JotCast | 11/29/22 Capitalist Times Live Chat

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11/29/22 Capitalist Times Live Chat

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Roger Conrad

5:12

Hi Martin. Those sound like decent yields. And in fact I intend to focus on fixed income as part of a high yield article in the December issue of Conrad's Utility Investor. My main reservations are (1)some of these REITs especially are vulnerable to rising interest rates and recession risk--not forecasting another 2008 but there were quite a few M-REIT bankruptcies at that time. I think credit risk is very low for utilities and midstreams and will focus on them in CUI. But there's also (2) inflation risk--and whether the Fed succeeds in besting cyclical inflation now or not, current policy discourages investment needed to ultimately bring secular inflation under control. That means more long-term downside for fixed income, though there could be a near-term bounce next year. Bottom line--tread with care.

Mike C.

5:16

These chats are great! Any thoughts on CHRD, CTRA and MNRL?

Elliott Gue

5:16

I follow MNRL and CTRA somewhat. The former is a mineral rights acquisition company focused on oil and gas. That's a decent business with commodity prices where they are today -- we tend to prefer Black Stone Minerals LP (BSM), which is in a similar business and is in the Income Portfolio. CTRA is the result of the merger of Cimarex and Cabot back in 2020/21. The old Cabot was one of the best Marcellus gas producers in the US and was one of the first to focus on costs and cash flow over (somewhat mindless) production growth. Generally, however, I actually prefer exposure to other US gas basins given transport bottlenecks out of Marcellus (like CHK and the Haynesville). The Old Cimarex increased the merged company's oil exposure and expanded the footprint to the Permian and Oklahoma among other regions. That makes sense and Cimarex was a decent producer pre-merger too. However, I also like CHK's focus more on dividends rather than buybacks at this time. Bottom line: CTRA is a fine company, I just prefer other

Elliott Gue

5:16

names like CHK.

Arnie S

5:17

The price of Altagas Income ATGFF has performed poorly in the last 3 months. What's the main reason for this?

Roger Conrad

5:17

Hi Arnie. I answered a question on Altagas extensively earlier in the chat. Bottom line is Q3 results were solid and management largely affirmed guidance including for dividend growth. So my advice of Buy<25 hasn't changed. I think the utilities will keep growing rate base and the NGLs export operation will continue to grow, despite some exposure to rising costs in western Canada and volatility in NGL pricing. The CEO retiring has probably had some effect. But I think the retreat in the Canadian stock market and Canadian dollar/US dollar exchange rate are also important reasons for the decline. I will again add that 15 of 15 analysts tracked by Bloomberg Intelligence as following this stock currently rate it buy.

Elliott Gue

5:24

That's another reason why I think any broader market rallies you see in coming months will be bear market rallies and the "real" bottom lies months in the future and at significantly lower prices.

Mack

5:24

In the latest CW issue, EG suggested that a recession was coming in 2Q or 3Q 2023. This is further out than I thought it would be. Can you elaborate on why you think it could be as late as 3Q for a recession to be apparent. Also, will the market bottom around the start of the recession, or not until the end of recession is in sight? Thanks..

Elliott Gue

5:24

In the issue I was looking at the traditional lag time from the first significant inversion of the yield curve and the start of an NBER recession. Since 1972 its ranged from about 4 months to about 12 -- using that framework and the fact the yield curve inverted by more than 58 basis points last week, points to a recession starting between (roughly) Q2 and Q3 of 2023. So that comment from the issue was solely based on that one indicator. It's hard to time the exact date when NBER will ultimately date the official recession -- for some time now, I've been saying it'll be roughly around the middle of next year and I think that remains a pretty good estimate with respect to historic norms. Historically, the stock market leads the economy -- it peaks before the economy enters recession and bottoms before the economy exits recession. the lead/lag times vary in each cycle. That said, when there is a bear market and a recession, the market has never bottomed before the START of the recession.

