JotCast | 11/30/23 Capitalist Times Live Chat

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11/30/23 Capitalist Times Live Chat

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Eric D.

3:24

I have large positions in epd and et and am looking for the best mlp to add to these.What would be your recommendation? Also I have a sizable position in cheniere . Would u recommend cqp which has a much higher dividend? Thanks.

Roger Conrad

3:24

Hi Eric. As I said in the previous question I addressed, Energy Transfer is still my favorite MLP/midstream for 2023--its returned about 27% YTD, pretty much right in line with the Alerian MLP Index--not surprising as it is a significant piece of it. I do like Enterprise and the other midstreams in our Model Portfolio, which is where I would suggest looking for another add. MPLX LP, for example, yields over 9% after boosting its dividend 9.7% last month.

As for Cheniere Energy Inc (LNG) versus Cheniere Energy Partners (CQP), we've generally preferred the MLP for yield over the years. With the Biden administration supporting faster permitting for LNG exports--a policy Republican challengers appear to embrace--it looks like the company is going to have federal regulatory support for expansion for at least the next five years. Both stocks have run up a lot since the March lows. So we would wait for a dip to 55 to buy CQP.

JT

3:32

Is it safe to buy a muni bond fund?

Roger Conrad

3:32

Hi JT. I think bond market volatility will be with us for a while. So anyone looking to buy bonds should stay on the side of short to intermediate maturities, despite the recent big rally and the still high level of yields. I would also keep to investment grade, even with municipal bonds. There is still the risk of a recession next year. And even with the economy still growing, we are already seeing sub-investment grade borrowers struggle.

Lisa

3:38

Why do they think NS has been so strong relative to other MLPs?
What do they think of HESM & its future given CVX is buying HES?
What do they think the prospects for MPLX are given all the consolidation in the E&Ps? Do they see MPC being acquired or combined with another producer?

Elliott Gue

3:38

Thanks for the questions. Year-to-date NS is up about 30% and the Alerian MLP index is up around 28.4%, so pretty much all of the outperformance this year has come since early November when NS is up about 7% more than the Alerian. I think you can attribute much of that to their strong Q3 earnings release on the 2nd. I also think growth in Permian output is a tailwind for them given their exposure to gathering systems in the region. Finally, they've been doing some self-help this year retiring an expansive preferred series they had outstanding. HESM: In my mind the most likely outcomes are 1. CVX buys in/takes private HESM, in which case existing shareholders would probably receive some sort of premium, since HES owns a minority stake in HESM. 2. CVX disposes of all of HES's Bakken producing assets and includes its stake in HESM as part of that deal. Since HESM has minimum volume commitments for years into the future that would remain in place following such as sale, I don't think that would have a

Elliott Gue

3:38

meaningful negative impact on HESM. HESM has performed well since the deal was announced so it appears markets are also taking the glass-half-full view on this deal regarding its impact on HESM. MPLX: The main holder of MPLX is Marathon Petroleum (MPC) rather than Marathon Oil (MRO) -- MPC is a refiner rather than a producer like MRO. While I do think you could see MRO involved in M&A I think an acquisition of MPC is less likely. Generally, I think the focus of most M&A activity in the industry will be resource access -- obtaining acreage or stakes in key projects. That's what drove the PXD/XOM and CVX/HES deals as well as a possible (likely) deal for CHK to buy SWN rumored last month. That should have much of an impact on MPLX.

Roger Conrad

3:40

Hi Lisa. Just adding briefly to what Elliott has said, NuStar is I think seeing a relief rally of sorts, as the strength of the pipeline segment in Q3 coupled with S&P's lift of the credit rating outlook to positive appears to take pressure off the dividend. Debt is still the main challenge here. And I think the dividend is still more at risk than for example Energy Transfer's, even though NuStar's yield is lower and hasn't been increased since it was cut by one-third in early 2020. Still rate it a hold. Hess Midstream and MPLX are buys in our Model Portfolio.

Lisa

3:50

TRP and KMI are the only 2 under their Dream Buy price. I am wondering if you think we should be adding to existing positions. With the spinoff of South Bow coming, have you thought about adjusting the Dream Buy price and/or do they see price appreciation? How much of the valuation is dependent on the USD CAD exchange rate?

Roger Conrad

3:50

Kinder Morgan's Dream Buy price is actually 16, but it is a buy up to 22. They continue to add to their nationally leading gas pipeline network in a very conservative way--the acquisition of NextEra Energy Partners' STX Midstream system in Texas a great example. This year's earnings growth has been held back by the cost of eliminating variable rate debt back in January. But KMI is a keeper in my view.

