JotCast | 12/30/21 Capitalist Times Investing Live Chat

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12/30/21 Capitalist Times Investing Live Chat

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Roger Conrad

3:02

A third level of protection for regulated utilities against rising interest rates is the fact that there are few major ongoing construction projects that require more than 3 to 5 years (tops) to complete. In fact, most of what we see now can be sited, permitted, built and fully financed within 12 to 18 months. And often utilities recover the entire investment in rates as incurred. That greatly cuts the risk that companies will be caught out with much higher financing costs than anticipated, as was the case during the 1970s when so many were building nuclear and coal plans.

3:03

Bottom line, I think the risk of rising interest rates to utility businesses is greatly exaggerated. And the arguments rely too heavily on the economics of the 1970s and 80s, which have changed greatly. The key challenge for companies is the same as it ever was--keeping the support of regulators for plans. That's not given. But companies that achieve it will be in good shape going forward.

Barry B.

3:05

I have been reading that oil production in this country is expected to rise 900,000 BBLS/day in 2022. Do you agree with that prediction and if so, what impact will it have on prices?

Elliott Gue

3:05

I suspect US oil production will rise in 2022 and 1 million bbl/day +/- seems like a decent forecast. However, even at 1 million bbl/day of growth US oil production would still be well below the 13 million bbl/day peak reached in early 2020 and the key point is that US producers aren't really drilling aggressively given soaring oil prices. Instead, as we noted in this week's issue, they're focused on free cash flow, paying dividends and paying down debt and I suspect that'll continue through next year. We continue to believe that OPEC+ will manage production as demand continues to recover next year, keeping supply growth lower than demand growth, so we see no issue with the global oil market absorbing additional US barrels without a major price impact. Longer term, the collapse in global investment in new oil and gas projects since 2014 is the main issue facing the industry -- unless investment in new production picks up soon, global oil production could fall on the order of 20 to 30 million bbl/day by 2030

Elliott Gue

3:05

...Even with OPEC+ maxxed out and US shale growing again, it will be difficult to offset declining output from those older wells.

Jack A.

3:11

An analyst on CNBC has chosen PSX as an energy play... What are your thoughts about PSX as an investment?.... Also, considering the hostility in the present administration towards expanding oil exploration and production, how much increase in production volume do you think is possible that could benefit both KMI and EPD?

Thank you

Roger Conrad

3:11

Hi Jack. Phillips 66 (NYSE: PSX) is basically the downstream half of pre-split ConocoPhillips--and will soon re-absorb the midstream assets spun off to Phillips 66 Partners LP in a takeover. PSX is not a producer of oil and gas as COP is. As a result, it's had to cut its expenses including CAPEX to deal with reduced output from E&Ps, though downstream operations have seen a solid recovery particularly from gasoline demand. I think the dividend increase announced in October and payable earlier this month is a sign they have adapted their financial and operating strategy to the current environment--which means the dividend and balance sheet should be secure.

Like Kinder Morgan and Enterprise Products Partners, I would argue PSX shares have been held back this year by the lack of guidance for a real recovery in midstream volumes, which has disappointed investors. I do think time is very much on its side for one--since the longer we go without, the higher oil prices are likely to rise and the greater the

Roger Conrad

3:15

staying with Phillips 66, the greater the incentive will be to increase production. And for all its public hostility to long-term US reliance on oil and gas, the Biden Administration is going to want to see more production now, since the alternative is much higher heating bills and prices at the pump. Bottom line--we still see it as a matter of when not whether volumes will recover and midstream companies prosper. We do plan to add PSX to our coverage universe probably under midstreams in the near future.

Michael L.

3:18

Elliott,

This is a followup to my previous question regarding the producers. With WTI in the 70s, what will it take to get the share prices of these companies to move further up? Quarterly reports that reflect increased profits at this price for WTI, shareholder friendly moves ( special dividends, buybacks, etc)? Thanks!

