JotCast | 11/26/24 Capitalist Times Live Chat

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11/26/24 Capitalist Times Live Chat

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Elliott Gue

5:22

We have it as a hold in the EIA model portfolio right now. That's partly due to the fact that we first recommended it on March 3, 2020 (this cycle, I've recommended XOM on and off for more than 20 years now) and the stock is up 189% since that time. So, we cut it to a hold and booked some profits when things got a little crazy back in 2022. However, I would say that it remains one of my favorite names fundamentally and we're likely to revisit that "hold" rating shortly as I think the stock has upside to $150-$160 in a normalized oil price environment ($80/WTI and $3+ gas). I also think XOM is far more likely to break higher >$125 than to revisit the 2024 lows under $110. I recently added it as a recommendation in another long-term service we publish as a buy under $125 and would likely recommend buying more on dips to the $110 to $115 area.

Victor

5:38

Hello Elliott, GLD and SLV dropped significantly after the election. What is the outlook on gold prices moving forward?

Elliott Gue

5:38

Gold prices were up 54% from last autumn through the October peak. So, I regard the post-election pullback as primarily a bout of profit-taking after a big run-up -- 50% isn't much of a gain over 13 months or so for some stocks, but it's a huge move for gold, which usually isn't as volatile.

From a purely chart perspective, there's a bit more support at around ,2400 to 2,450 and then, of course, the big breakout over 2,000 to 2,100 we saw early this year. My hopefully educated guess is that we don't see gold move much below 2,400-2,500 on this correction.

Elliott Gue

5:39

Longer term, I don't think the election moves the needle much on gold/silver prices. Right before the election, I read some commentary from various Wall Street economists trying to analyze the budgetary impact of policies proposed by both candidates. Many concluded, somehow, that a Trump Administration would mean higher deficits and, by extension, higher rates than a Harris Administration. Personally, I think that's just silly and impossible to know -- after all, in my lifetime I've never seen any President enact all of the policies they talk about on the campaign trail. Second, many policies discussed on a campaign are vague to put it mildly and trying to quantify them is a fool's errand. So, I think the US budget would look pretty terrible near-term regardless of the election outcome and interest rates are likely to remain relatively elevated compared to the last few cycles due, in part, to an avalanche of Treasury supply.

However, Long-term Treasury yields have risen more than any cycle since the late 1980s following a Fed rate cut. So, I think we’re closer to the top of the range than the bottom of the range for yields and the dollar is also probably closer to the top of its range than the bottom. That’s bullish precious metals.
And let’s not forget that gold and silver have been rising all year even with rising interest rates. SO I remain fundamentally bullish also – I like SLV, GLD and I like the gold/silver royalty/streaming companies, especially WPM on a pullback.

Victor

5:45

Guys, on the last EIA issue you explained that OXY continues to cut costs and debt by streamlining the portfolio, while devoting the lion’s share of free cash flow to dividends and stock buybacks. However, OXY has not performed when compared to other names, why is that?

Elliott Gue

5:45

Fundamentally, I think they're doing everything right. I think the problem with OXY is a lack of near-term catalysts. With a name like XOM you have the ongoing ramp of new low-cost volumes in Guyana, a name like EXE you have the LNG export story and upside from the SWN acquisition. For OXY, you have a company focused on paying down debt taken on as part of the CrownRock deal. While I like that acquisition, it'll take OXY maybe 2 years to generate enough free cash flow to bring down its leverage at current oil prices. What would prompt upside in the stock in my view would be a return to $80+ bbl oil, which could accelerate their deleveraging. In such an environment, you might see the market begin to price in elevated dividends/buybacks as soon as 2026, which would likely drive the stock higher.

Elliott Gue

5:45

I think $80+ WTI is very likely in 2025, but for now, OXY is in a sort of wait-and-see mode. It's sitting on technical support just under $50 though so we still think it's a good name to own longer term.

Guest

5:50

Thanks for all your wisdom & knowledge imparted to us through your publications & live chats over the years - invaluable! Just curious - what's happening to ATNT (T)? It

Roger Conrad

5:50

Thank you for those kind words. AT&T I think has turned the corner, focusing on its Top 3 US wireless/broadband network and shedding debt. Another big chunk will come off with the sale of its remaining ownership in DirecTV, which is a separate deal from the currently shelved sale of DISH Network satellite operations by Echostar and now blocked by bondholders. The next step will be a return to dividend growth. I rate the stock a buy at 22 or lower.

Ann Rice

5:53

seems to be lagging VZ.....

Roger Conrad

5:53

Hi Ann. I think Verizon's acquisition of Frontier puts it in a very good place regarding convergence of fiber and 5G. The deal has now won approval of shareholders and should win all regulatory approvals next year. The big picture in the telecom sector is consolidation of market share in the hands of the Big 3 networks:: AT&T, Verizon and T-Mobile US. I think there's room for all three to prosper, though T and VZ are by far the better bargains as stocks now. But I consider all 3 long-term holdings and pretty much every other telecom a sell.

Denis

5:55

Hi Guys, Could you please comment on which energy corps in the US and Canada will most benefit from the rollout of AI as this will require vast additional amounts of electric power. Thanks.

