JotCast | 11/30/21 Capitalist Times Investing Live Chat

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11/30/21 Capitalist Times Investing Live Chat

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Roger Conrad

3:23

Hi Rick. I continue to like both WP Carey and Medical Properties Trust--solid business models backing safe, growing dividends over 5% are pretty rare these days even in the REITs space. Both had pretty strong Q3 results and guidance as well, and I think MPW should get a nice lift in the next few months from closing several major transactions.

As for CyrusOne, I don't have any reason to believe the all-cash takeover offer from KKR/Global Infrastructure Partners will fail. Though we've seen some "investigations" of the price from the usual lawfirms (Lifshitz, etc), there appear to be few if any regulatory hurdles and the would-be acquirers certainly have the financing power to get it done. It's possible the bid could go slightly higher but as you noted the main reason for the hold rec is to collect the Jan dividend and slight discount between the current market price and the $90 offer. I do intend to replace it. But in the meantime, the REIT Sheet Recommended list has better buys.

Elliott Gue

3:31

I get the strip price from Bloomberg. For WTI the current 12 month calendar strip is $64.90 down from a high of just over $79 on Otcober 20th. We're back to where we were in early September on this basis but it's still a healthy number for most producers.

Ken V

3:31

Here are several questions for today
Assuming that the progression of Omicron is similar to the experience with Delta, and that effective vaccines/therapeutics may still be several months away at best, it looks like energy could be under pressure for some time before the supply/demand fundamentals you have been elaborating for some time regain their importance. Do we buy more or just hold?
You often talk about the importance of the strip price. Where is that published, or do we have to calculate it ourselves? It would be helpful if you included a chart in your monthly letter.
How important is a return of Iran to the market? They are already selling to China, so it should not mean their entire output will be added to world supply, just the excess over what China is buying.
If Biden curtails exports, which MLP’s will suffer? Will it be enough to threaten dividends?
Thank you for holding these chats.

Elliott Gue

3:31

I've covered the omicron/demand issue in answering a few other questions so I won't belabor the point here. Suffice it to say that I think delta is a good starting point as an analog -- we started hearing about delta back in February and then we saw seasonal surges in US cases in some states (Sunbelt) in the summer. However, there really wasn't much impact on oil demand or the performance of energy stocks -- WTI was in the $52.50 range at the beginning of February and surged to $75/bbl by early July. From the end of January through the end of June, energy was the top-performing sector in the S&P 500 +40.3% compared to the S&P 500 up 16.4%. Add in the upside risk from OPEC+ supply cuts and I think there's limited risk to oil from here.

Sohel

3:32

BEPC continues to make new lows ... is it still a buy?

Roger Conrad

3:32

Brookfield's C-Corp shares did hit a new 52-week low last week. On the other hand, it's just a few dollars below my highest recommended entry point of 40, and it's been reasonably stable since dropping to that level in May. Most important, however, is the fact that this company is operating well, boosting underlying earnings power while strengthening its balance sheet with development/acquisitions of contracted wind, hydro and solar energy facilities--something it's been doing for years. The past couple quarters have especially demonstrated the company's growing strength from adding scale, as FFO per unit rose 16.1% despite weaker wind and water conditions in North America. That's a stark contrast to several years ago, when FFO/earnings varied wildly from quarter to quarter depending on wind and water. I never advise really loading up on any one particular stock. But Brookfield is a solid buy for conservative investors who don't already own it. Earlier this year, it was overhyped. That's no longer the case.

Elliott Gue

3:35

Q: How important is a return of Iran to the market? They are already selling to China, so it should not mean their entire output will be added to world supply, just the excess over what China is buying. A: Yes, I really don't think this is a huge issue for the market as Iran is currenly producing 2.53 million bbl/day compared to more like 3.75 million before export restrictions. So, I'm looking for (at best) a gradual return of 1.25 million bbl/day to the global market over a period of many months. OPEC+ can also cushion the impact by holding production off the market to accomodate Iran -- all told, I think any negative impact on oil is in the prices.
Q: If Biden curtails exports, which MLP’s will suffer? Will it be enough to threaten dividends?
Thank you for holding these chats.

Mr. G

3:37

EPD is supposed to be Best in Class but it's been acting like a laggard, with one of the highest payouts %wise - what's the matter? Is it like it's Rodney Dangerfield - it gets no respect?