Elliott Gue

3:18

In the short-term shares in producers are leveraged to the price of oil -- most names peaked in late October/early November when the price of oil peaked. The pullback has been pretty mild with S&P 500 Energy down about 10 to 11% and the XOP ETF down about 18%. And, of course, energy is still the best-performing sector in the S&P 500 up 54.11% year-to-date with basically one more trading day to go. So, I think one thing you're seeing in both oil and energy stocks is an end of year effect. Simply put, if you're a hedge fund or institutional investor who has been long/overweight oil and energy stocks, you were sitting on some pretty substantial gains in October -November and you probably wanted to lock those in before year-end, so you can send your investors a nice year-end statement with lots of big, green numbers in it. Certainly, we can see that in the data on oil futures commitments, where there was substantial profit-taking in November/early December. I believe that sets us up for a rally into early 2022 in

Elliott Gue

3:18

both oil and energy as these same investors buy the dip and reestablish positions. Fundamentally, I see other catalysts including more special dividends/buybacks to be announced in their upcoming Q4 reporting season. Since many oil companies use their Q4 calls to announce their guidance for the year ahead, I think they could be particularly important as drivers for these stocks. One more thing to watch would be a spike in oil itself, which I believe is a growing upside risk as it appears that omicron is having only as modest impact on demand while OPEC+ is running out of spare cpacity.

Eric

3:23

Which 2-3 midstreams have the best stock appreciation prospects over the next 12 months?

Roger Conrad

3:23

Hi Eric. I've actually highlighted three for our Six Top Picks for 2022 issue of Energy and Income Advisor, which we intend to publish in early January. But I really think all of those we feature in the Model Portfolio and High Yield Energy List have the potential to at least double once once a real midstreams volumes recovery gets underway. I continue to believe we need to be wary of the smaller midstreams like Sprague Resources LP--which in fact I'm putting back on the Endangered Dividends less than two months after its most recent dividend cut. But the large and diversified players we've been recommending have adjusted their financial/dividend policies to an environment of more tepid volumes than we've seen at this stage of previous energy price cycles. So we can hold them with confidence in their dividends and balance sheets until we do get that volumes recovery.

Sohel

3:23

Does an increase in crude prices as you expect in 2022 help or hurt refiners like VLO? Would also appreciate your read on prospects for VLO in 2022. Thanks for all your information and guidance.

Elliott Gue

3:23

Refiners, unlike most other energy groups, do not benefit from rising oil prices. Refiners like VLO buy oil to make gasoline and diesel, so rising oil prices = rising costs. However, there are many offsets...the most important is that I believe oil prices will remain elevated in 2022 due to a combination of supply and demand drivers. Rising energy demand does benefit refiners because consumers don't really use oil they use gasoline, diesel and jet fuel. So, my sense is that refining margins rise in 2022 to mid cycle levels and that implies significant upside for VLO and others in the group.

Sandyw

3:29

Thanks your long life consistency. Trustworthy. What do you think about RIO vs BHP

Roger Conrad

3:29

Thanks Sandy. We appreciate that. We have favored BHP Group over Rio Tinto, in large part because its enterprise is currently more focused. But they are quite similar actually as businesses and are treated very similarly by investors. And while BHP's current yield is slightly higher than RIO's at the moment, I would argue that's not really significant now, since both companies set payouts in line with profit guidance--and we're not going to see that until next year. Bottom line is we like both BHP and RIO for long-term investors. Though shares will be volatile from quarter to quarter, they're actually the lowest risk stocks you're going to find in mining--which is now especially interesting as a bet on batteries.

John C..

3:37

HASI. Is it worth investing in at today’s price and considering the recent downturn in “green” stocks? What can we look for as far as safety and future dividend increase?

Would appreciate comments on Devon Energy and PSX at current levels

Thank you

Roger Conrad

3:37

Hi John. I sold Hannon Armstrong Sustainable Infrastructure Capital earlier this year from the CUI Aggressive Holdings. My thought then was that this was a well-run company with strong finances and tapped into the trend of rising spending on renewable energy and energy efficiency projects--but that the shares had been bid up to an unsustainable price in the low 70s and were due a sharp correction. As it turned out, I was right on both counts. But after a strong growth year and now trading in the low 50s, I think it's again a buy. This is a company that's proven it can increase profitability by adding scale. And I think it's best days are ahead. We may in fact come back to it in CUI for 2022.