Roger Conrad

5:55

I think TC Energy is a pretty solid play in Canada--well connected to both supplying AI with energy and LNG exports from the country's Pacific Coast to Asia. Broadly speaking, I like the larger midstream companies and US utilities as suppliers for AI that haven't been already bid to the sky. I'm generally more wary of nuclear power players despite being very bullish on nuclear power--valuations just too high right now.

Tom

5:59

Roger, any new thoughts or news on SOBO? Do you think that due to the long process and expense of restarting Keystone, and Trump only in office 4 years, this hot-potato project is ever likely to be revived?

Roger Conrad

5:59

Hi Tom. I think if it's going to happen, South Bow will need to be acquired by a larger firm with reach and resources--that has the financial power to fund and build after what should be swift permitting. The price paid for SOBO will almost surely be at a sizable premium to the current price. And if the deal is in stock, we'll have to make a decision then about whether we want to own the acquirer. But in any case, yielding around 8%, SOBO isn't pricing in a revival of Keystone XL but a future as an independent company growing its dividend 2-3% a year--and that's not a bad place to be as an investor either.

Guest

6:00

Hi Roger:Is NEP an MLP?

Roger Conrad

6:00

No, it's treated as a corporation for all of its investors except NextEra Energy the sponsor/parent. There's a 1099, not a K-1 at tax time.

Guest

6:01

Hi Roger: Is NEP an MLP? If so, does it receive the favorable tax treatment the way EPD, PAA, BEP and other MLP's do? Thanks.

Roger Conrad

6:01

No, the best way to think of it is as more of a REIT structure--the dividend is paid from distributable cash flow rather than GAAP earnings owing to the nature of the business and contract construction. So the dividend can be partly tax advantaged but there is no K-1.

Victor

6:05

Hi Elliott, what is your opinion on ENB in the short term? Will DVN benefit from a new and friendlier upcoming Trump administration?

Elliott Gue

6:05

Like many of the midstream names, ENB has had a great year. Fundamentally, I think it's in good shape though, like many names we've written about on today's chat, it wouldn't be a shocker to see some pullbacks given the speed of recent rallies.

DVN will benefit from lower regulations and easier permitting (they do have some sites on federal land). However, like most of the E&Ps we cover I think the benefits of lower regulations, and increased business visibility, will be more of a long-term value creation story and valuation rerating story than a short-term tonic for the stocks. Meanwhile DVN has been an underperformer of late -- operationally the company has improved (they had issues with integrating an asset through much of last year) but it just hasn't shown up in the stock price. I think it may be a lack of catalysts similar to OXY.

Susan P

6:08

Apologies if my queries repeat prior content/answers...Wondering about your thoughts on Suburban Propane and/or UGI (that's keeping Amerigas)? And, another duo is ATT versus Verizon as to which you prefer, if not both? Given the upcoming holiday, know I am thankful for both of you.

Roger Conrad

6:08

Hi Susan. Thank you for those kind words. Suburban Propane is I think attractive at a mid teens price for its yield and as a possible takeover target in the consolidating fuels distribution sector. The dividend cut in mid-2020 freed up considerable cash to cut debt and make modest acquisitions. And the company has been able to generate free cash flow even when weather has been so mild as to crimp revenue. We're getting into the crucial heating season, so results issued in early February will be key to the rest of the year.

UGI is currently challenged to turn around its Amerigas unit. And the guidance for FY2025 issued last week has raised hopes that may happen faster than anyone expected. I think there's work to do and the tock has gotten a bit ahead of itself. But the dividend now looks safe.

As for AT&T and Verizon, my advice is to split any investment between them.I like them both as long-term holdings.

Guest

6:11

Roger: Is either HES or HESM an MLP which receives favorable tax treatment like EPD does? What is the difference between HES and HESM? Thank you.

Roger Conrad

6:11

Hess Midstream is now treated as a C-Corp for tax purposes as is its parent Hess Corp, an independent oil and gas producer. Hess Midstream is basically Hess Corp's midstream services company in the Bakken. Its revenue and investment plans are tied to contracts with Hess Corp, which is a much larger company with a primary asset a 30% ownership interest in a vast Guyana oil field run by ExxonMobil. Hess also owns a controlling interest in Hess Midstream.

Dan E

6:12

As Thanksgiving approaches, just wanted to give your team a shout out for the excellent advise in handling the MDU investment over the years. What a fantastic outcome.

Roger Conrad

6:12

Thanks Dan. It was truly a case of the sum of the parts being worth far more than the pre-spinoff whole.

Denisimo

6:14

Now here's a generalized, overview question for you guys. Do you think we'll still be talking about, and investing in midstreams in the USA in 10-20 years ? That is....... still oil & natural gas to transport ?

Elliott Gue

6:14

Yes, I do. In fact, I think volume throughput will generally be rising over time.

It's important to remember that in 2000 fossil fuels accounted for 86% of global primary energy consumption compared to 81% to 82% today -- there is no widespread shift or energy transition underway. Energy demand is a function of economic growth, so with the global (and US) economies expanding generally over the past 20 years, energy demand has been growing. So, you have near stable contribution from fossil fuels + economic growth means a huge surge in demand for oil and gas over the years.

