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11/26/24 Capitalist Times Live Chat

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Roger Conrad

2:53

Hi Eric. I don't have a lot to add to what I've said about either stock already in the chat. NEP has a "judgment day" of sorts coming up in late January, when parent NextEra Energy has promised to deliver the results of a strategic review to boost long-term value. My view is they're going to keep NEP independent and offer a plan that eliminates the need to access outside capital, including to pay down the CEPFs--and that it will be a combination of NEE taking a bigger equity stake (it's literally more than 100X the size of NEP including the piece it owns), and a sizable dividend cut. But my advice is to just sit tight until there's clarity.

If someone doesn't take it over, AES is just going to have to keep posting solid results that follow its investment and long-term growth guidance--as it did in Q3. if it can do that, as it's done multiple occasions the past 20 years, we're in for a powerful recovery.

Dwayne E.

3:00

I've taken to heart your advice that buying at the right price is very important in this market. So I've been buying/averaging AES the past month, but there seems to be no bottoming out on AES. Would you recommend continuing to average in or wait until the trend is more certain of an upward trend.

Roger Conrad

3:00

Hi Dwayne. Maybe I haven't said this enough recently. But I never, ever recommend doubling down on a falling stock, no matter how much I like it. It works if you stick with it and you're right about a company's underlying business strength and ability to overcome current challenges. But no matter closely you look at something and are sure of your facts, companies sometimes do encounter hurdles they can't overcome with shareholders taking a big hit. And if you've been averaging down, what would otherwise be a mild hit to your overall portfolio becomes a hammer blow. I also think averaging down is a strategy that's just too at risk to emotional decisions--such as expecting a stock with negative momentum to bottom at a certain level. So my view on AES, NEP and BCE--the three bottom performers in the CUI Portfolio by far this year--is we stick with what we have. I still think recovery is in the cards. But with so many other stocks selling at good prices, I'm going to spread my bets.

Dan E.

3:03

Hi Roger, is there a point where AES’s utilities in Ohio and Indiana are worth more than the market values the entire company?

Thanks for your thoughts

Roger Conrad

3:03

Hi Dan. With AES selling for barely 6X expected next 12 months earnings, I would say that's very likely. Unfortunately, there's no magic price where this stock bottoms that anyone can count on. You either bet on the story that it recovers or you move on. And as I said to Dwayne, there's too much value in this market not to spread your bets.

Victor

3:04

Last Friday ConocoPhillips (COP) completed the acquisition of Marathon Oil (MRO).
1- What is your opinion on this merger and will MRO shareholders who now own COP shares will benefit from the M&A?
2- Are there any plans to add COP to the Actively managed portfolio?

Elliott Gue

3:04

Generally, MRO made sense for COP as their acreage was located in several key US plays where COP already has operations including Delaware Basin (Permian), E' ford Shale and Bakken. COP is a good operator and it looms like they'll be boosting their synergy targets now that the deal has closed. COP doesn't have the free cash flow growth potential of a name like XOM, but their capital returns should be solid via a combo of buybacks and dividends. We previously recommended COP in the portfolio and would certainly consider adding it back to the portfolio in the right environment. I would say that the market right now seems to be preferring names with a bit more of an immediate growth story -- so we've seen names like XOM and EOG outperform COP this year. We're also seeing some good momentum in names like EXE (gas) that have completed transformational deals.

Victor

3:05

Hello guys and thank you for hosting this service. I'm not sure if this question got delivered. I had a little glitch with the chat portal. Last Friday ConocoPhillips (COP) completed the acquisition of Marathon Oil (MRO).
1- What is your opinion on this merger and will MRO shareholders who now own COP shares will benefit from the M&A?
2- Are there any plans to add COP to the Actively managed portfolio?

Elliott Gue

3:05

Thanks for the question -- see just above. Unfortunately, sometimes the chat portal has a few glitches.

Zin

3:11

For the Live chat session, I live in Asia and thus wondering if you can ask them about these companies for me and then reply me back with the emails.

What do they think about
1) Freehold royalties
2) Devon Energy (compare to Expand energy)
3) Bircliff
4) Peyto

Thank you.

Roger Conrad

3:11

Hi Zin. You can certainly do that. Just be sure to send us your email.

