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12/28/22 Capitalist Times Live Chat
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AvatarRoger Conrad
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Hello everyone and welcome our CT end of the year live webchat. Elliott and I are looking forward to a lively discussion today.
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As always there is no audio. Type in your questions and Elliott and I will get to them as soon as we can comprehensively and concisely. We will be sending you a link to a complete transcript of all the Q&A after we conclude the chat, which will be when all questions are answered in the queue as well as emails we received prior.
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As always, we'll start with those.
Q. Recently, Roger, both Southwest Gas Holdings (NYSE: SWX) and NRG Energy (NYSE: NRG) have sunk on corporate moves that have not been well received by shareholders. Do you see any opportunities here? Thanks for your patient counsel and a happy new year to both you and Elliott.—Willy
 
A. Happy New Year to you Willy and thank you for those kind words. I’m currently rating NRG a buy at 33 or lower and Southwest a buy up to 80. These are really two very different moves, and investors appear to be reacting to them for correspondingly different reasons.
 
Southwest is
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selling the Mountain West pipeline system it purchased from Dominion Energy (NYSE: D) earlier this year to Williams Companies (NYSE: WMB). Investors’ concern is management estimates a non-cash loss of $350 to $425 million. That’s offset by a $100 million cash tax benefit. The $1.1 billion in expected net proceeds will pay off the $1.1 billion loans used to make the acquisition.
 
This transaction is a tacit admission the company was unable to permanently finance this purchase on terms that preserved the original acquisition economics. I think it makes sense given the state of the stock and bond markets now. It will reduce the company’s floating rate debt by more than one-third. And S&P has shifted its outlook for the BBB- credit rating to positive from developing. But there’s no getting around the fact that the selling price is disappointing, particularly as the quality of the asset is still strong and the purchase was less than a year ago.
 
The plan to spin off the Centuri construction unit in 2023 was
expected. I expect to see investors eventually attach considerably more value to that company as an independent entity, though probably not until there are more details. It was also disappointing that management did not clarify its dividend policy going forward, other than the saying they “are not modifying” it “at this time.”
 
Despite the discounted sale of Mountain West, I continue to believe the sum of the parts at Southwest is worth considerably more than a low 60s price. It may take some months for this stock to get back to the profit taking point of $90 plus we had earlier this year. But equally, I’m comfortable sticking with the stock going into the New Year—and we’re still in good company here with activist Carl Icahn still holding nearly 10%.
 
As for NRG, investors’ problem is clearly the roughly $5.2 billion of debt it will take on to buy Vivint Smart Home, though the acquisition appears to be a very good fit operationally. I thought it was significant that Moody’s affirmed the company’s credit
rating at Ba1 with a stable outlook following the announcement of the deal, as it saw cash flow benefits from increasing size and scale by 20% as offsetting the additional debt burden.
 
Keeping that rating is probably contingent on devoting a sizeable portion of NRG’s free cash flow to significantly reducing that debt over time—especially the portion that winds up priced at floating rates. That may hold back dividend increases (first test will be January 18) and stock buybacks for the near future, which will contrast with the policies of closes peer Vistra Energy (NYSE: VST). But I think after NRG’s drop, the share price adequately reflects those risks for aggressive investors.
 
 
Q. I’m still holding CMS Energy preferred stock. Your opinion on whether to wait it out for them to recover in the future or say goodbye and take a tax loss. I’m ok holding them at these
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levels as they currently appear to have stabilized but don’t want to hold them if they continue to drop. Thanks Roger.--John M.
 
A. Hi John. First off, CMS Energy is in very good shape financially, with a recession resilient regulated utility franchise operating under a multi-year investment and customer rate deal and little exposure to either maturing debt or floating rate debt. So there’s no real credit risk to these preferred stocks.
 
Where there is risk going into 2023 is from rising interest rates, as the Federal Reserve continues to push benchmark rates higher to corral inflation. My view is the central bank will eventually declare victory and stop raising rates, well short of quelling secular inflation but after the cyclical element of inflation has been knocked lower—which could well be with the economy in a recession. But the longer it pushes in the near term, the greater the risk that fixed income investments will lose more value, as they have this year.
 
Risk to short maturity bonds (1-2 years)
is not significant, since they’ll pay off at par in a relatively short period of time. And yields to maturity for high quality utility bonds of that duration are as high as 5% now. On the other hand, preferred stocks are mostly perpetuities, so they act like long-term debt and can lose considerable ground when interest rates rise—unless they have another feature such as convertibility into common stock.
 
