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11/29/22 Capitalist Times Live Chat
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AvatarRoger Conrad
2:00
Hello everyone and welcome to our November Capitalist Times live chat. As always, there is no audio. Just type in your questions and Elliott and I will get to them as soon as we can comprehensively and concisely. If you have to step out before we wrap up--which will be after everything is answered in the queue and pre-chat emails--we will be sending you a link to a full transcript of all the Q&A shortly after.
2:01
I'm going to start by posting answers to a few questions received prior to the chat. Thanks for participating today!
Q. Roger, please give your thoughts on the near term prospects for Pacific
Gas and Electric (NYSE: PCG) regarding reinstating a dividend. Thanks.—James C
 
A. Hi James and thanks for your question. The utility is definitely planning to reinstate one, though management has not set a specific date. As my Utility Report Card company comments in the November Conrad’s Utility Investor indicate, Q3 results were solid and in line with the long-term target earnings growth rate of 10 percent. The company also introduced a 2023 guidance range of $1.19 to $1.23 per share for earnings excluding non-recurring items. And it affirmed it would not seek equity financing for 2023-2024 CAPEX plans, which include robust spending on hardening the grid against California wildfires
as well as accommodating renewable energy and electric vehicles.
 
When the company emerged from bankruptcy, management basically gave a five-year window for restoring the payout, which would take it out to the 2024 time frame. I would say the main hurdle to restoring one earlier is politics—California regulators’ support against wildfire damages is absolutely critical while the hardening process (including undergrounding power lines) is completed. And with inflation a problem and recession a risk, management probably will be conservative about offering investors any cash payout. But the recovery plan under CEO Pat Poppe is very much on track and I rate PG&E a buy for more aggressive, patient investors at 14 or less.
 
 
Q. Hi Roger. In "Buying Renewable Energy the Smart Way" published 2/8/2021 you made a case for investing in Equinor ASA (NYSE: EQNR) and Orsted (Denmark: ORSTED, OTC: DNNGY).
I purchased Equinor and have done very well, as the investment has nearly doubled. Equinor is not listed on the Utility Report Card. Do you have an opinion if it is time to take some profit or if it makes sense to continue to hold EQNR? Thanks for all you do.--Andy Z
 
A. Hi Andy. I think Equinor is still a very solid long-term investment, combining a near-term way to play stronger oil and gas prices with a longer-term bet on renewable energy growth including offshore wind and hydrogen. And the policy of paying out special cash dividends is also attractive, even after the withholding tax that you can reclaim as a credit on your US taxes.
 
We do cover the company in Energy and Income Advisor as a hold in our “Exploration and Services” table. That’s primarily because of concerns about Europe’s energy market this winter, as I don’t think the stock is expensive even after this year’s gains.
2:02
But as I said, longer-term, this company looks pretty well placed. I will say the same about Orsted, which is now pricing in a very big slowdown in its expansion plans due to higher interest rates and inflation—which as my Q3 comments in Utility Report Card indicate has not yet happened.
 
 
Q. I like what I read about Chesapeake Energy (NYSE: CHK) and own the stock. What do you see in the 3 to 5 year period for this company? Will LNG and the energy problems in Europe have a big effect on this company? Monroe J
 
A. Hi Monroe. As you can read in the issue of Energy and Income Advisor published today, we’re adding to our Model
Portfolio position in Chesapeake as part of a broader and ongoing rebalancing. We actually favor the natural gas focus over the oil focus of several other producer holdings at this time, from which we’ve now harvested a portion of this year’s big gains.
 
The LNG trade is clearly expanding in the US and it will benefit producers like Chesapeake. But it typically takes several years to site, permit, finance and build liquefaction facilities and associated gas infrastructure (pipelines, storage etc)—even after a final investment decision is made. So while existing facilities are immensely profitable now in this country, it will be a while before new export capacity is available, so the primary market will remain the US and potentially Mexico. But the growth of the LNG trade is definitely another reason to like Chesapeake as a long-term bet on the energy up cycle—which we believe has a long way to run.
 