Freehold Royalties has been able to maintain a steady distribution despite very volatile oil and natural gas prices. I think gas prices strengthening are going to help results the rest of this year. And while I favor the MLP Black Stone MInerals (NYSE: BSM) as a royalty trust, I think Freehold's dividend and share price will head a lot higher.

The short answer is Devon Energy lacks the high quality assets Expand Energy (NYSE: EXE) starts out with as the merged Chesapeake and Southwestern Energy. We have an extensive writeup of EXE in the current EIA issue as well the "Drill Baby Drill" Trending Topics item. Devon's best bet is a takeover.

Peyto is a very low cost natural gas producer with a lot to gain from Canada's push to export. There seems to be some doubt about the dividend. But it's been well covered at low selling prices for natural gas.

Not familiar with Bircliff.

Denisimo

3:11

Is it time yet to buy some SLB yet? And how high can it go this cycle ?

Elliott Gue

3:11

SLB has been disappointing this year. The stock never seemed to recover after the Saudis announced some delays on longer-term capacity expansions which called into question the strength of the global oil services CAPEX cycle (SLB mainly operates outside North America land). Longer term, I think the market take is wrong -- global oil demand is still growing and we're going to need those Saudi and ex-shale barrels. I also believe US shale output is closer, potentially a lot closer, to a peak than the market thinks for a number of reasons including drill through of prime drilling locations and rising gas-to-oil ratios. So, I think we're going to see a second wind for global CAPEX and that's going to benefit SLB as the cycle continues. Ultimately, I can see SLB back at $80+ before this cycle is complete and we still like SLB here at current prices in the low $40s. Near-term, the upside momentum is in services names like BKR, which is primarily seen as a play on the LNG export boom trade.

Victor

3:15

Hello Roger and Elliott,

Thank you for providing valuable information about the energy sector and the macroeconomics of the industry overall. I found the "Drill, Baby, Drill" report particularly helpful.

I have a question about the Actively Managed Portfolio. I calculated the weight of each position, by multiplying the position size with the buy-under price. That’s the best approximation that I can come up with. I can see some positions represent more than 8% and others less than 2% of a total $100K portfolio. What is the allocation criteria of the portfolio? As some of the positions go up in price (like KMI) do you recommend trimming so that the weight of each position is maintained?
Thanks

Roger Conrad

3:15

Hi Victor. The short answer is heavier weighted positions generally have a higher conviction level for upside relative to risk. We do periodically pare back positions where momentum has outrun prospects at least temporarily. This is not applied uniformly to all positions, however.

Thank you for your kind words. And I would say to all Energy and Income Advisor members to check out the "Drill Baby Drill" article, which is posted under "Trending Topics" on the website. it's the macro piece to the posted issue, which is focused on the micro, mainly company-by-company earnings.

Kerry T

3:22

Thanks for the great newsletters and for these chats!

You had SEI rated as HOLD. I noticed it was at an all time high and
sold it. Was it on hold because the price was too high or were you
concerned about it's future?

I like to rank your recommended stocks by (price/highest entry) and buy
the best bargains. Sometimes that works great (like SEI) and sometimes
badly, (like NFE). I already own VET & WDS - how do they look?

Roger Conrad

3:22

Hi Kerry. Solaris has been a steady performer in a very cyclical industry. The main reason you see so many "hold" recommendations in the "Energy Services" space is that this sector is typically one of the last to participate in energy upcycles--mainly when producers inevitably start to ramp up activity. When that happens, services companies get more work orders and can charge more for them. We're not there yet, which is why our services picks are just Baker Hughes and SLB.

New Fortress may actually have hit a bottom for its business, with the Mexican LNG facility now shipping first gas to European buyers. The company is small, which is why it's trying to attract business partners and I wouldn't double down any more than I would any other stock. But it's probably moving more into the hold category, despite the lack of a dividend for the foreseeable future.

Woodside is about 20 times larger than Vermilion--so I would say it has more long-run staying power by far. But I think VET is still worth holding.

Kerry T

3:27

I'm thinking of buying some CHRD as it looks cheap now. How do you
like CHRD? Also, it's in your Canada and Australia portfolio, but the
headquarters is in Texas?

Is this a good time to add to my position in SLB?

