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

5:15

No. In fact, as this company gains scale with new development and acquisitions, it's clearly building earnings and dividend growth. I have thought for a while that they would slow the 10% annual dividend growth rate of the past several years. But they certainly appear capable of easily sustaining mid to upper single digit growth for the foreseeable future. And at the current price that's off of a 5% plus yield. Q3 earnings were pretty solid I thought and confirmed that management's strategy is on track.

The company is waiting on regulatory approval for two transactions--the purchase of AEP's Kentucky utility and subsequent sale of interest in a coal-fired power plant, and the purchase of American Water Works' water utilities in New York state. Both appear to be on track and will significantly increase Algonquin's earnings power, and ability to invest in contracted renewable energy as well.

There was a time earlier this year when we were advising taking partial profits in Algonquin--mainly when

Roger Conrad

5:17

renewable energy frenzy ran up the stock to when it was trading on a lot more hype than substance. But I think at this price and at this time, it's trading at a great entry point. Depending on how long this stock market selloff goes on, it may go a bit lower. But this company is in great shape to grow in a business it knows well.

Victor

5:26

Biden wants to increase the cost to lease land for oil exploration by 50%. He is also investigating oil and gas companies regarding "price gouging", and he is taking more measures hostile to the oil industry. On the other hand he is asking the Saudis to produce more oil and he is tapping on the strategic oil reserve. What do you make out of this?

Elliott Gue

5:26

Any policies which restrict domestic oil output are bullish for oil prices, so this will tend to inflate the price of oil. It's also (in my view) potential political suicide because inflation --particularly for basic necessities like energy -- is the biggest economic concern for most Americans (if polls and consumer confidence surveys are to be believed). SPR releases historically have little or no prolonged impact on oil prices...if we drain SPR too far it will be bullish for oil because it reduces the supply cushion the US has to address short term imbalances. Plus, remember that Saudi and OPEC+ are typically boosting output when the price is rising/high -- it's shrinking spare capacity that drives prices higher.

Nolan

5:26

Any thoughts on DVN it has gone from $10 to $40 and I didn't find anything about it in the portfolios. Any thoughts

Elliott Gue

5:26

We still like DVN generally. They have a fairly low breakeven cost, good acreage and a plan to return capital to shareholders. We just prefer PXD and EOG in the portfolio. I think the roll-off of PXD's hedges next year is an underappreciated catalyst for the stock as is the potential for the stock to offer an all-in yield of well over 10%.

John Canizaro

5:27

What are your thoughts on WTRG? Getting kind of boring holding it with no price movement.

Roger Conrad

5:27

Hi John. "Boring" is not a particularly bad thing on a day like today I think. And that stability is underscored by one of the steadiest business plans I'm aware of, confirmed by management's reaffirmation of 2021 guidance earlier this month and solid Q3 results. I don't see many hurdles to reliable upper single digit dividend growth going forward.

If there's one thing about Essential Utilities I could become concerned about it's the slow pace they've encountered getting regulatory approvals for recent acquisitions of municipal systems--the main one being of the wastewater system DELCORA that's at this point tied up in court. But management has plenty else going on to keep earnings momentum going.

One last point I'll make about Essential is that I've held the DRIP for this company since the mid-1990s--and with little additional investment other than reinvesting dividends the account is worth 25-30 times what I initially put in.

Victor

5:31

Elliott, you mentioned in the past that the solution for high oil prices is "high" oil prices. In your opinion what would be the price of oil in which demand for oil starts shrinking due to high oil prices and thus we get a balanced market?

Elliott Gue

5:31

Oil demand is pretty inelastic -- rising prices don't usually have an immediate impact on demand due to the lack of substitutes for oil/gasoline. After all, I'm quietly confident the solution most will choose for $5/gallon gasoline, probably isn't going to be the purchase of a $50,000 electric vehicle. I think the bigger impact is via the supply side -- at some point, shale producers will start to ramp up production to take advantage of higher prices. I suspect that you won't see a major shale supply response until most or all OPEC production has been restored (i.e. OPEC no longer has significant production taken offline during the pandemic to restore and spare capacity is tight). So, I think the supply side will be the big driver of prices this cycle and you'll probably see this kick in in H2 2022 if OPEC restores output and prices are still in the $80/bbl region.

Dragomir

5:37

Hi Roger & Elliott. While utilities have been in a modest sector swoon for a few months, AQN, one of my larger holdings, seems to be hit harder than most. Any insight into what ails AQN? Thanks.

Roger Conrad

5:37

I think the main reason Algonquin got hit harder than other electric companies is the same as why Brookfield Renewable did. Mainly, people who wanted to bet on the so-called "Biden Trade" on renewable energy following the election last year jumped into it and bid their stocks up. And when that bubble burst, they came down with the rest. Both companies as I've pointed out in this chat posted strong Q3 earnings and affirmed robust guidance. Both have raised dividends much faster than inflation. And they continue to execute successfully on asset expansion plans. But earlier this year, their share prices ran well ahead of their business growth and they've since come down to good entry points.