Bottom line: the CMS securities and in fact all preferred stocks are vulnerable to further price declines in 2023, to the extent the Fed keeps pushing on interest rates. You don’t have to worry about dividends getting paid. But we could, for example, see the CMS 4.2% Preferred price dip back to its low this year, which was about 16.
 
 
Q. Gentlemen, A point of clarification. There are two different recommendations on Algonquin Power & Utilities (TSX: AQN, NYSE: AQN) on the table. In Conrad’s Utility Investor (CUI), the current advice is to hold. In the Capitalist Times Income portfolio,
the advice is to sell. I understand that there are different strategies that maybe applied but if you could provide clarification, it would be appreciated. Thank you for your outstanding work and best wishes to you and your families in the New Year!
Warm Regards.--Paul M.
 
A.Thank you, Paul, and best wishes to you and yours. The main reason for the different recommendations you’re seeing basically boils down to publication dates and my evolving thinking on Algonquin as company. And per the Alert we sent to Conrad’s Utility Investor readers last night/this morning, it’s now consistent.
 
There are different approaches to the advisors. CUI Plus/CT Income is an actively managed portfolio. It has a cash component, which is right now quite high at around 30%. That’s because we see considerable risk of more downside in 2023 including for high quality dividend paying stocks. And it’s because we want to be able to take advantage of values we believe will appear in the coming year as prices head lower. We
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also manage the tax liability for any given year, though we’re mindful many investors don’t invest the whole portfolio and utilize different types of accounts—including tax deferred accounts where tax selling is not a consideration.
 
In the case of Algonquin itself, I added the stock to CUI Plus/Income at the end of 2021 and it’s been a big loser the last 12 months—mainly because regulators have delayed and now blocked its attempt to buy Kentucky Power from American Electric Power (NYSE: AEP), the process has left it with a heavy amount of variable rate debt. I don’t believe the new course management has promised to lay out at an early 2023 Investor Day will come anything close to being as negative as the stock now appears to be indicating.
 
But the loss in this actively managed portfolio—combined with those in a couple other stocks—does completely offset the gains we’ve taken in several other stocks this year. And by selling now, I’m freeing up funds for more purchases, reducing risk and creating a tax
loss that will benefit at least some members.
 
CUI portfolios in contrast are basically lists of recommendations, divided into three categories. Top 10 DRIPs for long-term savers who don’t harvest dividends, Conservative for long-term focused investors who want high current income and long-term capital growth, and Aggressive where we’re taking a shot on a situation we believe investors are undervaluing.
 
In the Alert, I recommended a swap of Algonquin common shares for its 7.75% convertible preferred. It remains in the aggressive category now, as we wait for management to clarify its plan. That’s almost certainly going to include steps to bring down variable rate debt, quite possibly with an asset sale or two. I’ve noted the company’s 42.49% interest in Atlantica Yield (NSDQ: AY) is worth about $1.3 billion now, which is equal to about 19% of the company’s total debt or 37% of its floating rate debt. Also notably the company’s Kentucky Power deal is officially in limbo after the Federal Energy Regulatory
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Commission rejected it and walking away would significantly reduce financial needs as well.
 
Until Algonquin does announce a plan, I don’t see its shares making headway. And I see risk of a dividend cut as well, which is why I put it on the Endangered Dividends List this month. The three advantages of a switch—as highlighted in the Alert—are you get a yield of nearly 17 percent on your investment for the next 18 months versus the common stock’s 11 percent. The preferred/equity units dividend won’t be cut as it’s interest from a senior note and the preferred has every bit the leverage to a recovery as the common stock.
 
There’s no guarantee this trade will work out as well as the Centerpoint Energy preferred did in 2020-21. And further drops in Algonquin’s share price will also bring down the preferred’s conversion value. But contingent on management delivering reliable guidance at next year’s Investor Day including meaningful steps to debt reduction,
I intend to hold to conversion, at which time our preferred shares will be swapped for common.
 
 
Q. Does Generac Holdings (NYSE: GNRC) hold potential to be added to one of your portfolios as a clean energy manufacturer? The company’s stock price has fallen hard in this market, yet sales are growing at a good clip. It appears to be priced as a value stock today. In addition to power generators, it is developing a line of commercial battery powered lawn mowers including a 26 HP zero turn mower. Thanks--Monroe J.
 