 
Q. What has happened to Dominion Energy (NYSE: D) and is the stock a good buy? It pays a nice dividend...
2:03
long time subscriber.--Frank J
 
A. Hi Frank. Basically, Dominion dropped because management has pulled its long-term guidance range for dividend and earnings
growth (mid-point 6 percent), pending what management called a “full strategic review” of its entire business. The intent was to signal future moves that will benefit shareholders. But the resulting uncertainty basically triggered a mass exodus of analyst support. And as this stock is about 75% held by institutions, there was considerable selling that drove down the price.
 
I don’t have a lot to add to what I’ve written about Dominion in the November issue of CUI, and before that the November 9 Alert “Portfolio Q3 Mostly Solid, Here’s What I’m Doing about Dominion and TDS.” In my view, the stock is priced for a pretty big reduction in earnings and dividend growth guidance, probably to something in the low single digit percentages. But I don’t expect to see any meaningful rebound until we see results of the strategic review.
The big issue for the company is the 2.6-gigawatt offshore wind facility they’re building off the Virginia coast, which is also the only offshore wind project being built by a regulated utility with the investment going into rate base. The company reached a deal with the state Attorney General—a skeptic of offshore wind—that regulators are likely to approve early next year. And it continues to lock in costs for the project, with more than 90% targeted by early next year.
 
If management can report real progress on both of these issues to investors when Q4 results and guidance are released (expected Feb 10), then I think we’ll see a lot more focus on moves Dominion can make that would unlock shareholder value—such as selling its remaining 50% stake in the Cove Point LNG export facility and/or the Millstone nuclear plant in Connecticut. Both are valuable assets and sale proceeds could wipe out a big portion of the $17 billion of parent level debt. And I think we’ll see recovery. But in the meantime, I’m
comfortable holding the stock even after this drop—Q3 results affirmed operations are strong. In fact, Dominion actually increased earnings guidance for 2022.
 
 
Q. Roger. I enjoyed your succinct CUI summary of investors’ response to Dominion last week and Algonquin Power & Utilities (TSX: AQN, NYSE: AQN) last Friday – “Investors have ruthlessly punished disappointment.”
1.   Question: is this a “new norm” for our utilities if they engage in “changes in long term growth guidance rates”? 
2.   I do not recall such extreme investor behavior before for utilities. But I have only been investing since 2014 and did not live through Enron and its utility industry fall-out.
3.   Should we expect similar “punishment” when Avangrid (NYSE: AGR), Brookfield Renewable Partners (TSX: BEP-U, NYSE: BEP), Comcast (NSDQ: CMCSA), Medical Properties Trust (NYSE: MPW), etc. next report?
4.   To your points which you have made crystal clear:
a.   “Dividend paying stocks’ ability to reliably raise payouts over time is basically
2:04
a.   their value proposition” and “….being able to finance CAPEX at an affordable price” are crucial. 
b.   If our utilities cannot affirm guidance, then “we’re likely to see lower prices even for stocks of the strongest companies.” 
c.   But D and AQN really got slammed. Wow! And I think you commented that their (i) Q3 results and (ii) guidance for the rest of 2022 were not off, but their long-term growth guidance rates were altered?  Please advise.
Thanks always Roger for your sage commentary.
 BTW – will you and Elliott ever speak at conferences out on the West Coast or Las Vegas in 2023 or 2024? I know you just finished in Florida recently. 
Best.--Barry J.
 
A. Hi Barry. Thanks for your questions. Starting with the last one, Elliott and I really enjoyed being at MoneyShow in Orlando earlier this month, and we’re thinking about what else we might do with them in the future. So while I can’t give you anything specific now, we will be keeping you guys informed, since meeting up with customers is our primary
motivation for doing live events.
 
At such an unsettled time for the investment markets and economy, I’m not sure about what’s a new norm and what’s an anomaly for how investors treat certain news. But in any market, when companies that have appeared to be doing very well suddenly create uncertainty by pulling guidance—as Algonquin and Dominion unfortunately did this month—it’s a negative surprise and people are going to react by lightening up on positions, driving down share prices.
 