Elliott Gue

5:25

sorry about that -- I just managed to post that question in the middle of my answer.

Bill Graf

5:33

Hi Roger & Elliott: Thanks for holding monthly chats.
My question is the sudden interest in CEIX?
What about OXY and DVN? Better to stay away right now?
Thanks

Elliott Gue

5:33

Thanks for the question. It's actually been a banner year for coal prices because countries are struggling to offset the big drop in natgas supply from Russia. That helps CEIX. The problem, in my view, isn't just Russia though -- EU gas prices began to spike long before Russian gas exports were disrupted. The problem is that the EU has expanded intermittent power sources in recent years while retiring their baseload coal and nuclear plants. That's a ticking time bomb -- when weather conditions don't support renewable generation then you become reliant on expensive imported commodities. Germany has even been burning brown lignite coal -- which they produce domestically -- but is very "dirty" this year because their energy supply situation is such a mess. I just have trouble getting behind a coal stock right now -- I think natgas is the better play with more upside and better fundamentals. We still like OXY and have it in the model portfolio -- we didn't recommend taking profits on it as we did on EOG, PXD, XOM

Elliott Gue

5:33

and others mainly because we'd reduced the position size on the big run-up earlier this year and it was already a small position in the model. DVN is a name we've liked though it's not in the model portfolio at the moment. Generally, out view is that all of the E&Ps and upstream names have seen huge runs this year and we think a correction is likely at some point -- that's why we recommend trimming position sizes, taking some profits and raising some cash in this issue.

das555

5:37

In the "New" portfolio you have 10.1% allocation to COP while only having 4.5% for EPD. Does this reflect your view that you have twice as much conviction in COP than EPD?

Elliott Gue

5:37

We recommended selling a large portion of that COP position in this issue, which has reduced the position in COP from 10%+ to about 3.0% of the new, rebalanced portfolio. Allocations also have to be considered in terms of sub-sector exposure. For example, right now almost 40% of the portfolio is in midstream names (EPD is only one of several) and pre-changes we also had a huge position in upstream names. So, what we did this issue is trim some of our larger upstream positions to raise defensive cash and bumped up our services and nat gas exposure a bit via buy recommendations in CHK and BKR.

Arnie S

6:07

Hello, I noticed on the Nasdaq web site that officers at Energy Transfer (ET) have bought over 4 million shares of the company's stock since September. I suppose this is good news for the stock, or am I missing something?

Roger Conrad

6:07

It's been one of our better performers this year (total return 61% plus). One reason is management is delivering on its promise to restore the dividend to the pre-pandemic rate of 30.5 cents per share. The payout for this month was up 74% after four consecutive increases and should pass the target level by mid-2023. The keys have been successful cost cutting and debt reduction, combined with successful conservative asset expansion including the merger with Enable Midstream. In contrast, the volumes environment has remained tepid overall as producers have remained very conservative on output anticipating a downturn--so cash flow is not really vulnerable to a potential recession. The price could give up some ground in an overall stock market decline. But we like the stock at 15 or lower for building long-term positions.

Robert

6:12

With severe water shortages in the southwest, is there any prospects for a desalination plant or two along the Pacific coast with pipeline transmission to Lake Mead, Lake Powell and Las Vegas area (for central distribution) ?

Roger Conrad

6:12

Hi Robert. Yes. California regulators this month approved construction of a new desalination facility by California American Water (American Water Works) to serve the Monterey Peninsula. Consolidated Water (NSDQ: CWCO) is the premier pure play in desalination, with operating facilities in the Caribbean and related water construction units. There's a chance it might resurrect a project in Baja California that was scrapped due to differences of opinion with the Mexican government.

Desalination is much more expensive than other ways of collecting and distributing water. And getting it to Vegas etc would require building some pretty massive pipelines. That will happen if there's enough money to make it so. But it's a long-term undertaking.

