JotCast | 12/28/22 Capitalist Times Live Chat

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12/28/22 Capitalist Times Live Chat

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Arthur

3:26

Thoughts on AY? I am down about 27%. Mainly in a taxable account. So it probably makes sense to TLH, but since it pays a decent dividend was wondering if you thought if the funds could be better deployed elsewhere

Roger Conrad

3:26

Hi Arthur. As I noted in an earlier answer, Atlantica looks pretty solid as a business and appears on target for another dividend increase in February--when management is expected to announce Q4 results and update guidance. The loss you state pretty much matches what the shares have done year to date--with dividends it's about -22%. But the five-year annualized return with dividends is about 10.8% and I think it will return to that over time--based on sustainable yield and portfolio growth.

Guest

3:32

Which utlity companies do you see benefiting from the drmatic reduction of hydro power in the SW caused by climate change?

Roger Conrad

3:32

I think water utilities like American Water Works (NYSE: AWK) and Consolidated Water (NSDQ: CWCO) will earn nice returns investing in desalination facilities the next few years. So far as power utilities, I think we're going to see a lot more solar built--since sun is strong in the region and solar doesn't require the water coal, nuclear, gas and obviously hydro do. Pinnacle West (NYSE: PNW) has proposed a new hydrogen hub in the Southwest and is also a leading deployer of solar energy. It could also be a beneficiary of the incoming governor's promises to boost renewable energy--though relations with elected state regulators are the critical challenge now. I rate Pinnacle a buy on dips to 70 or lower.

David O.

3:37

Which oil major in your opinion has the best prospect of keeping up with much less replacing or growing depleting reserves? I own CVX and XOM. Such a company with time will become ever more valuable…this green stuff has only so much to offer the world. The discoveries off Guyana and Suriname are exciting. Do you think Georgetown, Guyana will be the “New Miami”…get that condo now???

Elliott Gue

3:37

We like both CVX and XOM; however, our view has been that XOM's intermediate to long-term production growth prospects are best of breed for the supermajors. I really have liked their strategy of high grading production in favor of truly world-class, low-cost projects such as Guyana and Permian. Also, as we suspected the fact that Engine No. 1 won a handful of board seats at XOM demanding they pay more attention to climate change has had no discernible impact on their production growth-focused strategy. I basically fled Miami for a quieter corner of Florida last year as it got too crowded and interested to read an article recently talking about some serious housing shortages in places like Guyana. I don't know enough about the real estate market down there to know if it's a good deal but I would not be surprised -- I seriously doubt we've seen the last big discovery in the region. Incidentally, HES is another big oil company -- partnered with XOM on Guyana -- that I have been watching closely lately.

RicM

3:39

What occurred with SARK yesterday?

Elliott Gue

3:39

SARK went ex-dividend on a $13.74801 per share long-term capital gains distribution yesterday, which will be paid tomorrow (12/29/2022). This distribution accoutns for the entirety of yesterday's price "drop." Adjusted for the distro, SARK is trading near an all-time high.

Robert G

3:41

What are the ranges of outcome price wise for Dominion’s restructuring?

Thank you

Roger Conrad

3:41

Hi Robert. I think Dominion's current share price reflects pretty low investor expectations about the outcome of the strategic review, which is understandable given the high level of uncertainty due to the scarcity of details from management so far. My view is we're likely to see asset sales--with the unregulated assets as the most likely candidates: The remaining interest in the Cove Point LNG facility, the Millstone nuclear plant in Connecticut and renewable natural gas operations in Virginia, the Carolinas and Rocky Mountain states. We could also see sales of some of the natural gas distribution utilities. Dominion management has been criticized for selling its natural gas pipelines near a market bottom. But the market for all of these assets is strong--and selling them would greatly reduce debt.

As for the long-term earnings growth rate, I would expect 4-6%--which would be based entirely on utility CAPEX in Virginia and South Carolina. That I think would earn the company a price in the mid-to-high 60s

Roger Conrad

3:42

initially--but with the price moving higher over time as utility projects are completed, particularly the offshore wind project that has many concerned about ultimate cost.