TC Energy's spinoff of its oil pipeline assets--the biggest part of which being the Keystone pipeline system--as South Bow is I think still being viewed with a great deal of investor skepticism. And if there is any value in TC's current price it's sub-$5 a share. But I also think management laid out a solid case for both the spinoff and remaining company at its Investor Day earlier this week that should ultimately push post-spin value well north of my $50 buy price and $40 Dream Buy price for TC. That includes a 2023 guidance boost for the pre-spin company.

Roger Conrad

3:52

Continuing on TC--management also said its dividend will "remain whole" post spinoff, meaning the combined dividends of post-split TC and South Bow will be at least equal to the current payout. And it affirmed it will start shipping gas on Coastal GasLink by the end of the year with commissioning activities "in full swing" with a decision on further expansion now in progress. That eliminates the primary risks overhanging the company this year.

Guest

3:59

With the Fed likely on hold or dropping rates in 2024, how do you feel about diversifying into some beaten down muni bond funds which have significant discounts(BKN, MYI, etc) at this time?

Roger Conrad

3:59

That's an interesting idea. My main concern about muni closed end funds is they're fairly opaque when it comes to what's inside, as well as how much of the dividend is coming from actual interest income on the bonds held. And dividends for both BKN and MYI have been volatile over the years. The Blackrock Fund, for example, paid 6.8 cents a month from Nov 2020 through Oct 2022, then cut to 5.4 cents for two months and then cut again to 4.45 cents and finally to 3.95 cents for most of 2023, before raising to 5.7 cents to start 2024. BKN's discount looks attractive at 12.5%--but has been 10% or more for almost its entire life. Bottom line: If you want high yield, energy midstream stocks' dividends are also tax advantaged but also higher and reliably growing--which these funds' payouts are not.

Frank

4:05

Roger, in CUI you have midstreams recommended in your portfolio's of KMI, TRP, and PBA, but no EPD. Enterprise Product Partners is arguably the blue chip of midstream, but I don't ever remember you having it in any of your portfolio's

Roger Conrad

4:05

Hi Frank. Enterprise is a long-time Model Portfolio recommendation of CUI's sister advisory Energy and Income Advisor, which has a coverage universe of 50 energy midstream and MLP companies. CUI does track EPD in the Utility Report Card coverage universe. But midstream companies aren't the major focus of CUI. i would say Kinder Morgan, TC Energy and Pembina are probably the most "utility like" of the space, which is why I've mixed them in. But if you're most interested in midstream, EIA is going to be a much more comprehensive resource than CUI.

Phil

4:06

Hi Elliott. I didn’t know you did your undergrad economics at the University of London! I’ve just retired from UCL. . . . As I understand from your thesis in support of upstream oil companies, you think that we are in a long-term cyclical upswing as a result of underinvestment in new oil production. That said, I notice that oil prices have been responding to decisions by Saudi Arabia and other Middle Eastern countries to adjust their levels of production to optimise their profits over the near and intermediate term. Isn’t it the case that these Middle Eastern countries have considerable potential to increase their production if they need/wish to and isn’t this likely to be a countercyclical force working against your thesis? As someone who owns XOM and who is looking to offload shares at a good price, how would you suggest handling this sale?

Elliott Gue

4:06

I have fond memories of UCL and have a few friends who went there. I did my undergrad in economics and then did my MSc Finance at Imperial, which was part of University of London back in the 1990's when I graduated. Congratulations on the retirement! Re: OPEC 's ability to increase output, it's really a mixed bag. Some countries -- notably Saudi Arabia, UAE and Iraq -- likely have significant spare capacity, meaning they could boost output if they needed to or wanted to. Other OPEC members -- Angola and Nigeria for example -- have pretty limited capacity to increase their output as their official quotas are really little more than fantasy based on what they were able to produce 4 years ago. Many OPEC countries have mature fields and/or have not invested enough to maintain their existing infrastructure in recent years. So, bottom line is that there is some spare capacity in OPEC but not as much as some people suppose. For example, Saudi produces 9 m bbl/day and their official capacity is 12 m bbl/day, so 3