Roger Conrad

3:37

Hi Mr G. As I said answering a question about Kinder Morgan earlier in the chat, Enterprise shares like those of other midstream companies are currently suffering from investor disappointment--due to the general lack of a volumes recovery. We think one will eventually happen. But what gets lost I think is that EPD and the other best in class of the sector have fully adapted to a low volumes environment with their financial and operating policies--demonstrated by EPD's high coverage ratio and free cash flow generation after dividends despite tepid Q3 volumes. That means the dividend of close to 8.5% is safe and set to keep growing--which is pretty good pay for us to just be patient with the shares a while longer.

Mack

3:42

With the recent pullback, I am thinking of adding to existing positions in CEQP, HESM, MPLX and PAA. Most have yields over 9%, approaching 10%, and look like screaming buys to me. But am I missing something? Thanks.

Roger Conrad

3:42

I don't think you are. All of these companies had very strong Q3 coverage ratios and free cash flow generation after dividends--despite what was a rather tepid volumes recovery for North American midstream overall. Again, investors seem to be looking for more of a volumes recovery before giving these midstream company stocks another leg up (all are up substantially this year despite recent selling). And one isn't likely until producers get more comfortable cranking up investment. But the point is these companies will be raising dividends and buying back stock even if the volumes recovery takes a year or more to emerge. The one caveat is they'll likely sell off too if the stock market really rolls over here. But the dividends are adapted to bear market conditions already.

Elliott Gue

3:42

Q: If Biden curtails exports, which MLP’s will suffer? I suspect the Biden administration might focus on banning oil exports, so MLPs that focus more heavily on oil would see the worst impacts. That would be further softened by fixed rate throughput contracts with producers. I'd only see it threatening dividends if such a move were prolonged and I don't think it's a move they're likely to make because it would backfire. The reason I say that is US oil trade is more about the TYPE of oil than the quantity of oil. The US is still a net importer of oil -- we tend to import heavier and sour grades of crude and export light sweet crude (most shale production is light, sweet). So banning exports would trap more light sweet oil in the US; yet, US refiners are already maxxed out on this type of oil. The need to import heavy sour crude would remain undiminished so it would have a limited impact on total US oil imports. Further, it would annoy our trading partners by driving up the price of Brent and other light sweet

3:43

crudes while handing a huge chunk of cash to OPEC+ by cutting global oil supply by some 3 million bbl/day

Jimmy

3:48

Elliott: Would you address the "stranded asset" issue with big oil as EV's become more prominent? Some have suggested it may be a 3T problem.

Elliott Gue

3:48

I simply don't see oil projects as stranded assets. EVs haven't yet had much of an impact on global oil demand, which is still growing. Moreover, oil is likely to remain the dominant fuel for transportation globally for at least 20 years (likely more). What has happened is that the focus on ESG and EVs has starved the traditional oil and gas industry of capital, causing spending on exploration and development to remain very low. As a result, there simply aren't enough reserves out there to meet demand, putting upside pressure on prices (as we've seen this year). You could say that EVs are actually raising the price of oil by depressing the supply side of the market this cycle. I believe the market is beginning to reflect that as big oil companies that invest in oil (XOM is a perfect example) have dramatically outperformed the energy "transition" majors like BP in 2021.

Ken in Phx

3:51

Assuming that the progression of Omicron is similar to the experience with Delta, and that effective vaccines/therapeutics may still be several months away at best, it looks like energy could be under pressure for some time before the supply/demand fundamentals you have been elaborating for some time regain their importance. Do we buy more or just hold?
You often talk about the importance of the strip price. Where is that published, or do we have to calculate it ourselves? It would be helpful if you included a chart in your monthly letter.
How important is a return of Iran to the market? They are already selling to China, so it should not mean their entire output will be added to world supply, just the excess over what China is buying.
If Biden curtails exports, which MLP’s will suffer? Will it be enough to threaten dividends?

Elliott Gue

3:51

I answered these question in pieces earlier in the chat. My apologies for the disjointed answers but the chat provider limited the length of my replies and I can be a bit long-winded when talking about oil.

Ken in Phx

3:52

Would you consider also showing $ size of position in your model portfolio? Number of shares does not give me an idea of current position sizes unless we are following your portfolio exactly.

Elliott Gue

3:52

I think that's a good and very valid point. In fact, Roger and I were just discussing this week some enhancements to the service we're planning for 2022 and that was one point we discussed -- making the portfolio easier to use and track.

Richard L

3:53

I don’t hear much about this but it seems to me the rush to EV should be a giant boom for all electric utilities. Am I missing something? As always I have to ask about SO. Will the ongoing delays ever end? Thanks for your help.