Aaron

6:16

Dear Roger, really appreciate your financial inputs. How do you feel about laddering tax free municipal bonds for a 75 year old looking for income at the present time? There is $500,000 currently available for investing. You and Elliott are doing a fine job !!! (a current subscriber)

Roger Conrad

6:16

Hi Aaron. The two major risks to that would be further increases in interest rates and inflation, which I think will be with us even if the Federal Reserve manages to tame cyclical inflation--since raising rates now is slowing investment needed to quell secular inflation. The other is credit risk, which would increase greatly in a recession and likely cause spreads to widen greatly for munis. I think working with a good broker who understands the market would reduce both risks--though understand that potential for capital appreciation is limited.

6:17

What is your current advice on the Algonquin Convertible Preferred stock?

Roger Conrad

6:17

Hi JT. It's the same as the common stock right now, which is to hold until management clarifies its objectives and resets guidance. I will have more in the December CUI, which will focus on high income opportunities.

Lee B

6:19

Am I correct in assuming BEP and BEPC are essentially the same in terms of earnings, dividends and underlying businesses? The spread between the two seems to create arbitrage opportunity. In retirement accounts I have been able to sell BEPC 3 points higher than BEC repeatedly, and then reverse as prices near parity. I’m happy to make the difference, but curious if I’m missing something.

Roger Conrad

6:19

Yes. The only difference is BEP is partnership units and BEPC is C-Corp shares--that means dividends are treated differently at tax time. But other than that, everything is the same from ownership to the amount of dividends paid.

The difference in price is basically because many large institutions can't own partnership units--Brookfield created these specifically to increase their participation and the company's ability to raise equity capital. That's not a difference likely to go away anytime soon, so I would expect there would be many more opportunities to arbitrage.

Guest

6:26

Before Sprint was acquired by TMUS, you argued that it did not have the scale to compete with T, VZ and TMUS. And you appear to have been right. Can to compare that with your prior opinion on TDS which is much smaller than sprint, and is that the real problem now with TDS - that the really do not have the scale to compete.

Roger Conrad

6:26

Yes, where I got it wrong was being slow to appreciate how quickly T-Mobile US would be able to absorb the Sprint assets and squeeze out costs without losing appreciable numbers of customers. I still think Deutsche Telekom is how you own it though, as it pays a dividend and will be able to acquire 50% plus ownership without any capital outlay--as TMUS uses all its free cash flow to buy shares at a premium price.

As for TDS, they've been able to compete well for years as a small company with a best in class network because they've focused only on rural and small towns. What's changed--and again I was slow to appreciate I think--is how inflation, fuzzy marketing and lack of a killer application have made consumers unwilling to pay more for 5G at a time of rising inflation--and how that would spur a big company launch into rural and small town America. I still think TDS will survive as its infrastructure builds out. The reason for the sale is that I think risk of a dividend cut has risen steeply due to

Roger Conrad

6:27

combination of rising interest rates at a time of elevated CAPEX and pressure on revenue from competition. But yes, scale is essential to survival in this sector. And being a rural provider no longer offers the protection from competition it once did.

Terry

6:35

Altagas hasn’t been doing well. Appreciate any insights you can offer.

Roger Conrad

6:35

Hi Terry. I really don't have anything to add to my answers on Altagas from earlier in the chat. Again, guidance still looks solid and I expect there will be a dividend increase in January. Weakness in the stock is likely due to the departure of the CEO slated for next year, declining Canadian dollar and Canadian market weakness and very likely concerns about what a recession could do to the commodity price sensitive element of NGL exports. But the company at this point appears on pretty solid ground--and is mainly a regulated utility in any case.

Guest

6:37

Hi, I tax sold my position in Northwest Health REIT. Can you recommend an alternative to rotate into? PS. I'm Canadian so Canadian REITS are preferred because of the tax credit.

Roger Conrad

6:37

I cover about a dozen in The REIT Sheet, including several on my Recommended REITs List. I expect to post the November issue tomorrow. Call Sherry at 877-302-0749 if you're not already a member and are interested. This issue will be heavy on the recommended stocks as I've indicated earlier in the chat.

