre-chat question about Cheniere, which we do cover in Energy and Income Advisor and rate a buy at 55 or lower. The company has effectively used the Biden Administration's pause in new LNG export facility permitting to extend its lead over rivals by accelerating development of its fully permitted projects. And the upward revision in EBITDA and distributable cash flow guidance for 2024 is a good indication the decision to hold in more cash with a reduced dividend has paid off. We rate it a buy at 55 or lower.

I have not looked at Americold for sometime, though it could be a future addition to our REIT Sheet. The lack of a dividend increase since early 2021 does give me a little pause and I think demonstrates some of the headwinds facing the business, including currency weakness.

I don't really know Old Republic--though insurance I think is an increasingly tough business.

Elliott Gue

2:34

Question: Hi Elliott:

The pipeline partnerships and companies have seen an increase in price recently, but PAGP doesn't seem to have moved very much, and is significantly below your "buy under" price... What is holding it back? I thought PAGP would be one of the companies that could benefit from increased production and export.. Your thoughts....

Thank you

2:35

All of the midstream companies will benefit to some extent from higher oil and gas production over time. EPD, for example, is a name that was early to focus on US energy exports and it’s done phenomenally well this year, up 34%. Now, several of the midstream names are already at or over out “Buy under” prices after big run-ups this year. That does NOT mean we don’t see more upside for these names, but these “Buy <” prices in the portfolio are meant to act as a guide for good entry points – we’d recommend waiting for dips in names that are above our entries.
PAGP suffers a bit from the perception that there’s too much Permian oil takeaway capacity. The hot theme right now seems to be rising gas demand and export volumes, which benefits some of the other mainstreamers more. However, we still think PAGP is a solid value here and the stock is still up 28%+ in 2024.

Jack A.

2:40

Hi Elliott:

The pipeline partnerships and companies have seen an increase in price recently, but PAGP doesn't seem to have moved very much, and is significantly below your "buy under" price... What is holding it back? I thought PAGP would be one of the companies that could benefit from increased production and export.. Your thoughts....

Thank you

Roger Conrad

2:40

Hi Jack. PAGP is up nearly 30% year to date, so I wouldn't exactly call it laggard this year. But it is true that the midstream MLPs have greatly underperformed the midstream C-Corps this year. You would expect some discount, if for no other reason than many people don't like K-1s. But in my view, we'll see this historically wide discount going forward.

As for Plains itself, as we pointed out in the current Energy and Income Advisor issue, Q3 results were strong and the company raised its 2024 guidance. That's basically thanks to efficiency measures, debt reduction and recent acquisitions--rather than an improved environment for volumes. And I think the big gains are still ahead for Plains later in the cycle. But we can look forward to a mid-teens dividend boost in January.

Jack A.

2:44

Hi Roger:

You recommended AES. I bought it at $17.50, and it's now almost at its 3 year low of about $13. What has happened? Is it the recent uptick in interest rates? But why has it fallen so much? I have done well with some of your other recommendations, but not AES. Your thoughts....

Thank you

Roger Conrad

2:44

I won't repeat what I've said about AES earlier in the chat. But I would list the reasons as (1) Getting dropped from the DJUA and therefore related ETFs, (2) misplaced concerns that a potential end of wind and solar tax credits will slow investment that's being spurred by data center demand, (3) over blown concern the company won't be able to offset the revenue impact of weaker foreign currencies despite aggressive hedging and a strong track record and (4) selling momentum. We've seen this stock act like this before when there were much stronger headwinds to the core business and it's bounced back. My view is we'll need to be patient but that it will happen again.

Eric D.

2:49

please review the pros and cons of cqp vs lng . which stock has the better total return.Thanx

Roger Conrad

2:49

Hi Eric. They're basically two ways to bet on Cheniere's growing portfolio of LNG export facilities. CQP is an MLP, so it pays a tax advantaged dividend and you file a K-1 at tax time. LNG (Cheniere Energy Inc) is parent company and its sole asset it 49.56% of CQP. It pays a much lower dividend but will give you a 1099 at tax time. Year to date, LNG has returned 30% to CQP's 17%. The 10-year return is 182% for CQP and 209% for LNG--though again you get a much lower dividend with LNG 0.9% vs CQP 5.9%. We prefer CQP for the dividend.

Bill G.

2:50

Hello Elliott: Thanks to both you & Roger for these monthly get togethers.
Is BP a buy at less then 30? Sold XOM earlier this year.
Need some oil in my portfolio, I think, but article in todays Chicago Tribune
states next year there will be more oil available, but less demand.
So that is a counter issue to consider.

Elliott Gue

2:50

Thanks for joining us. I think BP is going to be OK longer term; however, I believe the stock is a bit of a value trap here. The problem is that back in 2019-2020 under their former CEO, they communicated a plan to gradually transition their business away from oil/gas in favor of alternative and renewable assets. They projected a significant oil/gas production decline by 2030 with their renewable assets picking up the slack. The problem is basically two-fold. 1. Their renewable/alternative investments just haven't met their return/profitability targets. Part of the problem is that they were mainly investing in projects managed by other companies, which means they don't have as much control. 2. The other big problem (the bigger one in my opinion) is that they cut back oil oil/gas CAPEX right at the lows of the cycle when what you really want to see is companies with a strong balance sheet and access to capital increasing investments in new oil/gas projects when costs are low. Essentially, they increased

Elliott Gue

2:50

investment in a part of their business that's not performed particularly well while starving capital from their crown jewel (oil/gas assets). The former CEO was terminated about a year ago due to an "inappropriate relationship" at the office. The incoming CEO is, in my opinion, much better. He's shifted the strategy to limit the projected declines in oil/gas output, holding on to oil/gas assets previously slated for sale and investing in new projects like their Kaskida project in deepwater GoM. However, BP lacks the sort of transformative growth asset that XOM has in Guyana. There's been considerable chatter about some of the other European majors like Shell and Total shifting their primary listing to NYSE/US, which would probably be an upside catalyst for the stocks. However, while I know BP technically hasn't been "British Petroleum" for some time, I have to say I still think of it that way and I just can't see them relisting from London to New York. BP also has too much debt which constrains their ability

Return capital to shareholders.
I know you mentioned you sold the stock, but XOM remains my favorite supermajor. The best upstream growth story of any of the majors headlined by Guyana and Permian. CVX would be a second favorite, really like their LNG gas growth leverage though the deal to acquire HES is probably a near-term headwind for the stock.
If you’re looking for more oil coverage in a smaller package, we do like EOG Resources (EOG) in the model portfolio– a good organic growth story in shale. Solid balance sheet and low breakeven costs.

Eric F.

2:53

Can you give us an update on AES? I assume it’s down because people expect things with alternative energy to do worse under Trump. But I know from your teachings that isn’t the case.

I know the stock NEP has gotten hammered and people are expecting a dividend cut, do companies do that right after they just raised the dividend? It seems like they wouldn’t have raised it last month if they were expecting their financial situation to get worse?

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