On the other hand, it’s hard to argue investors haven’t already priced Avangrid, Brookfield, Comcast and Medical Properties Trust for disappointment—which means the next surprise is likely to be on the positive side. As I pointed out in the November CUI, Avangrid has multiple catalysts for positive surprises, starting with the increasingly likely close of its proposed merger with PNM Resources (NYSE: PNM) next year.
 
Brookfield is down primarily because its parent Brookfield Asset Management (NYSE: BAM) has been an aggressive
acquirer this year at a time when investors are particularly squeamish about expansion. Comcast has sold off on broadband growth concerns. And Medical Properties has had a tough year primarily because investors are concerned about the financial health of its hospital tenants and the impact of higher interest rates on its ability to expand.
 
One way to look at this is Dominion and Algonquin have basically sold off to the same level of valuation as these companies, as sentiment on them has soured. But again, I think all of them are still solid on the inside, which means they have what it takes to recover.
 
 
Q. Hello Roger. My apologies for this ignorant question but could Kinder Morgan Inc’s (NYSE: KMI) pipelines be potentially used for hydrogen? I ask this in the event our energy mix transforms to a hydrogen-based solution. Thank you!—Robert N
 
A. Hi Robert. I think Kinder is putting itself in position to provide pipeline transportation and related services for a wide range of possibilities
2:05
. That probably starts with their CO2 system, which is currently used primarily for enhanced oil recovery (CO2 injection) but can be adapted to facilitate storage and transportation of captured CO2. But they are now a major producer of renewable natural gas—basically methane captured from farms and landfills—which can already be blended with conventional natural gas in pipelines with the same potential uses for residential customers, industry and power generation.
 
As you may have read, companies like Kinder are also exploring blending hydrogen to conventional natural gas and have had a good measure of success. That’s a very good sign that pipes carrying gas now could ultimately carry hydrogen. The chief challenge for a switch is basically economics—while “blue” hydrogen can be produced economically from fossil fuels, “green” hydrogen from electrolysis requires more energy than it produces. And while industrial processes can be converted to hydrogen if costs make sense, residential conversion would likely
require a new generation of appliances.
 
Bottom line is natural gas is likely to be used for some time to come. That’s good news for Kinder—but the company is gearing up to profit from “greening” energy as well, one reason I think it’s such a great long-term holding.
 
 
Q. Do you see the closing of the Kentucky Power purchase from American Electric Power (NYSE: AEP) as turning Algonquin’s fortunes around or is there something else—Lee O.
 
A. Hi Lee. I think the delays winning regulatory approval that was supposed to happen in mid-2022 definitely hurt Algonquin’s earnings this year. So a close is a necessary first step toward eliminating the uncertainty currently hanging over the stock. The last remaining hurdle is
approval from the Federal Energy Regulatory Commission. That still appears on track for December or early January at the latest. But until it’s done, the company won’t be able to permanently finance the debt portion (equity already issued), which means uncertainty about what kind of rate they’ll get.
 
Again, the key to a recovery in the stock is what management comes up with in the way of new guidance. The loose version discussed in the Q3 guidance call earlier this month is that utility rate base growth will be mostly in line with previous expectations, while supply chain disruption is likely to continue affecting timing of new unregulated renewable energy projects entering earnings—including the solar facilities under the partnership with Chevron Corp (NYSE: CVX). Investors are already pricing in something a good bit worse, which means a positive surprise is a strong probability. But I don’t think we can expect a meaningful recovery for
2:06
Algonquin stock until there’s new guidance from management.
 
 
Q. Roger/Elliot---you are probably getting a great many questions about Algonquin Power & Utilities (TSX: AQN, NYSE: AQN) after their recent drop. Mine is basic--is their dividend safe? I did a back of the envelope calculation and they appear to be selling below book value as I write. Is it reasonable to add a few shares and lock in the mouth-watering 9% yield? Thank you for all that you have done for me and my family over the last few decades.--Don C.
 
A. Hi Don. The important thing now is the stock is basically pricing in a dividend cut now with a yield of close to 10%. Algonquin does not have a revenue problem, with more than 80% of earnings backed by regulated utility rate base and most of the rest by long-term contracts. What it has is a financing challenge, caused mainly by the combination of rapidly rising interest rates and regulatory delays closing the
Kentucky Power acquisition this year. That’s led in my view to speculation about a dividend cut. At this point, I don’t think one is either needed nor preferable. And as you point out, the stock is now selling for 97% of book value, which to me indicates institutional investors are unloading because of the uncertainty.
 