Roger Conrad

3:53

Hi Richard. Certainly from an earnings standpoint that's true. If EVs and other electrified transportation modes are adopted at anything close to what governments want, there will ultimately be a lot more electricity consumed. But the more certain benefit will happen in the near term from deploying charging stations. Regulated utilities are the only companies in this space that can rate base whatever they invest in this area. In other words, so long as they have go ahead from the states where they operate, they'll immediately earn a guaranteed return of 9-10% on whatever they spend. It's hard to see how a company like Chargepoint Holdings (NYSE: CHPT) can possibly compete with that. And in any case, the utility makes its money off the investment no matter how many stations Chargepoint or Tesla build. Edison International (NYSE: EIX) is the utility that's currently getting the biggest bang from charging station investment. But electrics across the country are building in deployment to their CAPEX plans.

Roger Conrad

4:01

Continuing with the part of Richard's question on Southern Company, future major delays getting the Vogtle nuclear reactors up and running become less likely the more work is done. And as of the last update, Vogtle 3 had completed hot functional testing and the work overall was 95% complete. We also know this design works, as several reactors in China have operated now for a couple years. And while the NRC's inspection did find "two violations of federal regulations" at Vogtle, they were of "low-to-moderate safety significance. That said, I think it would be foolish to rule out the possibility of additional delays--two reasons are this is a first mover project in the US and the coronavirus combined with labor market pressures remain a workforce challenge. I'm comfortable holding Southern at this price. But until Vogtle gets closer to the finish line, I wouldn't buy over 65.

4:10

Witch,in your opinion, are the five best managed utility cos.?

Roger Conrad

4:10

Good question JT. Management quality is right up there with regulatory relations when it comes to rating the safety of utilities as investments. I'm happy to say that I'm pretty comfortable with the management teams at all of our electric, gas and water Portfolio holdings. As for standouts, I think Entergy has probably had the most difficult job proving itself this year in the wake of Hurricane Ida's destruction of its service territory and system infrastructure. Exelon's effort to complete the spinoff of its unregulated generation and energy retail business is a major challenge that's requiring debt management of regulatory, operational and financial issues--and so is very successful including successful settlement discussions in New York. Edison International appears to have avoided major wildfire liability for a third consecutive year, despite the fact that conditions are arguably worse than ever. Dominion Energy has navigated two big shifts in Virginia politics the past few years--and managed to get a

Roger Conrad

4:14

Continuing with the utility management question, Dominion managed to get a better price for selling the Questar Pipeline after federal regulators rejected its sale to Berkshire Hathaway. And finally, I think Southern Company management has done a terrific job managing a huge project (the Vogtle nuclear plant) beset by numerous challenges beyond its control--including the bankruptcy of the lead contractor, soaring commodity costs and workforce disruption from Covid. Through that it's held support of regulators and its municipality partners in the project. And (thanks to lower than expected financing costs) it looks like the project will still come in at a lower all-in price than initial expectations. So there you go.

Arnold S

4:26

Any thoughts about Capital Product Partners LP CPLP ?
Are they just doing well because of excess charges for sea freight right now, or is there a real reason to hold this one for the long term?

Roger Conrad

4:26

Hi Arnold. They've pretty much turned things around since splitting off and merging the crude oil tanker business with the former Diamond S Shipping. That company merged with International Seaways (NYSE: INSW) back in July, with each DSSI share exchanged for 0.5537 shares of INSW. That deal was a positive for those who kept their Diamond S after the CPLP transaction.

As for CPLP now, they've kept things conservative financially, including holding the dividend at 10 cents a quarter so far. But they're definitely benefitting from the current environment and are using it to build a stronger market position by taking advantage of willing sellers--including taking delivery of two LNG vessels this. it's worth noting that these companies tend to be run primarily for the benefit of their ultimate owners. But it looks like CPLP is in good shape once again to reverse at least a portion of its long drop from a split-adjusted $153 plus in 2007.

Bonnie

4:36

First, thank you so much for all your help over the years. I have done very well in my CUI portfolio. I appreciate your insights on ETR. I have a question on D. I am reading the short, mid and LT analyst sentiments on D and they are not looking positive. Can you provide some insights on D and what are your thoughts on DUK and EIX which they say are competitors?