Alex M

6:42

Hi Roger. I'm thinking back to the struggles that KMI faced a few years ago (reliance on capital markets for growth capex, thin dividend coverage, high debt burden, being forced to issue a high-yielding preferred to fund growth, etc.), which ultimately resulted in having to cut the dividend and switch to a self-funding model. With the benefit of hindsight, are there parallels here with the current state of AQN? They were raising equity capital to fund growth and the balance sheet had relatively high levels of debt (including floating rate). As an evolving utility company, it's a good business in a good space, but there seems to be a common theme as a cautionary tale here with respect to being reliant on equity markets to fund growth and using variable rate debt to expand. For debt-heavy businesses that are trying to grow, a falling stock price often seems to portend a dividend cut. Your thoughts? Thank you.

Roger Conrad

6:42

I would say the biggest difference between Algonquin now and Kinder then is that AQN does not have a revenue problem. The company is about 80% regulated utility, and the rest is basically contracted renewables where cash flow is very steady. Kinder in contrast was a midstream company at a time when falling oil and gas prices were starting to pressure volumes. There is a similarity in that AQN wants to move to a more self-funding model, which is what KMI ultimately did. But in this case, most AQN CAPEX has been related to acquisitions, Kentucky Power being a big one. The equity portion of that deal is funded and credit lines arranged so the challenge is converting short-term to longer-term debt. Kinder cut its dividend to hold in more cash flow and AQN could do the same. But the final difference here is when KMI made its move, it was unexpected. In AQN's case, it appears to be already priced in. That's one reason I don't mind sticking around to see what guidance ultimately is.

Jeff

6:46

Roger, can they cut or stop the dividend to AQNU. How likely would that be?

Roger Conrad

6:46

Hi Jeff. AQNU is a preferred stock, so as long as Algonquin paid a common dividend of any size it would have to keep paying on the preferred. That's basically what Centerpoint Energy did, cutting its common payout deeply in April 2020 but holding the level on the convertible preferred.

The exposure here is the conversion value--conversion is mandatory and will take place on June 15, 2024. The value of what you'll receive then will depend on where AQN trades at that time.

Jon B

6:51

One more question. Roger, I think you commented to someone that Atlantica may have difficulty raising debt financing for new projects/dropdowns. Is this specific to Atlantica? Or is this a yieldco issue? Are we likely to see another yieldco crash on concerns that the model doesn't work with rising interest rates?

Roger Conrad

6:51

Hi Jon. Atlantica is having the same challenges as every other company rated below investment grade so far as raising debt capital is concerned. That's why growth has been relatively slow the past few quarters for the dividend and is likely to remain so. On the other hand, the current dividend of 6.5% is well protected by very long-term contracted cash flow--and at that level I think provides a pretty good value floor. And there's enough from contract escalators and modest expansion that's self funded to grow dividends at a low single digit percentage rate as well. There's also the possibility Algonquin will sell its stake to another sponsor more in the mold of a Brookfield Asset Management or Global Infrastructure Partners that will speed up growth. Bottom line is I don't think a yieldco crash is in the cards--particularly not as NEP and CWEN have proven their business model with scale and have such strong parental support. AY is probably the most vulnerable but again the dividend is safe and self-funded.

Willy

6:53

Roger, although CVX is not presently in your portfolio, would you consider it a “sell some” candidate much like XOM? I own both and consider them part of the bedrock of my portfolio with a very low basis. Thanks so much for your patient counseling.

Roger Conrad

6:53

Hi Willy. Actually, I do have Chevron Corp in the Top 10 DRIPs portfolio in Conrad's Utility Investor and have been recommending it as a buy on dips to 125 or lower. The current price of 180 plus definitely makes it ripe for harvesting some gains, though I believe the company is extremely well positioned for the longer term energy super cycle. I look for an upper single digit percentage dividend increase in January.

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