A. Hi Monroe. We’ll certainly take a look at it. The main business is of course generators and sales have been strong, with management expecting 22-24% revenue growth for 2022 with decent EBITDA margins (18-19%). The concern here is the health of the economy, and the bankruptcy of a major customer did trigger a big writeoff and more than GAAP headline earnings per share in Q3. And competition in the distributed generation business is tough, particularly in solar—which Generac has expanded into.
 
 
The stock is down from $357 and change at the beginning of 2022 to less than $100 now, which tends to get us interested. On the other hand, though, it’s economically exposed with all of its $1.3 billion of debt at floating rates and operating in a cyclical business. There’s also no dividend at this time. And there is a wave of shareholder suits against the company, which are likely just related to the big drop in share price but are cause for caution nonetheless. There’s more earnings and guidance coming up in mid-February. Until then, we’d stay cautious.
 
 
Q. Hi Roger, Elliott and Sherry. First, Happy Holidays to everyone, and a big shout out to Sherry, who is always so pleasant and helpful. In the latest DDI/CT Income Update - you recommended selling Algonquin Power & Utilities (TSX: AQN, NYSE: AQN) and Medical Properties Trust (NYSE: MPW). I invested in both for the income, and both are in my IRA - so there is no loss to harvest for tax purposes. Regarding MPW, I think it was clear you believe their
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dividend is safe. I say that because you said think they probably will raise their dividend a penny next year. Is that an accurate reading of your assessment of their dividend? Regarding AQN - it isn't so clear to me your thoughts on their dividend's safety. I did see you don't expect an increase in '23, but do you expect a dividend cut?
 
Given my purpose for these investments is the dividend, I won't be able to easily replace their 10% yields if I sell them. If the dividend is safe, it makes sense to me to hold them until their prices recover somewhat before I sell. If the dividend isn't safe, then yes, time to cut them loose.
Thanks so much for all you do for us. Happy Holidays.--Andy Z.
 
A.Hi Andy. First, Happy Holidays to you and thanks for your kind words for Sherry.
Starting out with Algonquin, I don’t believe a dividend cut is inevitable. I think the company has the ways and means to keep paying at the current rate, even with its need to reduce floating rate debt. But I also think there’s quite a bit
of uncertainty about what management will actually do, which is why I’ve included the stock on the Endangered Dividends List in the December issue of Conrad’s Utility Investor. And while they wouldn’t have a revenue problem even in a recession, they are facing some pretty severe headwinds from rising interest rates.
 
Bottom line, I think investors are pricing in a lot of uncertainty—including a great deal of bad news that hasn’t and isn’t likely to happen. But there is considerable risk to Algonquin’s dividend right now, which makes the convertible preferred the best way to own it—for those who can handle the risk that I outlined answering a previous question and highlighted in the Alert.
 
As for Medical Properties, my feeling is still that management is likely to raise the dividend a penny a share in February, at the time it releases Q4 results and updates guidance. And I believe they’ve done a very good job this year managing what are two pretty substantial risks: The impact of rising interest rates on
their ability to do transactions and the health of their mostly hospital operator tenants. The one investors have focused on is Steward—and that company’s fortunes improved further last week by extending its credit agreement through year-end 2023.
 
On the other hand, the headwinds of a rising interest rates and tenant health in a likely recession aren’t showing much sign of letting up heading into 2023. So it’s hard to see MPW shares making much headway until they do, even though with short interest at 13% or so of float there’s always potential for a short squeeze.
 
Bottom line: I believe there are better opportunities in REITs for the actively managed CUI Plus/DDI/CT Income Portfolio in 2023, even though MPW should be able to hold its dividend. I will continue to cover it in the REIT Sheet.
 
 
Q. I own both Algonquin Power & Utilities (TSX: AQN, NYSE: AQN) and its convertible preferred stock AQNU, both
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with substantial paper losses. Is your advice to sell AQNU as well...currently yielding about 16%! Is that sustainable??? Thanks—John C.
 
A. As I indicated previously in this chat as well as in the CUI Alert, the source of the 7.75% (AQNU) preferred dividends is interest on a senior bond issue, so it will not be cut unless the company went Chapter 11. The preferred will mandatorily convert to common stock on June 15, 2024. The next payment of 96.875 cents per share should be declared in February for payment in March—and there will be five more payments before conversion.
 