Elliott Gue

4:06

million spare. But they've never really produced more than 10.50 million bbl/day on a sustained basis, so my view is that their sustainable spare capacity is likely more in the 1.5 million bbl/day range. They also have no incentive to bring back that spare capacity in a way that destabilizes the oil market. Most likely, the disciplined OPEC producers (which have all the spare capacity) would wait until there's a clear sign of oil market tightening -- such as a large drain in storage globally -- to start boosting their output. OPEC doesn't really want $150 oil -- this destroys demand -- nor do they want $70/bbl because they need $90+ in many cases to balance their budgets. In a more or less balanced market, OPEC tends to act as a sort of central bank for oil, mopping up excess storage by pushing down production and then increasing output to blunt spikes in oil. In my view, the bigger risk than a prolonged glut is a situation where oil prices rally,

OPEC boosts output and then runs out of spare capacity. That’s when you can see a destabilizing spike in prices such as we saw in 2008.
Re: XOM. That’s our favorite out of the supermajors given its superior production growth profile. Right now it’s sitting around $100, the lows of its recent range, and should it dip down into the $90’s we’d likely recommend accumulating more as, ultimately, I think it’s worth $150+. One technique we’ve recommended in the past for managing this position is to sell part of the position and book profits when we get a big rally – we recommended booking some XOM up around $115 to $120 early this year. So, if you’re looking to exit then you might consider selling it off piecemeal on strength – that’s generally how we proceed in the service.

Lisa

4:11

any info you put in there about where you see natural gas and the NGL business going would be very helpful. Do you think the ET will get a new license from DOE for the Lake Charles LNG project?

Roger Conrad

4:11

Hi Lisa. As I've indicated in a couple of my answers during this chat, we're pretty positive on US LNG export growth. And we see opportunity for producers and pipeline companies connecting output to LNG facilities, as well as the operators themselves. I do think you have to look at the business on a project-by-project basis, since each is a multi-year undertaking in terms of siting, permitting, financing and construction. And this is a time when project costs can escalate quickly.

Energy Transfer's challenges getting the Lake Charles project going I think demonstrate dissension between certain departments in the Biden Administration--with the president favoring rapid development but coming up against keep it in the grounders. During the Q3 earnings call, ET management noted "significant" commercial interest in new capacity and said it intends to sell 80% of the ownership interest. And it seemed to indicate the Department of Energy was coming around. I think that's likely.

Roger Conrad

4:12

But I like ET even in the unlikely event Lake Charles expansion is abandoned--lots of levers to pull to keep growing that 9% dividend.

Michael L

4:18

Elliott, has there been any change to the futures curve (or anything else) that would affect your DCF analysis for CHK or EQT? Also, is ETRN still on track to finish/open the MVP early next year? Most importantly, where do you see the price for these 3 companies in 12 months? Do they still look like they have a lot of upside?

Elliott Gue

4:18

Actually very little change. I think a lot of investors are confused by the natural gas market because the financial media is constantly talking about the front-month futures. So, in March gas was $1.99/MMBTu and today it's $2.81, so a huge rally, right? Actually most of that rally is a function of seasonality -- in March the front month was April and that's a weak month for gas demand. Today it's January 2024, which is a strong month for gas demand. In late March, January 2024 futures sold for $3.92, so the price of gas has actually fallen over that time frame. Look at the futures curve for gas last spring and today and they're virtually identical after next summer -- since my DCF valuations are based on these companies ability to generate free cash flow over the long haul, and they hedge significant production over 6 to 12 months, there's very little impact on valuations from short term swings in gas prices.

Elliott Gue

4:18

I just reran my models last weekend and I have EQT at $63 to $64 valuation -- it's down a bit mainly because I bumped up their WACC (weighted average cost of capital) in the model to reflect rising volatility and rates. For CHK I get to about $122, which is down only slightly for the same reason.

Alex M

4:27

Hi Roger. WTRG is trading a pretty big discount to its historical valuations. Do you attribute this to the current interest rate environment, or is the risk profile of the company changing because it has more gas exposure now? Thanks.

Roger Conrad

4:27

Hi Alex. I don't think Essential Utilities' ownership of its Pennsylvania natural gas distribution utility adds any real risk to the overall enterprise. It's mainly another very low risk source of rate base/earnings growth--mainly from the pipe replacement program. I also don't see this company as particularly affected by interest rates, with the Q3 dollar amount increase in interest expense basically offset by a combination of systematic reduction in operating and maintenance expense and higher interest income. Perceived utility exposure to higher rates and delays closing two large municipal system acquisitions have raised some doubts the company can stick to earnings growth guidance of 5-7%. But Q3 results provide plenty of backing for being able to do so. And I think we will see a return to higher valuations and a 40s-plus share price as WTRG continues to post solid results.