Has your crystal ball become any clearer about whether there will be a
recession or not?

regards

Roger Conrad

3:27

We do track Chord in Energy and Income Advisor in the Canada and Australia coverage universe, mainly because it merged with Enerplus. The company pays a variable dividend, which has recently gone lower but should go higher over time. I think it's generally solid and I have recommended it as an alternative to Black Stone Minerals for readers who don't want an MLP.

We continue to like SLB as a high quality services company for patient, long-term investors. We would stick with the allocation in the EIA Model Portfolio.

I think there's already been a recession in some sectors--some areas of property for example that I highlight in this month's REIT Sheet, to post later this week. I think your question though is the risk of a market correction caused by a recession--and I think there are other factors that could cause one, which is why we're still sitting on a lot of high yielding cash in our model portfolios.

Willy

3:34

Roger, what do you see as the next hurdle for HE? Also, the sentiment on AES seems unusually negative, with a recent downgrade. Are their prospects that grim? I guess all these underperforming stocks are candidates for tax loss selling in the weeks ahead.

Roger Conrad

3:34

Hi Willy. It looks like there's still some doubt that the settlement agreement for the Maui wildfire will survive a court challenge from insurance companies. But provided that holds, it looks like Hawaiian Electric has the funds in place already to make the first of four payments under the agreement next year. Once the settlement is in place and the first payment made, the next challenge will be getting a good price for American Savings Bank--which should cover at least two more payments. The utility is still getting support from the state for wildfire mitigation and replacing oil fired generation with renewables. So recovery still appears on track.

Regarding AES, as I said earlier in the chat, I think the selling we've seen has a lot more to do with technical factors and sentiment than anything we've seen in the underlying business. Those are usually elements for recovery and have been on several occasions for AES in the past. But it's taken patience to avoid selling at the bottom--and it's likely to now.

Kerry T

3:39

Hi Roger:

You made quite a compelling case for staying with AES or adding to it in
the latest CUI newsletter. As I understand it the stock is cheap because.

1. Alternative energy stocks are especially out of favor because
President Trump will soon be in office again and the Republicans will
control both House and Senate.

2. It was removed from the DJUA index and therefore had to be sold by
funds that duplicate that index.

If I got that right, it leads to two questions.

1. How long after the new leadership takes over will it take for the
market to realize it was "wrong" about AES and start pushing the price
back up?

2. Is it possible, the only reason AES was at it's previously much
higher price because it was included in the DJUA index and we can only
expect it to get back there if it's added back?

regards

Roger Conrad

3:39

Yes I think you've got the first two reasons right. There's also the matter of emerging market exposure and therefore to currency, which the company hedges against but that still raises doubts.

As for your other questions, i think so long as investors are worried about wind and solar tax credits being repealed, there's going to be a cloud over companies associated with renewable energy. Sooner or later, if AES keeps reporting solid results, the fear level will drop and the stock will recover--as again we've seen multiple times really the past 20 years. And if the stock rises enough--like AES' replacement Vistra did--then Dow Jones will probably add it back again.

nathanhig65@gmail.com

3:43

Latest Gas forecast??

Elliott Gue

3:43

If you're looking at the futures, Decembers go out today and most of the open interest is in the January '25s it's a weather trade. We've seen some pretty cold weather of late (it was in the 40's even down here in Florida) which help drive a nice rally to $3.50 or so in the January futures. Also helping is the situation in Europe right now -- generation conditions for wind/solar have been terrible in key countries like Germany, which implies higher gas demand to fill the gap. TTF (the EU benchmark) popped to the equivalent of $15/MMBtu (using the US/Henry Hub pricing convention). That's right at the top end of the range since early 2023. So, that's helping provide support for US gas as well. At the same time, US gas storage is still about 239 bcf above the 5-year seasonal average. In my view, we'd probably need a colder than average winter

Elliott Gue

3:43

in order for gas futures to see much upside from here. What I am (very) bullish on is longer-term natural gas prices If you look at the futures curve for the second half of 2025, you'll see prices from $3.40 or so up to $4.25 plus. The current 2026 calendar strip -- average of all 2026 contracts -- is sitting at $3.81/MMBtu. These prices have been far more stable than the wild swings we've seen in the front month futures based on weather. This is really good news for high -quality US shale E&Ps with low breakeven pricing. Names like EXE and EQT can generate copious cash flow at prices in that $3.50 to $4/MMBTu region. So, I like the E&Ps here even though I'm not bullish the n-t gas futures.

Daniel N.