Alan

3:43

Hello Elliott and Roger. Which utilities do you see benefiting from the reduction in hydropower in the SW USA which appear to be a consequence of climate change?

Roger Conrad

3:43

Hi Alan. I believe I answered your question under "Guest." Let me know if there's more you want to know.

salvatore p

3:45

Afternoon Roger

Received your year end moves . Does swap aqn for aqnu mean we sell the one to buy the latter . And what about the number of shares - are they to be kept the same and put in the additional monies in for the purchase ? Thanks in advance . .

Roger Conrad

3:45

HI Salvatore. Basically, the advice is just to take the proceeds from selling Algonquin Power & Utilities common stock and invest them in the convertible preferred. I am not advising committing additional money to any Algonquin securities. This is just a better way to be in the position, in my view.

Robert

3:48

Dominion and Verizon are down substantially this year. Is this a good time to add to these positions?

Roger Conrad

3:48

I like both of these stocks and I think both are likely to perform far better in 2023, despite our forecast for an overall rocky market. Dominion has a bit more uncertainty now with the ongoing strategic review, though as I've pointed out it does not have a revenue problem. Verizon has a challenge converting its best in class network to additional revenue in an environment where consumers don't want to spend more. But it's also priced with very low expectations, with a sustainable yield almost as high as its P/E.

The chief caveat is I don't ever advise really loading up on any one stock.

Elliott Gue

3:54

A question e-mailed in pre chat: Elliott, I agree that cryptocurrency is a disaster --- Why isn't BITI doing better? Answer: BITI is a fund designed to track the inverse of the daily performance of Bitcoin futures -- it's designed to rise in value by 1% for every 1% daily decline in Bitcoin. BITI was only listed in June and since that time Bitcoin prices -- and bitcoin futures have generally traded modestly lower -- from around $18,000 bitcoin in mid-June to $16,600 today. There's a phenomenon with inverse ETFs known as "compounding error." Basically, the ETfs track DAILY changes in the price of an underlying asset, returns over longer term periods can deviate from that benchmark. The worst environment for compounding error is a sideways trading market with significant volatility, which basically describes bitcoin futures since end June when added to the portfolio. These inverse ETFs really shine when the underlying asset trends more consistently lower, which is something I expect to happen with bitcoin in

2023 (my target remains sub-$5,000). When that happens, BITI should see meaningful upside. Indeed, in many cases the compounding error issue works in your favor when the underlying market trends. This is one reason why I recommended taking a small position in BITI to start and have subsequently added to it – I believe an average price near current levels will be attractive once the real break lower in bitcoin futures begins (I suspect) at some point in H1 2023.

Alex M.

3:55

Hi Roger. The preferred shares of TDS have been declining rapidly in value. Is there any company-specific news to justify this behavior? Seems like more than just a response to interest rates. Thanks.

Roger Conrad

3:55

HI Alex. I think the main reason the TDS preferreds have dropped so much to date is they're perpetuities, which means they get hit like the price of long-term bonds do when interest rates are rising. I did recommend selling TDS common stock earlier this year because the company now appears to have a revenue challenge as well as a debt challenge--and the headwinds are likely to get a lot worse in 2023 before anything improves. That in my view puts the common dividend at increased risk. These preferreds have an added layer of protection because they're senior. But TDS expects to have negative free cash flow of $370 million even before common dividends in 2023, which means it will have to turn to a hostile capital market to keep building its fiber and 5G. Since that CAPEX is critical to staying competitive, I think management will prioritize it, and its balance sheet second. So while I don't see immediate risk to preferred dividends, I think we need to look carefully at what's reported in mid-February.

Roger Conrad

3:56

Bottom line: I think it's OK to hold TDS preferreds for now. But you should be prepared to sell if Q4 results and guidance show a worsening of the negative trends we saw for revenue, cash flow and debt--as well as customers--in Q3.

Guest

4:03

Roger: One more question. Can you explain the difference to us readers between the designations of a "conservative" MLP like EPD, MMP and MPLX vs. an "aggressive" MLP like ET? I sure would like to acquire a 10% yield when/if ET's dividend goes to $1.20/share this year but do not know how much more risky ET is as a company compared to "conservative" MPLX's yield of 9.6%. Can you provide us readers with some guidance? Thanks.