That argues for a big recovery in this stock, if management can close Kentucky Power and button up its financing challenges. What I do not recommend is anyone double down on any stock. And you’ll note I’m recommending a hold until there’s clarity on guidance.
 
 
Q. What do you think of Kinetik Holdings (NYSE: KNTK)? Why is it so volatile?--Henry T.
 
A. It’s not a company we currently track in our coverage universes, though it looks like one to potentially add to Energy and Income Advisor’s “MLPs and Midstream” coverage. The primary holder is oil
and gas producer APA Corp (NSDQ: APA), which I believe was formerly Apache. Kinetik is currently 42.87% owned by APA.
 
As for why it’s volatile, it’s a midstream energy company—a business that’s had its ups and downs. And that includes KNTK, which fell to less than $5 in early 2020. I would say, however, that shares have actually been quite steady over the past year or so. As for the dividend, it appears well covered at 1.5 times in Q3 and based on cash flow from contracted assets in areas where oil and gas production is strong.
 
 
Q. Dear Roger, I bet there will be several of us asking questions about the share price meltdown in Algonquin. I'd been watching for an entry point for a couple years now, and despite the principle of not trying to catch the 'falling knife,' I've built my stake since shares fell below 8. I noticed the AQN announcement that management has been buying at these prices. Bargain? Steep market overreaction? 
 
I have a couple more specific questions:
2:07
1. Why is everyone so surprised by the earnings revision downward? The Kentucky Power acquisition is pretty big relative to AQN's size, and they issued a bunch of shares and debt in preparation of closing, which has been delayed. Wasn't this obvious that there would be a short-term impact? Share dilution brings down per share metrics, there are more dividends to pay on those shares right away, and interest to pay right away on the debt... all before the transaction closes and any cash flow comes in. AQN originally said the acquisition would immediately add to per share earnings. Is this narrative still intact, just delayed until start of 2023? Or is there a deeper worry in the quarterly announcement that was not expected? 
 
2. I have read concerns that AQN will need to shore up its finances, might have overextended itself. But I've not seen any recent comment on AQN's ownership stake and relationship with AY. Couldn't AQN sell portions of its stake in AY in any liquidity crisis? And wasn't the idea of
acquiring the sizable stake in AY that AQN would eventually execute drop-down transactions with its yieldco? AQN hasn't seemed to do many drop-downs yet, but is this higher interest rate environment where it makes more sense? 
 
Thanks, Dan N.
 
A. Hi Dan. I won’t repeat what I said about Algonquin answering the previous questions. But specifically, there’s been no official change in management’s forecast that adding Kentucky Power will be accretive to earnings, since much of that projection is based on cost cutting from replacing older coal power plants with new wind facilities. The key question will be how much additional debt finance costs is there, which will only be answered when there’s new guidance.
 
Second, Algonquin owns 42.49% of Atlantica Yield (NSDQ: AY) currently. That has a value of about $1.34 billion at present, which if sold
around that price would liquidate about 13% of the company’s total debt—and likely solve any liquidity challenges for the foreseeable future. The trick would be making the sale, which optimally would be all at once to a buyer like Brookfield Asset Management. As for drop downs to Atlantica, the big challenge now is how the yieldco can obtain finance on reasonable terms—which in the case of debt would be even more of a challenge given its non-investment grade rating (Algonquin is still BBB).
 
Again, I think the problem with Algonquin now is we don’t know when Kentucky Power will close, if/how permanent debt finance will shift the economics and what management will do about it—one goal of the review seems to be to minimize need for equity finance. And until there
answer to these questions, I’m rating the stock a hold, though I agree it looks cheap and insider buying is encouraging.
 
 
Q. Dear Roger, it seems Brookfield Renewable Partners (TSX: BEP-U, NYSE: BEP) has been very busy. First they announced acquisition of Westinghouse (as part of a consortium), and now they announce a bid to acquire Australia's Origin (again, through a consortium). Thoughts? Is this another buy low 2nd choice option after the AGL bid was rebuffed? How does the timing match up with Australian government energy policies? Thanks—Dan N.
 