James

4:28

Hi Elliott, can you give us an update on your thoughts on SLB stock price action? It has corrected to a spot where it usually finds support for a recovery (just below 200 DMA). How concern are about this breaking support and taking a dive lower?

Elliott Gue

4:28

We still like SLB fundamentally. Technically, it's into key support as you said at the 200-day with the next obvious support level at $43 to $45 or so, which is the lows this year. I think the most likely catalyst for a decline in SLB to that lower support level would be a big drop in oil, which I still don't see happening. November is oil's worst month from a seasonal perspective mainly due to weak demand seasonally and the tendency for inventories to build this time of year.

Elliott Gue

4:28

I still see scant evident demand is weak overall -- for the most part we're getting mixed signals from high frequency data series like the DOE inventory reports. IEA lacks a lot of credibility in my view because they've been wrong so often and, frankly, have become so political -- for example, I don't know how anyone can read quarterly conference calls from TSLA, GM, and F and conclude EV demand is accelerating. That's next-level wishful thinking/ whistling past the graveyard. So, I still think we see the oil market tighten, prices find support around current levels and that should support names like SLB. Generally, we'd likely view dips as an opportunity to accumulate SLB and other names with offshore/ex-North America spending exposure. We are taking a cautious approach by maintaining high cash levels in the model portfolio to reflect elevated economic uncertainty.

Guest

4:40

Cmments

Elliott Gue

4:40

In my view, the reason is that in the US monetary and fiscal authorities have been pulling in opposite directions -- a big tightening in monetary policy has been offset by fiscal expansion the likes of which we've never seen in peacetime. My view remains that recession is inevitable -- we're already seeing signs of this including a weakening in the labor market and Walmart's recent earnings call (I wrote a piece about this over on my Substack). Excess savings from the COVID era are largely gone, consumers are suffering sticker shock from elevated inflation, particularly for oil/groceries and other necessities and some consumers appear to be getting squeezed by student loan repayments and or tightening credit conditions. I think the divergence in fiscal spending between US/EU also explains why the US economy has been more resilient while EU has slipped into recession (or very nearly so).

Guest

4:40

Some time back you indicated if the LEI was negative 3 mo in a row we would have a recession in the future like within a year or so. Has the LEI been negative? I know it is dropping but can't find the graph you use to see actual +- .

Elliott Gue

4:40

Yes the sequential month-over month change in LEI has been consistently negative since mid-2022. Also the LEI diffusion indicator -- basically a measure of how widespread the weakness has been -- has been below 50 for most of this time. The year-over-year change in LEI turned negative in July 2022. So all signalling recession.

The gap between these signals and the start of a downturn is longer than usual. The main reason is that one of the most important components of LEI is the slope of the yield curve -- so the inverted curve has been a major reason why the LEI has turned negative.

Contrary to popular belief, the inverted yield curve is NOT a signal of recession, it's a signal the Fed is tightening policy (which it has been). Normally a dramatic Fed tightening quickly weakens the economy, but that hasn't happened on the normal schedule this cycle.

Elliott Gue

4:40

sorry -- posted part of the answer before the question there.

Alex M

4:40

Hi Roger. As you know, BKH has one of the best dividend track records for utility stocks. However, they recently missed their annual increase. Perhaps they are just delaying it, but I noticed that they've got some sizable debt maturities over the next few years. Moreover, their payout ratio has climbed to the top of their 55-65% target range. Do you suspect they will hold the dividend steady for the next few periods? Just wondering what your thoughts are as I have some room to add more to my position. Thanks.

Roger Conrad

4:40

The lack of a dividend increase for Black Hills Corp was a bit of a surprise, especially since management has affirmed 2023 earnings guidance at the "top end" of the previous range. It looks like they've decided to align plans for the dividend with 2024 earnings guidance, which will be released in February along with Q4 results. That decision may have to do with pending Wyoming regulators' approval of a now filed "constructive" rate settlement. But I didn't see anything in the earnings call to indicate a meaningful reduction in the long-term target earnings growth rate of 4-6%--as management did affirm $700 mil system resilience CAPEX per year. And assuming the top end of the guidance range in 2023, the payout ratio is about 65%, which even by very conservative management would mean at least a low single digit dividend boost for 2024. I'm still rating BKH a buy all the way up to 70--though with the caveat that I never advise really loading up on a single company, especially with so many at Dream buys.

Lisa

4:41

thank you for your insight!

Elliott Gue

4:41

Thanks for the questions and for subscribing!

Alex M

4:49

Approximately where do you expect the new WPC dividend level to land now that the company has divested the office portfolio? $3 per share? Less? Thanks.

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