Roger Conrad

4:03

The two biggest difference makers are (1) the nature of revenue and how cyclical it is, and (2) strength of balance sheet. Enterprise, Magellan Midstream and MPLX are large, diversified businesses with revenue that's proven resilient in downturns. That's amply demonstrated by the fact they consistently raised dividends in the previous decade, as the energy sector was down cycling. Energy Transfer is also a large, diversified business that's demonstrated revenue resilience. But it's also had a balance sheet challenge, which required it to cut its dividend in half just a couple years ago. The company has made great progress slashing debt since, which has enabled it to nearly reach its goal of restoring the 30.5 cents per share quarterly dividend it paid prior to the pandemic. But there's still work to do with nearly $9 bil in maturing debt the next two years and $9 bil plus in variable rate debt. It's on track to get there--ET is my top midstream pick going into 2023. But until it does, it carries more risk.

Elliott Gue

4:05

Question: Hello again, I have another question about oil field service companies. For several years, I have followed the fortunes (or misfortunes) of Dawson Geophysics (DWSN), without investing in it. Are you familiar with the company? It seems to provide the kind of 3-D imaging services that should be (eventually) in demand. Do you have any small poorly-followed under-appreciated companies that are going to make us all rich? And, yes, Happy New Year.

Answer:
DWSN primarily focuses on North American seismic surveys. I’m familiar with it though I haven’t really watched it in a few years. My sense is that there’s actually a fairly large database of high-quality seismic data out there on the major shale plays and he larger oil services companies like HAL are capable of providing similar services to the majors there. Given the data analysis capabilities at a company like HAL – and in-house at major E&Ps like PXD and EOG -- I am just not convinced that DWSN offers anything truly proprietary or unique. With smaller companies like that I prefer to look at names with some sort of a sustainable competitive advantage or competitive “moat.” I just don’t see it here.
There has been significant consolidation in the energy business in the past 15 or 20 years so there aren’t as many small companies as there used to be flying under Wall Street’s radar screen.
That said, I am watching a number of small and mid-sized producers, services and equipment firms – we do plan o

on making some changes and additions to the portfolio in the New Year as the macro outlook begins to settle down.

Lorraine

4:11

I'm a longtime holder of EPD. It seems like a buy and hold forever investment, but doesn't seem to get much mainstream coverage. What do you think? Also, do you think XLE is a good way to get exposure to the major oil companies?

Roger Conrad

4:11

Hi Lorraine. I don't know if anything is really buy and hold forever. But Enterprise Products Partners does come pretty close in the midstream energy space--given its scale, balance sheet, blue chip list of customers and positioning to facilitate exports of US NGLs. It is covered by 23 Wall Street research houses as tracked by Bloomberg Intelligence, 19 of which rate it buy versus 4 hold. Less than 40% of float, however, is owned by institutions and 32.3% is owned by the investment vehicle of the founding family (EPCO Holdings)--so I agree it's under-owned. Shares are also little more than half the price at the peak of the previous cycle, despite paying a 33% higher dividend. I think EPD will eventually trade at a much higher price this cycle, but we're going to have to stay patient. XLE's top six holdings are all in our model portfolio and are 60% of the ETF. It's OK but we'd rather own individual stocks where we control how much we own of each. Also XLE pays less than 4% as dividend and will drop if we're

Roger Conrad

4:11

right about a recession next year.

Elliott Gue

4:23

Question: Your call for a reduction of our holdings in some of our exploration and production companies was prescient..... But with the attempted opening of China "full hog", has your view changed? ... Do you still feel there will be a reduction of E & P company prices from current levels?
Answer: Yes, historically amid a broader market sell-off and a likely global recession energy stocks participate to at least some degree in the market downside. So, we still see the risk of additional downside in many of our favored names into 2023 though we’ll be looking at these “sales” as an opportunity to recommend buying some names at attractive prices.