Roger Conrad

4:36

I suppose Duke Energy and Edison International compete with Dominion Energy for investment dollars. But as regulated monopolies serving specific regions of the country, they're not business competitors in any way, shape or form. In fact, they're business cooperators--as prominent members of the primary electric utility trade group the Edison Electric Institute. I also note that analyst sentiment on Dominion is actually the most positive overall that it's been all year, with 12 of the 18 analysts covering it as tracked by Bloomberg rating it buy, versus 6 holds and no sells. As I said earlier in the chat, I believe investors want to see more clarity on the sale of the Questar Pipeline and relations with Virginia's new governor. But other than that, things are pretty bright for this company from a business standpoint and I expect a dividend increase early next year.

I do like Duke at a price under 100--as it is after today's selloff. The company has a huge investment opportunity in renewable energy under

Roger Conrad

4:38

Picking up on Bonnie's question. Duke has a big investment opportunity under North Carolina's new energy law. And management has proven its skill navigating a challenging regulatory and investment opportunity, reaching a deal with activist investor Elliott Management that should benefit all shareholders. As for Edison, the more they prove their ability to avoid more liability from California wildfires, the better I think their stock will perform. Bottom line, I like all three companies.

Michael

4:48

Hi Roger, Picked up VOD today on the drop and was wondering if they have posted numbers subsequent to your reccomendation in DDI.

Roger Conrad

4:48

Hi Michael. They did post earnings and declared a dividend as well-the same semi-annual rate in Euros they've paid since Feb 2020. I thought the numbers (first half FY2022, end Sept 30) were pretty solid and I definitely liked the increased guidance from management. Covid and its impact on roaming revenue as a global company is a concern but I think pretty well reflected in the guidance and share price. And I think the dividend is safe--well covered with free cash flow and with revenue rising again company wide (5%). I am considering adding to the position, though I want to see where this selloff takes the price in the near term, as we may get a better entry point.

Guest

4:54

Roger: what do you think of ES and SO? Are dividends relatively safe? Any chance for meaningful price appreciation?

Roger Conrad

4:54

Dividends are definitely very safe at both companies. I think EverSource has potential for significant long-term upside if management can execute on its planned construction of offshore wind facilities in New England. They also have an opportunity in transmission construction, as there are projects available and the Biden Administration's spending on infrastructure is likely to more than offset the impact of lower allowed returns on transmission from the Federal Energy Regulatory Commission. The company has done a great job staying on the same page with New England regulators, particularly in often contentious Connecticut. I don't see much risk to the 5-7% annual earnings and dividend growth target through 2025. As for Southern, the key to meaningful appreciation is getting Vogtle built as I've noted earlier in the chat. But the dividend is safe. They also plan to get into the mini-nuclear plant business, announcing a venture with Bill Gates' company this month.

Ken in Phx

4:54

I see you said you answered all the pre-chat questions. Perhaps mine arrived too late, so here they are again.

Roger Conrad

4:54

Thanks Ken

Mark

5:01

Hi Roger and Elliott I am really late getting on this month's Live Chat and I am sure this has already been addressed but if not I would appreciate you thoughts on our midstream favorites EDP, MMP, KMI and ET and the energy sector in general , all of which is falling away rapidly. Is there any reason to believe this segment will recover without a change in the energy investment climate, government anti oil and gas policies and regulations, real economic growth ,and an end to Covid fear and trembling. Thanks for all you do. Mark

Roger Conrad

5:01

Hi Mark. We have actually addressed each of these individually so I'll keep this answer to three main points concerning best in class midstream companies--which each of these are. First, even after today, all of them are still up quite nicely year to date. I make this point because they've made gains despite all of those macro conditions you've named, which if anything were worse at the beginning of this year than they are now. Second, all of these companies reported very strong Q3 results including high distribution coverage, low debt/EBITDA (with debt reduction) and free cash flow generation after dividends and CAPEX. And they've done this despite the very tepid volumes recovery I've pointed out. Bottom line is they've adapted to where we are in the energy cycle now and dividends and balance sheets are safe as a result. Third, these stocks have sold off in the weeks since announcing Q3 numbers in large part with the market now but before that because investors seemed to be expecting a more robust volumes

Roger Conrad

5:05

Continuing with Mark's question, a more robust volumes recovery, or at least more guidance that one is imminent. But if we know one thing about commodity price cycles, it's that they're driven by investment. And the longer that's lacking from producers--for fear of a significant price relapse, new regulation and ESG pressure on sector investment--the higher prices are likely to go this cycle. The only way that reverses is with a volumes recovery to increase supply. And at that point, we should see more significant gains in midstream stocks--in addition to the yields, which right now are off the chart for companies that can easily increase them.

Jimmy

5:15

Roger: Algonquin has lost all its sizzle. Any fundamental issues with the company?

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