Looking forward, rising electricity demand for AI. Growing demand for oil, gas and coal in emerging markets (a consequence of their rapid economic growth). Look at India -- 1 billion+ people, a fast-growing economy (outperforming China) and primary energy demand has soared 51% from 2013-2023. Most of that came from coal and other fossil fuels.

The US is the world's largest producer of oil and gas -- I think the US shale industry, and

Elliott Gue

6:14

US midstreams -- sit at the very heart of serving the world's growing demand.

Roy D

6:16

Hello... good afternoon. I read your answer above regarding the MLPs increasing in price too much too soon. Do you think any of these price increases have to do with any potential mergers? I can't help but wonder if there is still some consolidation possible. Thanks

Roger Conrad

6:16

Hi Roy. Actually I think it's the midstream C-Corps like Kinder, ONEOK, Williams etc that have risen too far too fast. The MLPs are still relative bargains, though they too have gained quite a bit of ground this year.

As for consolidation, I think we're still early innings for both midstream and producers--or at least no further along than mid-innings--when it comes to M&A. What we're seeing mostly now is larger companies taking advantage of greater access to capital and increasingly high stock prices to buy smaller companies, especially those currently held by private capital. These deals are immediately adding to earnings as companies realize savings. And I think we'll see many more. We've yet to see a couple of majors merge. But I think we will.

Alex M.

6:20

Hi Roger. What are your thoughts on CVS now that they've released earnings? Thanks.

Roger Conrad

6:20

Hi Alex. As I noted in the most recent CUI Plus/CT Income, I think CVS measured up with its results, starting with it was able to largely affirm guidance and avoid another cut. There are still the same headwinds from dealing with the cost of providing Medicare plans. But the results issued earlier this month combined with the statements from management last week indicate the company is making progress toward its goal of integrating insurance, pharmacy and health care services--which rival Walgreens largely failed to do. I now rate it a buy again at 60 or lower.

Elliott Gue

6:23

One from the mailbag: I’m intrigued by Elliott’s adding XOM to the ATR portfolio. Especially given how many months it’s been range-bound and that you’ve got it as a Hold in EIA. Given XOM’s webcast next month, the new administration, etc., do you foresee a breakout of the current trading range? (And, would you move XOM back to a buy under 125 in EIA?)

I did add XOM to the Active Total Return Portfolio in my Capitalist Times/Creating Wealth service as a buy under $125. The main reason for that is CW is a general market service and I hold recommendations from across a long list of industry groups in that model portfolio. So, I wished to increase our exposure to energy and I wanted to choose a high-quality stock that would give us instant exposure to oil and a broad-based portfolio of energy-related assets. XOM fits that bill to a T. Similarly, I recommend EXE in that portfolio for the same reason – in my view it’s one of the highest quality natgas names with good exposure to the LNG export themes.
We’ve had XOM in EIA as a hold for some time. Some of that is a “legacy” issue as we originally recommended it in early March 2020; since then, it’s up close to 190% and we booked some gains, cut the stock to a hold in 2022 when things got crazy for the industry.

So the main reason for the difference in rating in the two services is that EIA is a pure energy-focused service and we have plenty of exposure to oil upside via other names. In contrast I wanted a single name for CT/CW that would fit in the portfolio and give us more exposure to energy.
All that said, I like XOM a lot. And I think it’s fair to say we’ll be reevaluating our buy targets and ratings for all of the names in the portfolio as part of our year-end portfolios reviews. I see upside to $150 to $160 in XOM in a normalized oil price environment.

Mack

6:26

Roger -- Thanks so much for your overview of the factors NEE is facing with NEP at aprx 1:58 in this chat. I've tried to set an estimated investment outcome based on what you said. Meaning [1] NEE doesn't buy in NEP but rather tries to make it "work." [2] The current annual div of $3.60 (per Yahoo) will be cut to aprx $1.13 and the price of NEP will settle out at aprx $22.50. The new yield will be 5% at that point. [3] While $22.50 is a 23% increase from today's price, it's still way below the $33 in May/June. How fast NEP will recover toward $33 is anybody's guess. So [4] it may make sense in this investors tax situation to harvest some of the loss from NEP, and then maybe add back to the position in Jan/Feb once the situation is clearer.

Roger Conrad

6:26

Hi Mack. Everyone's situation is different when it comes to taxes and where they hold particular stocks. But I think anyone taking a tax loss on NEP right now with plans to buy back in needs to keep top of mind that NextEra Energy has promised to resolve NEP's strategic review by the time it releases Q4 results for both companies--which is now projected for January 24. There's also the possibility they tell what they're going to do ahead of the release, as they've done in the past.

The risk to those selling and then buying back in to NEP is that NEE says what it's going to do before you're able to buy back and avoid the wash rule--and that what they say relieves or surprises enough that the stock shoots back up. It wouldn't take much buying power to make that happen, even with the modest short interest as this is a $1.6 bil stock. I'm not forecasting that. But it's certainly possible.

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