A. Hi Dan. I think Brookfield and its parent Brookfield Asset Management (TSX: BAM, NYSE: BAM) are basically taking advantage of having a much lower cost of capital right now than their rivals do for new construction projects as well as acquisitions. I think they’ve done very good work in the past identifying assets and operations that will be accretive to earnings for both BEP and BAM—while minimizing the risk at the parent level. And I think both the Origin
2:08
and Westinghouse deals do that—as partners will not only share the financial burden but take assets off the hands of BEP/BAM that don’t fit the mission. That means in Origin’s case shedding the LNG assets—which should match up with the government’s new focus on renewables growth. For Westinghouse, it’s everything but the recurring income from services. And these appear to be financially ring fenced as well.
 
As we’ve pointed out before, even in the best of times, investors sell off stocks of acquiring companies. That’s been the case here even more so, as there are added concerns about cost of debt financing. But at this level, BEP is pricing in a worst case just after reporting very strong Q3 numbers that affirm successful expansion. It’s below by Dream Buy price for those who don’t already have full positions
2:14
 
Q. Hi Roger. I'm holding Healthcare Realty Trust (NYSE: HR) at a 29% loss and Medical Properties Trust (NYSE: MPW) at a 41% loss. Do you see any realistic chance for a meaningful recovery for either one or should I take the losses for taxes. I do have gains to offset. Thank you. Teresa P.
 
A. Hi Teresa. The short answer is I think both of these REITs will recover and in the meantime they should be able to hold their dividends at current levels. MPW should actually be able to increase the quarterly rate a penny a share next year. HR is down primarily because investors are concerned about its ability to realize synergies from the recently closed HCA merger. MPW is for reasons I highlighted in an earlier question—basically speculation its hospital tenants won’t be able to stay current on rents at a time of rising inflation and the effect of higher interest rates on new deals. But I think both are still strong on the inside as businesses, even in a potential recession. So as the economic environment at some
point improves, share prices should bounce back.
 
That said, as you know we’re expecting a recession and further declines in the stock market. So it’s hard to imagine either HR or MPW making a big move—at least ahead of Q4 results and guidance not expected until February. So both are possible candidates for tax losses to offset gains if that makes sense to the individual investor. My official advice is to hold both, however.
Victor
2:18
Hello Elliott. We saw recently how Harold Hamm made a move to make CLR private. He is concerned that this administration will regulate access to capital along with the financial industry and their ESG focus to damage the oil industry. Harold Hamm could've done it before when his stock was cheaper but apparently he was determined to get out of the public eye. Do you see other companies moving in that direction?
AvatarElliott Gue
2:18
CLR is a unique situation because Harold Hamm controlled a majority of the company through a variety of vehicles. I just don't see any other mid or large-sized shale producer with a similar majority shareholder who could take them private. I suppose it's possible you'd see a company like OXY get acquired by Berkshire, but that's about it.
Bob T.
2:20
Devon Energy Corp (DVN) is an oil & gas E&P company. It has a large dividend yield of approximately 7.5%. This seems large for an E&P, more like a midstream. Is it a red flag? Any comments on DVN?