3:49

Good morning gentlemen, and thanks for hosting these chats.

Three questions about AES, which seems to be testing ridiculous lows (trading in the 12s today)

• I could use a summary of what's really included under the umbrella of Energy Infrastructure at AES. That division was a target of analyst criticism after quarterly results, despite strong results in regulated utilities and renewables/US generation. I had one analyst comments that the AES coal phaseout is housed in this division, so Infrastructure includes legacy coal plants. Other? LNG import facilities? International ops AES hasn't managed to unload yet? Are some of these highly profitable assets, but they're lumped together with less attractive stuff?

• One Trump-transition question (I'm sure there will be more): any anticipated risk to hydrogen hubs? AES is supposed to be putting billions into a JV with APD.

Roger Conrad

3:49

Hi Daniel. AES is a big company with a lot of different assets in multiple countries. They're primarily financed at the project level, which means even a default is not recourse to the parent--as is the case with AES Puerto Rico. AES' ability to meet guidance depends on the bulk of assets performing well to offset weakness at others. And management has been able to cut risk dramatically organization wide by selling "non-core" assets. In Q3, about 43% of adjusted EBITDA was from the Infrastructure business. That was basically fossil fuel generation assets as well as LNG facilities. Arguably, the gas and LNG business is growing, while coal is being phased out--though notably both gas and coal power plants have been requested to stay open longer in some areas, which has increased their value.

Hydrogen hub investment would definitely be at risk of big cuts without IRA tax credits--which why ExxonMobil is fighting to keep IRA in place. AES' investment to date does not appear at risk to a crippling impairment.

Daniel N.

3:54

• With AES bottoming out, it seems worth asking (if only as an intellectual, valuation exercise): is AES a buyout candidate? By whom? Why couldn't NextEra (for example) offer a 20% premium, pay with stock (P/E ~24) and buy AES (P/E ~7) in a move that would immediately add to profits? Just fold the renewables division into NextEra Resources, pick up more regulated electric franchises, and then make a crash program to sell off the international stuff to private equity etc? Making the purchase with stock that's nominally ~3X as valuable as shares to be purchased just makes this seem obvious -- use your stock premium as a de facto discount to acquire beaten-down competitors. Or at what point does private equity come knocking and do unto AES what was done until AY, ALE, etc?

Roger Conrad

3:54

First of all, I have no idea if AES is bottoming out right now--in a momentum led market like this one, stocks can go a lot lower and higher than any measure of business value can justify. What's important is being willing to bet on where the stock will be in 12-18 months, not later this week.

I do agree AES is getting very cheap here. And there are multiple features that would make the company attractive to potential buyers, including a well managed renewable energy development program that's closely linked to Big Tech. The major complication that Atlantica didn't have is regulated utility assets, which in AES' case would require approvals that would likely take at least a year to garner. Obviously, there's a price where a buyer would take that risk on. And an environment of lower interest rates would open a lot of possibilities. But at this point, I think it's more likely AES stays independent.

Daniel N.

4:04

Good morning Roger -

• Thoughts on D and uncertainty of US offshore wind? I'm a bit surprised the price didn't dip much further after the election, given Trump's famous hostility to offshore wind. D had recently completed purchases of areas that could have been huge expansions of their current offshore project, and would have been further leverage for their turbine installation vessel investment. Thoughts?

Roger Conrad

4:04

I don't think there's much the administration can do to affect the Coastal Virginia Offshore Wind project--which is on time, on budget and now expected to have a LCOE (levelized cost of energy) that's competitive with the lowest cost solar and natural gas facilities. It's fully permitted already and it has the support of the Republican state government and Virginia regulators--which is why Dominion was able to sell 50% of the project to private capital firm Stonepeak ahead of schedule and the election. The remaining hurdles to this project are in the execution: sticking to construction schedules and receiving delivery of the construction ship Charybdis. But so long as the company sticks to them, CVOW will be producing electricity in 2026. The new administration could certainly not permit expansion on the areas Dominion just acquired. But those were purchased in rate base. Lack of permits could reduce opportunities for Charybdis after 2026 in the US--but it could be contracted overseas in that case.

Daniel N.