As I pointed out answering a previous question in the chat, I sold Algonquin common from the actively managed CUI Plus/CT Income Portfolio, mainly because I don’t see it making much headway until management reissues long-term guidance for earnings and the dividend.
I also see potential for a dividend cut next year. But I am comfortable with the convertible preferred as alternative for risk tolerant investors.
 
 
Q. I see four discrepancies from your most recent CUI Plus/CT Income report: 1) CVS Inc (NYSE: CVS) lists buy 80 shares @100 in the title and buy 250 @ 100 in the recommendation? 2) HP Inc (NYSE: HPQ) lists Hold 200 shares in the title and buy 200 shares @ 25 in the recommendation? 3) Newmont Mining (NYSE: NEM) lists Hold 100 shares in the title and buy 100 shares @ 50 in the recommendation? 4) Total Energies (Paris: TTE, NYSE: TTE) lists Buy 200 shares @ 60 in the title and buy 140 @ 60 in the recommendation? Can you clear this up?—James R.
 
A. Thanks for pointing out the errors. In case of future discrepancies in any of our reports, I strongly recommend referring to the portfolio table. For CUI Plus/CT/DDI Income, that’s always attached to the end of the report.
 
 
In this case, the reason for the errors is basically that we’ve made several changes to recommendations the past few weeks. We will correct them in future updates. But here’s the correct information.
 
1.   Our position in CVS based on the model is 80 shares with a buy at $100 or less for new investors.
2.   I restored our 200-share position in HP to a buy at $25 or less in the current report. Reasons for doing so are highlighted in the writeup of the position.
3.   I restored our 100-share position in Newmont to a buy at $50 or less in the current report. Reasons for doing so are highlighted in the writeup of the position.
I reduced our position in TotalEnergies to 140 shares from 200 shares.
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1.   The buy up to target remains 60.
 
 
 
Q. Roger. I would appreciate your opinion on the valuation of Keyera (KEYUF). Buy, sell or hold? How does this pipeline company line up with other US and Canadian companies that you have written about over the years. Thanks.--Rick P.
 
A. Hi Rick. Keyera is actually more of a gathering, processing, fractionation and storage company than a pipeline. So the majority of its business is upstream. I think it’s well managed and has navigated very tough environments, particularly in recent years, while expanding where it’s made sense. A good example would be this month’s acquisition of Plains Midstream Canada’s 21% working interest in the Keyera Fort Saskatchewan complex, which brings its ownership of the facility to 98% at a modest price. The company expects immediate accretion to distributable cash flow when it closes in Q1 2023—which will further strengthen the dividend.
 
I currently rate Keyera a hold in our Canada/Australia coverage universe in Energy and Income
Advisor, though I’ve rated it a buy for the most part since I started covering it in the early ‘00s. The main reason is my concern about a recession next year and its potential impact on the energy sector. And this is a much smaller and upstream focused company than for example Pembina Pipeline (TSX: PPL, NYSE: PBA) in Canada, which means it’s likely more vulnerable to cyclical pressure. But I do like this company as a long-term holding. I also believe the 16 cents Canadian monthly dividend paid since Sept 2019 is safe, though its US dollar value will fluctuate with the exchange rate—and that’s been mostly negative this year.
 
 
Q. Hi Roger: You have previously advised us Energy and Income Advisory readers that Energy Transfer LP’s (NYSE: ET) board has repeatedly expressed their intent to raise their dividend to the pre-pandemic amount of $1.22/share. As you know ET has been very aggressive in raising their dividends every quarter for the last year – wow!!!
 
1.   Can you tell me where the Board has made such statements? 
2.   Can you provide us with the location/website where I read it on any Board transcripts? 
3.   And is it binding on the board?
Thanks Roger. Merry Christmas to you and your family. Best--BHJ
 
A. Thank you for those kind wishes and the same to you and yours. To answer question 3 first, Energy Transfer management’s repeated statements of intent to restore the pre-pandemic 30.5 cents per share quarterly dividend—in fact to go well beyond it with increases—are most definitely NOT legally binding on anyone. They can change direction at any time for any reason.
 
Back to question 1, it’s management not the Board that has made statements. The most recent time I’m aware of was during the Q3 earnings call on November 1, when co-CEO Thomas E. Long stated the following
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 “As a reminder, future increases to the distribution level will be evaluated quarterly with the ultimate goal of returning distributions to the previous level of $0.305 per quarter or $1.22 on an annualized basis, while balancing out leverage target, growth opportunities and unit buybacks.”
 