Taking advantage of this type of volatility is why several years ago I started posting the "trading above targets" list in every issue of CUI. We actually got an opportunity to take partial profits in many of these renewable energy stocks when share prices ran ahead of business value. Now that's no longer the case.

Victor

5:37

PDCE doubled this year. It does correlate with oil prices but not as much as others. Do you see more potential on this name?

Elliott Gue

5:37

I suspect PDCE would rally with oil generally. But, there are lower cost producers out there with higher dividend potential so we prefer others. It has done well since late last year mainly because it was so distressed in late 2020 and got saved by higher oil prices.

Roger Conrad

5:37

Continuing on Algonquin--it's a great company that's once again trading at a good entry point.

Victor

5:39

TTE and RDS.A have not done very well this year. What is your opinion on these two?

Elliott Gue

5:39

Generally I think all of the supermajors will be OK long term. But we prefer the "growthier" names that have continued to invest through the downcycle. This is exactly what supermajors are supposed to do -- take advantage of their massive balance sheets and low cost of capital to invest at the bottom of the cycle. XOM is a perfect example, up 54% this year vs. 25% for RDS/A.

Nolan

5:41

I bought DVN @ $10 and its has gone up to $40 I know I should take profits but I just can't let go. I couldn't find

Elliott Gue

5:41

I covered DV earlier in the chat. Generally, I think they're solid, we just prefer names with better lower production costs and more direct capital return/dividend upside potential.

Jimmy

5:48

Roger: Do you think Pacific Electric and Gas is performing in such a way to regain investor trust in the next few years. How many years before a small dividend might be paid?

Roger Conrad

5:48

Hi Jimmy. I think PG&E has a long way to go before fully regaining anyone's trust. But hiring Patti Poppe as CEO earlier this year was the best possible step they could have taken to get there. I met her briefly at an Edison Electric Institute financial conference a few years ago when she was still CEO of CMS Energy. But before that, she had already impressed me with what she'd accomplished at CMS, enabling the Michigan utility to grow earnings and dividends robustly primarily by improving efficiency, while navigating regulation. So far, her tenure at PG&E has had its rocky points, including the company's potential $1.15 bil liability for the Dixie Fire this year. But there are also signs of real progress in improving safety, though her plan to bury power lines may be cut down. Bottom line is I still think this company is on the path to recovery, and a dividend in the next five years. But it is going to take patience for investors. And if Ms Poppe were to leave, I might reconsider that view.

Lee

5:52

I love these chats….many thanks. I’m wondering what to do with TGP shares. They’re trading within a few cents of the takeover target of 17. Since the market is in a tailspin and other stocks are getting cheaper, it might be a good time to sell TGP to finance the purchase of PXD,

Roger Conrad

5:52

Hi Lee. So long as Teekay has that all-cash takeover offer of $17 per share in hand from Stonepeak, it's unlikely to sell off much, no matter how much further the market sells off. And the only reason I could why the deal would fall apart would be Stonepeak suddenly being unable to come up with the $1.5 bil or so in cash. That said, it appears to have paid its last dividend, limiting upside to the takeout point. And if the deal did collapse for whatever reason, I think a quick trip to a single digit share price can't be ruled out.

Victor

5:57

I'm still holding some SHLX. It has a decent yield but it hasn't gone up in price. What is your opibut it hasn't even with the recent move on oil prices.

Roger Conrad

5:57

Hi Victor. Our view is Shell Midstream Partners is going to be essentially dead money until general partner and 68.51% owner Royal Dutch Shell finally comes clean on its long-term intentions. It's been clear for a while that Shell is no longer interested in dropping down assets--and why should it given SHLX' extremely high cost of common equity at a 10.5% yield? We've already seen one dividend cut. And though management talked a good game in the Q3 call about considering buying back stock or raising dividends, the existing franchise has been under pressure from soft volumes and operating problems at the Colonial Pipeline system. We believe the most likely outcome here is Shell looks for a low price to buy up the common shares it does not currently own. Until then, there are any number of midstream companies without the risks of SHLX and equally high yields.

Jeff

6:02

Roger, just got home so forgive me if you have answered this. What is going on with AQN. It's kind of gone straight since I bought it at a buy under price.

Roger Conrad

6:02

Hi Jeff. Yes, I've fielded several questions on Algonquin today. Bottom line is the underlying business is still very strong and growing. There are two major acquisitions in the works that will present some uncertainty until they close, and concern about financing is likely stirring some caution on the company. But both deals still appear on track to lift earnings power next year.

I think we can also chalk up some of the recent weakness to the selloff of utilities overall--today was one of the worst I've seen for the DJUA. But in any case, I'm very comfortable continuing to recommend Algonquin, which was expensive earlier this year but is now at a great entry point.