4:14

• I'm sure you'll get a lot of questions about NEP, as it tests new lows in the 16s... but here's one I haven't seen in prior chats: the market is pricing in a 70% or more dividend cut, and at this point NEE could elect to go even further to 80% and still be close to a 5% yield. Wouldn't that hugely reduce the income NEE is supposed to get from NEP? Those assets were dropped down, and while NEE still collects fees for operating them (I believe), most NEP asset income is supposed to come back to NEE through the NEP dividend. If they cut the NEP dividend very far, will NEE investors cry foul when they see the impact on NEE earnings? Or will this be such a blip in quarterly results that there would be a collective shrug?

• AY is about to leave the aggressive portfolio. Would NPIFF make a suitable pick to replace it? Beaten down, it yields about 6%, growing about 7 to 10% annually, executes projects competently, finances conservatively?

Roger Conrad

4:14

Yes that's true that NextEra Energy's dividends will be reduced along with other shareholders. That's one reason I think one element of the strategic review could NEE buying in more ownership of NEP, possibly by assuming some of the CEPF obligations. But at the end of the day, NEE has more than 100X the market capitalization of NEP and the cash on its books is more than twice the value of NEP shares it doesn't own. NEE's Q3 revenue was over $26 bil versus $1.2 bil for NEP.

NEP is in other words a drop in the bucket for NEE in all but one respect--it's been a very useful financing vehicle for CAPEX. And management has a lot to gain from making it so again.

I've more or less replaced AY with the TC Energy spinoff South Bow, both for high yield and as a likely takeover--as the owner of Keystone XL. As a renewable power play, however, Northern Power is a good choice. Keep in mind it pays dividends in CAD--and that currency is under a lot of pressure now.

Susan P

4:17

Thanks to all involved with Capitalist Times...Blackstone Minerals will have distribution volatility (e.g. a 10-cent cut earlier this year) but given its double-digit yield and current price just below Roger's entry point, I wondered if Elliot's thought's on nat gas going forward -- esp. considering the potential impact of exporting for LNG -- would benefit this LP. As Roger wisely points out, no debt is a positive but he also noted it's sensitivity to oil/ng pricing. Thanks again for all your hard work.

Elliott Gue

4:17

Thanks for the question and for attending the chat.

Yes, absolutely longer term pricing upside would benefit BSM. One of the issues they've faced is that drilling activity in the Haynesville is quite sensitive to near-term gas pricing. If you look at operators with acreage in Louisiana like EXE you can see how they respond to low gas prices is to cut back CAPEX across-the-board; however, they cut spend more in Haynesville than Marcellus because costs are higher there. I'd estimate that, roughly speaking, they'd need to see reliable $3.25 to $3.50 gas prices to generate significant free cash flow. Some pure-play gas producers in Haynesville like CRK need even higher prices because of their elevated cost structure. So, BSM has definitely seen some volume declines out of producers in the Haynesville, particularly an independent, private operator called Aethon. Commodity businesses all work based on a marginal or "swing" supply cost basis.

Elliott Gue

4:17

In other words, when demand for a commodity starts to rise, the price will need to rise enough to incentive higher cost "swing" suppliers to ramp up output. In the US, you have associated gas production (gas from oil plays like the Permian) that will continue even at very low gas prices, then you have the Marcellus shale in Appalachia where operators like EQT and EXE can generate free cash flow in the low $2's/MMBtu. Then, one of the next big steps on the cost curve is the Haynesville with a breakeven more like $3/MMBtu. If gas demand rises enough, it will pull all available supply from cheaper sources like Permian/Marcellus and would need to rise up to that $3 to $4 region to attract marginal "swing" supply from Haynesville. The futures curve tells me that's what the market expects -- the 2026 calendar strip (average price for all 2026 NG contracts) at $3.80+ means the market currently expects to need Haynesville volumes by '26 to balance supply and demand.

More Haynesville production and higher prices would benefit BSM.

fardds

4:19

What is your very best energy stock?

Roger Conrad

4:19

My top pick in midstream this year has been Energy Transfer LP (NYSE: ET). It's returned almost 50% this year and is now selling for more than my highest recommended entry point of 18. But I think it will at least double from here by the end of this price cycle.

As I just mentioned, I also like South Bow (NYSE: SOBO) the spinout of TC Energy that owns the Keystone XL pipeline. I think it's likely the Trump administration would favor this project and that SOBO would probably be acquired by a larger company to get it done. The stock also yields around 8% and management has guided to low single digit percentage increases going forward.

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