Thank you
AvatarElliott Gue
2:20
Actually, that's really not excessive for an E&P these days because most have shifted to some sort of variable dividend policy that pays a "base" dividend plus a dividend based on quarterly free cash flow. For example, PXD, one of our favorites, pays 9%+ as does CHK, another model portfolio holding. So, I don't think DVN's high dividend is a red flag at all -- that's just a function of the new distribution policy adopted by most E&Ps.
Guest
2:21
In previous issues of EIA, COP position size is 66 shares. In the recent issue of EIA released today, it shows a position size of 80 shares, of which 56 shares are to sold and keep remaining 24 shares. Why did the position size changed from 66 shares to 80 shares?
AvatarElliott Gue
2:27
We made 2 changes to the model portfolio this issue. First, originally the model portfolio was set as a $50,000 portfolio, but it had grown to $81,000+ over the past couple of years due to the big rally in energy stocks. To make it easier to calculate allocations and follow the model, we rebased the portfolio to $100,000. So, previously COP accounted for 10.14% of the model portfolio of $81,000+ (66 shares) and we rebased it to 10.14% of the $100,000 new model portfolio (that's 80 shares). The second stage of the process was that the previous model portfolio didn't include a cash component (which is unrealistic), so we have recommended selling down stakes in individual recommendations we see as expensive relative to our intermediate term targets -- thus, we recommended selling about 70% of your COP holdings to raise cash alongside sales of EOG, XOM, PXD and VLO. The issue itself runs through the exact math behind the changes in a series of tables for all the recos. The most important thing is to focus on the
AvatarRoger Conrad
2:25
Q. Roger: I have another question for tomorrow’s readers. Why did BEP trade in a narrow range of $10-$18 for 11 years from 2008 to 2019 and then explode out of there since 2020? Do its fundamentals justify such a value? Or will this be another type of 2015 Energy Transfer LP (NYSE: ET) crash from $35 to $10/share?—Barry J.
 
A. Barry. If there’s one thing I’ve learned about the stock market, it’s that nothing has a zero probability. But in this case, the big difference between Brookfield now and Energy Transfer then is there’s basically no realistic risk to its dividend, which in fact is on track for another mid-single digit percentage increase in February. Brookfield’s cash flow is also basically locked in by contracts—and where it isn’t, it’s the low cost source (hydro especially). The company has a low cost source of capital in its parent Brookfield Asset Management. And it has a long history of successful expansion that’s accretive to earnings.
As for valuation, one reason to justify a higher price than mid-teens for BEP is the dividend has grown about 50% in the last 10 years—and dividend stocks always follow their payouts higher over time.
AvatarElliott Gue
2:27
percentages we recommended allocating to each recommendation --
AvatarRoger Conrad
2:31
Q. Roger. I am not good at reading a company’s summaries. But a brief summary for Brookfield on my TD Ameritrade account screen shows that for the past 8 quarters BEP’s earnings have been negative. Why is this a good company to invest in? Thanks.--BHJ
 
A. Like MLPs and REITs, Brookfield is essentially organized as a pass through entity, which means they enjoy certain tax advantages based on what their assets are. In BEP’s case, its wind, hydro and solar power plants—as well as distributed energy facilities—that run under long-term contracts and have generous non-cash expenses that allow them to effectively zero out GAAP earnings per share. That enables them to pay more in dividends. But it also means EPS is a useless measure of their true profitability—and ability to pay dividends. Rather “funds from operations” is the proper measure of profitability, as it does take those tax advantages into account.
BTW, this is basically the problem I have with big stock screen services. Earnings are presented as though one size fits all—and the numbers also include non-recurring factors that have no impact on underlying growth or ability to pay dividends. You walk away with less understanding of what the company does and its real strength than you would not looking at them at all.
 
 
 
 
 
Please discuss
Victor
2:35
Elliott, in your last report you said that you expect a drop of more than 20% in the overall market including oil stocks. Right now stocks like XOM , EOG and VLO seem to be very resilient to a market pull-back. For instance, do you still think that's possible to see XOM down to 85?
Thanks for all your input!
AvatarElliott Gue
2:35
Generally, in bear markets, you have a few groups that lead the downside, several industry groups in the middle, and a few clear leaders (sometimes the leaders just fall less than the broader market). There comes a time in each cycle, however, where almost all stocks get hit as part of a correlated risk-off trade. I think there's a good chance energy stocks will get caught up in that and see a correction. Today, the S&P 500 Energy Index is at roughly 689, which is close the the highest trading level in 8 years and it's up 312.6% since the March 18, 2020 lows, so I do think a correction in the range of 20% is entirely normal in the context of a broader market sell-off and risk-off trade. We did recommend taking some money off on XOM, EOG and VLO this issue as we think the risk of a pullback at some point in the next 1 to 3 months is pretty high. We will likely recommend using that pullback to  add back exposure to the group.
Buddy
2:44
Elliott;  I sold XOM north of 100 but would like to reload after it corrects.  At what price does XOM become attractive again?  Thanks
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