Bonnie

6:03

Roger, I appreciate your clarification on D with relation to DUK and EIX. I will look over the previous chat for your comments on D and the new Virginia governor. Have a wonderful holiday and a Happy New Year! Thank you.

Roger Conrad

6:03

Thanks Bonnie. You do as well, though feel free to contact me anytime if I can be of help. I will also have a lot to say on these companies in the December issue of Conrad's Utility Investor next week.

Mack

6:05

Do you have an opinion on MGY (Magnolia)? Thanks..

Roger Conrad

6:05

It's not one we have in our coverage universe but we'll look into it. Certainly had a great year so far despite selling off a bit recently. Nice to see all that free cash flow.

jack20

6:11

Any facts or rumors as to why PBA CEO resigned so suddenly? Personally I thought he was doing a great job!

Roger Conrad

6:11

Hi Jack. Yes Mick Dilger was a favorite of most of us covering Pembina Pipeline, which I have since before he joined the company in 2005. As I pointed out answering one of the questions we received prior to the chat, the rumor is there was a difference of opinion with the Board on the future direction of the company. We can only speculate on that, since neither the company nor Mr Dilger has commented on the situation. But what we do know is the new CEO is the former CFO and has been around the company since early 2015. And while it's not always true, the CFO is often the guy at a company who knows best what's going on. Another thing that gives me confidence is the new CEO Scott Burrows affirmed the company's 2021 guidance when he took the helm. Bottom line--there's always uncertainty when a long-time leader leaves a company. But in this case, I think the new leadership deserves the benefit of the doubt until we have a real reason to do otherwise.

James

6:18

Have you considered using stop losses on positions in Energy & Income advisor? What is the sell discipline in this service which seems to be very passive?

Roger Conrad

6:18

The sell discipline with all of our long-term advisories like EIA is basically to unload if (1) if a company starts to weaken as an underlying business and (2) if a stock appreciates to a point where the price doesn't appear sustainable. If you look back in our EIA issue archives on the website, you'll see we were huge sellers earlier in the energy price cycle when we saw oil and gas prices staying lower for longer. We advised wholesale selling of weaker names the past few years as well, especially in midstream in anticipation of dividend cuts as past versions of our Endangered Dividends List demonstrates. And in fact, a large number of companies in the coverage still rate sells. We also basically circled the wagons around the strongest companies a couple years ago before oil prices began their descent to zero. What we haven't (and won't) sell are stocks of companies that stayed strong on the inside--and today's action notwithstanding, that's a strategy that's paid off to date. As for reason two, we did sell

Roger Conrad

6:20

half our position in Brookfield Renewable when it spiked up as part of the Biden trade. We anticipate selling more pieces of positions going forward as the energy cycle continues higher and stocks rise. Hope that answers your question.

Andrew

6:27

Hi Roger and Elliott,

Thanks again for all your hard work and the help you've given me over the last - well since 2008 when you were with a different service.

You touched on the issues with PBA - the CEO leaving abruptly - but I read somewhere that PBA was getting close to buying the assets it really wanted from Inter - from Brookfield. Have you seen or heard anything new on that?

Also, do you have any insight into the carbon capture project going on that at least one commentator suggested might be the reason Dilger resigned.

Roger Conrad

6:27

Thanks Andrew. I haven't seen anything new on Pembina's negotiations with Brookfield Asset Management over Inter Pipeline assets. Brookfield Infrastructure Corp (NYSE: BIPC) completed that deal earlier this month, and I imagine management has a lot to do to complete consolidation. But considering BIPC is basically a collection of assets--rather than an operating company like Pembina--I think a deal that's a win-win for both sides is certainly still very possible. The main question I would have is if a deal has been affected by the departure of CEO Dilger. And I think as outsiders we're just going to have to wait and see, though as I indicated earlier in the chat, I'm certainly comfortable sticking with Pembina at tis current price.

Regarding the carbon capture project with TC Energy, I think it's basically the same wait and see for us. This venture was announced in June before the Inter Pipeline bidding war really heated up. And despite obvious potential it's more or less faded from view since.

Roger Conrad

6:29

In any case, the first phase wasn't expected to be completed until 2025, so there would not be any significant revenue contribution until then most probably. I expect our next opportunity to find out more will be in February when both companies announce 2021 and Q4 results.

Andrew

6:36

One more question if I can - Yieldcos. Thanks to you Roger, I got into these at prices for all four that I'm up over 100% on all of them - without dividends.

All the yieldcos are linked up with strong parents - CWEN - with Clearway, AY - with Algonquin, NEP wth Nextera, and BEP with Brookfield. Given how prices have risen and yields come down, it seems unlikely any of them will be bought under, but do you see any new one's coming to market?

Given how ahead of the curve you were on yieldcos - do you see any similar investments on the horizon?

Thanks again for all you and Elliott do, and I hope you both have a wonderful holiday season.

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