I believe you should be able to access transcripts from ET’s investor presentations from their website www.energytransfer.com. I also have an update on ET—and why going beyond 30.5 cents per quarter for the dividend is increasingly likely—in the current issue of Energy and Income Advisor.
 
Q. Roger and Team. I hope you had a wonderful Christmas. Where do you see the best value for 2023: Southwest Gas (NYSE: SWX), Verizon Communications (NYSE: VZ), Brookfield Renewable Partners (TSX: BEP-U, NYSE: BEP) or Enterprise Products Partners (NYSE: EPD)?--Ben F.
 
A. Hi Ben. I think all four companies present a great deal of value
entering 2023. Enterprise, for example, will yield well over 8% at its current price following next month’s likely semi-annual dividend increase—and it’s barely half its high for the previous energy cycle with an unmatched position to capitalize on growing US NGL exports. Brookfield has been really beaten down by concern about its recent expansion moves, though it’s repeatedly demonstrated ability to do deals profitably and the Origin Energy and Westinghouse purchases are set to be immediately accretive while adding scale, reach and expertise to do more expansion. Verizon has the best wireless network in the US and 2023 looks set to be the year where it starts monetizing it effectively—and its very safe, free cash flow protected yield is almost as high as its P/E. And Southwest as I noted answering an earlier question above is worth far more than its current price just on a sum of the parts calculation.
 
As a note of caution, we believe first half 2023 could be pretty rough for the stock and bond markets. So
we’re taking a pretty defensive position now with our actively managed portfolios holding a great deal more cash than usual—for deploying later in the year in stocks at what we believe will be lower prices. That means we’re basically advising most fresh money buys be done incrementally—investing a third of the total now, another third sometime in Q1 and the final third some weeks after that. But all four of these stocks would be great candidates to add to conservative, long-term, income focused portfolios.
 
 
Q. Could you please comment on your recent conservative recommendation of Boston Properties (NYSE: BXP). Does this not contradict the notion of many pundits who profess that, increasingly, working from home and not the office is a wave of the future.—John R.
 
A. Actually, I think Boston Properties is nicely aligning its business as an owner of office properties to a hybrid model of home/office work, which appears to be emerging as the new normal in markets where it operates.
 
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Management’s focus is increasingly on higher quality “Class A” properties, where occupancy rates are far stronger than typical office buildings. It’s also become a major player in life sciences, where demand remains very high. And guidance for 2023 funds from operations (FFO) per share--$7.15 to $7.30—is strong enough for an increase in the quarterly dividend of 98 cents per share that’s been paid since January 2020.
 
A recession next year, combined with much higher borrowing costs than a year ago, would be a major headwind for office properties in 2023. But Boston Properties’ guidance appears to take difficult conditions into account. The company’s successful issue of 5-year green bonds in November—which it upsized to $750 million from $500 million (6.75% coupon)—demonstrates it can still access capital markets on reasonable terms. And our entry point of little more than half the REIT’s 52-week high and a yield of nearly 6% prices in very low expectations as well. Look for more in the next REIT Sheet,
which I expect to produce in the next week.
 
 
 
Q. Hi Roger. Here is a current article from Bloomberg indicating regulators are starting to reject rate increases following the outcry of tapped-out consumers. This is not a surprise as I've been reading in various places for months that the affordability of electricity is becoming an issue. So it seems that while utilities will be able to make new capital investments regulators are making them eat most of the costs of any system upgrades they may implement. Their alternative is to defer new projects, which would also seem to inhibit revenue growth. So would this development affect your company ratings in the Utility Report Card at least for some companies? Regards--Jim C.
 
A. Hi Jim. Thanks for sending along the article. Clearly there can be no energy transition that’s not also affordable. The rising cost of electricity is now a major issue for utilities and regulators as they consider CAPEX plans to boost efficiency, increase resilience and add renewable
energy to grids. And there are number of sell recommendations in the Utility Report Card now.
 
Ironically, the primary driver of rising utility rates is rising natural gas and coal fuel costs, which are passed along automatically to consumers with no impact on utility earnings. And the spending utilities are doing to increase grid efficiency and speed adoption of renewables should reduce that pressure over time. But rising interest rates especially have increased the cost of funding the investments, particularly those for multi-year projects like offshore wind facilities.
 