4:24

Question: The WSJ reports that there will be a building of "dozens" of LNG terminals overseas in the coming years, but they mostly seem to be of the floating type...... To what extent is Baker Hughes involved in the construction of floating LNG terminals vs. those that are land based?.... Are there any additional opportunities you see in the building of these floating LNG terminals?
Answer: BKR Hughes is a leader in certain types of equipment that’s used to compress and liquefy natural gas. Regardless of where the liquefaction equipment is located –onshore or floating – BKR’s products are a critical step of the process.
An example is Shell’s Prelude Floating LNG (FLNG) facility in western Australia. The full design capacity here is 3.6 million (metric) tonnes per annum of LNG – BKR supplied the turbomachinery for that plant.

Question: The price of "BOIL", the leveraged play in LNG prices has fluctuated a lot, do you see any opportunity in its purchase?
Answer: BOIL tracks the Bloomberg Natural Gas Sub-Index on a leveraged basis – it’s designed to rise in value by 2% for every 1% rally in the Bloomberg Natgas Sub-Index. That index, in turn, tracks US Henry Hub natural gas futures using a specific rolling methodology. So, BOIL generally tracks the price of US natgas rather than LNG prices specifically, which are more leveraged to the price of gas in Europe, Japan, Korea and China, which are major importers of LNG.
Front-month US natgas futures have (finally) broken down, which is something we’ve been expecting for much of the year (we were early on that call). We could see a bit more downside near-term especially since gas didn’t see any upside from the recent Artic blast so we’re not recommending BOIL at this time even in our shorter-term trading services. Since we do generally expect US natgas prices to average at higher levels

in coming years than the current quote, the best way to play that in our view is via gas-leveraged stocks like CHK.

Hans

4:31

Elliott, What is your outlook for oil in 2023 Thanks.

Elliott Gue

4:31

We'll have a more detailed outlook out in January, but my general view is that WTI will be well-supported on dips to around $70 -- at prices under $70, I think you could see Saudi/OPEC press for more cuts and or lower global supply. Also there are a number of upside catalysts for oil that should help put a floor on prices -- examples include the (rather bizarre) efforts to "cap" Russian oil prices and the potential for that to impact supply from Russia and the end of Strategic Petroleum Reserve sales into 2023. I also think that oil prices are unlikely to spike above $85 to $90 sustainably amid a global economic downturn. Longer term my forecast remains higher for longer -- oil prices in the $80/bbl+ range (probably more like $90+) on average are needed to balance supply and demand in a normal economic environment. Saudis also need prices well above the current quote to justify expanding their capacity as planned.

Jeff B

5:05

What is your opinion of CEQP?

Roger Conrad

5:05

We sold one-third of our model portfolio position in Crestwood Equity Partners in the December 22 issue of Energy and Income Advisor--which is the current issue posted on the website. The move was one of several we made to raise cash for potential purchases next year, as well as to remove some risk. Crestwood has come a long way the past few years cutting debt and streamlining to its most profitable operations--including several successful acquisitions. But it's still one of our higher risk midstream companies, on both a balance sheet (sub-investment grade rating, high level floating rate debt) and revenue (near wellhead focus) basis. That said, we're comfortable with the reduced size of the position going forward. We also continue to expect a dividend increase in April, and eventually a higher credit rating as leverage is reduced. CEQP is a buy for those who don't already own it.

JT

5:10

Happy New Year everybody. 30 days ago I sold a muni bond fund to harvest a tax loss. Is it too soon to buy it back? If so, what do you think of 3 month CDs at 4% as a place to park cash while waiting for a better time?

Roger Conrad

5:10

Hi JT. I prefer a top quality money market fund like Vanguard Federal Money Market (VMFXX) as a parking place for cash. This fund for example yields almost as much at 3.5% plus--and the more the Fed squeezes rates higher, the higher the yield will go. You can also access the funds from a money market fund at any time, which will likely be critical as we re-deploy in stocks in the coming year. In contrast, CDs tie up your money until they mature and the yield is fixed. As for buying back a bond, we don't believe interest rates have peaked this cycle--so while yields may be attractive they could go higher and erode capital invested in fixed income now. The exception would be bonds maturing in 12-18 months, some of which now yield well north of 5% even for investment grade companies. I've highlighted some issued by utilities I like in the December issue of CUI Feature article.

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