Regulator/utility relations are a key part of the Quality Grade system I use to rate companies in the Utility Report Card. And we watch many factors from election results (see November issue) to ongoing cases to assess them on a state-by-state basis.
 
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I think at this point it’s a severe overstatement to say regulators are rejecting utility rate increases en masse. In fact, most states are still approving at least most of what companies are asking for. That includes multi-year investment plans. And we’ve even seen some upward movement on return on equity in response to rising interest rates, outside of states like Illinois where ROEs rise automatically.
 
Also, this is not the 1970s and 80s, when utilities spent billions on projects in advance of recovery that regulators later refused on the grounds of “imprudence.” These days, utilities don’t spend money unless regulators pre-approve its use and the eventual return on investment. And again, everything else including fuel costs and interest expense is directly passed on in rates.
 
There is risk, as I have pointed out in CUI, to earnings growth guidance. And investors have punished utilities that have been forced to pull guidance, notably Algonquin and Dominion Energy (NYSE: D) following the release of
of Q3 results last month. The market hates uncertainty more than anything else, so the reaction is understandable.
 
Nonetheless, I think both reaction and risks are overstated at this time--not just because regulators in most states are working with companies to over come headwinds but because utilities do have options to time their CAPEX and in many cases fund it with sales of non-core assets.
 
In the December issue, I highlighted capital structure, with a company-by-company focus on exposure to variable rate debt and near-term debt refinance. I think this is the biggest headwind utilities will have to deal with in 2023. For the most part now, however, regulators in most states remain supportive of companies’ financial health.
 
 
Q. Good morning Roger. I wanted to ask about PG&E Corp (NYSE: PCG) preferred issues. Is this an opportunity to buy the shares at a steep discount now and receive a windfall of all back dividends,
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perhaps next year, when dividends are reinstated for the common shares?—James C.
 
A. Hi James. I count 8 Pacific Gas and Electric preferred stocks that are actively traded now, as well as a convertible preferred at the parent level. All are heavily discounted to par value. But that’s due entirely to the recent backup in interest rates as all of them are now current on dividends—with the payment of the deferred but still owed cumulative dividends occurring earlier this year.
 
As I noted in the December issue, preferred stocks are basically perpetuities, meaning they tend to act like junior long-term bonds when interest rates rise. That exposure obviously triggered big losses last year. And I think with the Fed continuing to push rates higher, there’s risk prices could fall well into 2023, before we see a reversal in monetary policy. So anyone who buys these preferreds now will lock in a nice yield (the 4.5% pays 7.5% at a price of $15), but should be prepared to for a paper capital loss in the near-term. And
if inflation does come roaring back, as it did in the 1970s and 80s several times following big Fed rate hikes, then they will give ground again.
 
 
Q. Roger. It's that time for "Tax Loss Harvesting" and wondering instead of Bonds would iShares Preferred and Income Securities (NYSE: PFF) be the place to put the proceeds because of the ETF's depressed price, current yield and reduced tax implications versus Bonds? I do recognize it doesn't fall within your utility purview but was wondering if you had a opinion. I like you have been a long owner of Dominion Energy (NYSE: D) but decided to through the towel in!--Ed
P.S. Always will appreciate your recommendation on Centerpoint Energy (NYSE: CNP)!
 
A.Hi Ed. Two things. First, this ETF pays a highly variable quarterly dividend. That was a good thing in December, when it paid 23.7 cents per share. But we’ve also seen considerable drop offs in payments, such as the 6 cents paid in December 2020 versus 16 cents the year before and 15 cents the prior month. It can
be counted I think to pay a mid-to-upper single digit yield, but no one should count on the 9.3% that now shows up in many screens.
 
Second, the reason for the variable yield is that the ETF rebalances every month. Looking at the most recently released 10 largest holdings, there’s a wide range of securities—ranging from 1-3 year bonds (a category I do like because there’s really no risk to principal) to perpetuities that are extremely vulnerable to rising interest rates. I think the ability to adjust monthly is a big positive in an environment like this one. But no one should assume this is a balanced portfolio either, as there are three NextEra Energy bonds in the most recent top 10 holdings. You’re really relying on Blackrock to make the calls. And the history of this fund is if rates rise in 2023, net asset value will slip further.
 
Personally, I prefer a portfolio of short-term bonds of companies I like, such as what I recommended in December.
 
 
Q. What’s your current opinion on Woodside Energy Group
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(ASX: WDS, NYSE: WDS). I remember that you advised readers to hold. Thanks—John M.
 
A. Hi John. Woodside is tracked in our Canada and Australia coverage universe for Energy and Income Advisor. Our current advice is to buy at USD25 or less. This is the combination of the old Woodside Petroleum and the former oil and gas production assets of BHP Group (ASX: BHP, NYSE: BHP). And it’s gained considerable value since that spinoff/merger closed earlier this year. The company is a major player in LNG exports from Australia, which is uniquely well positioned to serve Asian markets. And it’s been enjoying growing business amid the past year’s boom. It’s also making a big investment in hydrogen down under, which will position it well in that market. Pays dividends twice a year in US dollars—consensus is another
mid-single digit percentage increase for what’s declared in February, which I think is reasonable.
 
 
Q. Is EQT Corp (NYSE: EQT) a buy at current prices due rising demand from LNG exports?--Monroe J
 
A. Hi Monroe. The Appalachia-based natural gas-focused producer is likely benefitting to some extent from a tighter natural gas market that’s due in part to the growing LNG trade. Unfortunately, the cancellation of the Atlantic Coast Pipeline and the continuing delays in starting up the 94% completed Mountain Valley Pipeline have prevented so far its output from reaching the Atlantic Coast—and the Cove Point LNG facility. And keep in mind that LNG facilities take years to site, permit, fund and construct—so with there’s not likely to be a meaningful boost in US LNG export capacity from current levels for several years. This is more of a long-term driver of growth.
 
 
 
Q. Greetings Gentlemen, First, I would like to wish you and yours a healthy and happy New Year. I have two questions about Canadian stocks.
First, are you sticking with your original buy-under price for Vermillion (TSX: VET, NYSE: VET) in the face of windfall taxes? If so, why?
 
Second, what are your thoughts about Imperial Oil (TSX: IMO, NYSE: IMO) -- it seems to be a pretty well integrated player-- upstream, mid stream, downstream. And it seems to be bucking the trend with aggressive CAPEX. Is it carrying too much of the wrong kind of debt? 
 
Lastly, how do you feel about Coterra Energy (NYSE: CTRA)? I know it is trading about 10% above your buy-under price, but how does it compare with Chesapeake (NYSE: CHK)? If I am not mistaken, they are both natural gas plays. What are the differences, and why do you seem to prefer CHK to CTRA? Many thanks.—Jeffrey H.
 
A. Happy New Year to you as well Jeffrey. Starting with Vermilion, the windfall taxes on European energy producers are a negative for earnings and investment. And management has responded by suspending the stock
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buyback program, which disappointed. The company is still going ahead with the Corrib acquisition at this time, with a Q1 close anticipated. Management appears to be sticking with CAPEX targets as well as dividend plans. And drilling in Australia and Germany appears to be going well. So while the windfall tax is a negative, I still view 25 or lower as a reasonable entry point.
 
Imperial Oil is basically ExxonMobil’s (NYSE: XOM) unit in Canada, as it owns 67.22%. So arguably the world’s biggest and strongest oil and gas player backs its fortunes as a company, which should mitigate any concerns about the balance sheet—and the $3.2 billion in total debt compares to $2.6 billion in balance sheet cash. I think we’ll see more dividend growth, like the boost for January—though remember that the payout is in Canadian dollars and the US dollar value will fluctuate with the exchange rate.
 
As for Coterra versus Chesapeake, both are natural gas focused and we believe will do well long-term, though Chesapeake is the
better value now trading below our highest recommended entry point and Coterra is not.
 
Comparing balance sheets, Coterra has no variable rate debt and roughly $637 million in maturing debt through the end of 2024—compared to $778 million cash in the bank and about $500 million in expected free cash flow after dividends in 2023. Chesapeake has about $2.2 billion in floating rate debt and $235 million of debt maturities through 2024—versus $74 million cash on the books and $1.9 to $2 billion in expected free cash flow after dividends for 2023.
 
That may account for some of the valuation difference now between the two, especially considering Coterra is investment grade and Chesapeake is not. But for all practical purposes, neither company really has a debt problem now that the energy cycle has turned up.
 
 
Q. Dear Roger, the Algonquin Power & Utilities (TSX: AQN, NYSE: AQN)
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