I discussed PSX in an earlier question. My view is it's probably a buy in the low 70s where it trades now, but only for patient investors since we don't really know when we'll see that volumes recovery. As for Devon, it's benefitting from higher prices for oil and gas, and a buy up to 40 in our E&P and Services coverage

Roger Conrad

3:38

universe--though we favor the producers in the Model Portfolio.

Jeff

3:38

Hi Roger,

Roger Conrad

3:38

Hi Jeff. Thanks for joining us.

John C..

3:45

hello,
I may not be able to make the chat but would like thoughts on a couple subjects:

Any names that you feel have run up to the point that it is a good idea to take some/all off the table?

As a retired individual, my priorities are for income and capital preservation. thus my interest in essential services. I would also like to have a portfolio that leans toward "set and forget it" with only occasional need for me to review/adjust/rebalance. My questions:

a) general guidance on this need (as i magine many other subscribers may be in a similar boat)
b) any sense you might offer re: what percentage such a portfolio should devote to various sectors such as utilities, energy, real estate, etc

Also, EOG resources - thoughts on this name?
Thanks

Roger Conrad

3:45

Hi John. We don't see any of our Energy and Income Advisor portfolio names as being over-extended at this time, especially those that have pulled back since announcing Q3 results like the midstreams. I did make a few switches in the High Yield Energy List the past few weeks, mainly to get higher yielding names in there. But at this point, energy looks like one of the few sectors with a great deal of upside in 2022, despite the gains we saw in 2021 and to a lesser extent in 2020 following the February/March crash--which in retrospect was the bottom for this energy cycle.

As for utilities and essential services, it's remarkable that the majority of this year's gains in the Dow Jones Utility Average have come this month. But as I wrote back in November, this is a sector where business growth has actually caught up to bull market pricing. And I think there's real potential for the buying momentum to extend into 2022, as investors leave higher priced fare.

There are a number of stocks rated "sell" in our various

Roger Conrad

3:47

coverage universes--EIA, CUI REIT Sheet, etc. And these are good places to take money off the table. But by and large, I feel good about the ability of the Portfolio stocks we have in these services to generate average annual total returns of 10% plus over the next five years from their current prices--given their business prospects.

3:50

Getting to the other part of your questions, we generally advise keeping specific sector exposure to 20% or less of your portfolio. However, it's also true that essential services is a broad category and the stocks we hold in the CUI Utility Report Card coverage universe behave differently from each other in different environments. The same is true of REIT Sheet companies, since REIT is now better thought of as a form of corporate structure rather than only a way to hold conventional real estate. And my coverage universe there includes names that could be associated with tech/growth as well as value/income. Bottom line is to know what you own.

3:52

If you are interested in a service that puts all sectors ahead in a managed portfolio format, I would like you to check out my CUI Plus service, which holds stocks across all dividend paying sectors and also advises weightings/numbers of shares to own. Call Sherry at 1-877-302-0749 if you want to find out more.

3:55

As for EOG, we continue to hold it in our Model Portfolio and rate it a buy up to 100. We expect to see higher oil and gas prices push up free cash flow further in 2022--$5.4 bil is the company's current guidance and is almost 4 times dividends paid this year including the $3 per share special cash payouts. With this company rated A- with a stable outlook and seeing no real balance sheet pressure, that should mean even more generous dividends/share buybacks in 2022, and bigger gains for the stock.

Sheldon

4:03

Hi Roger,

Would you take a loss in Magellan and reinvest the proceeds into TC Energy? They seem to be similar companies.
Also, would you take a loss in Nabors? If so, are there any recommended replacements.

Roger Conrad

4:03

We can't provide personal advice in our advisories. I can say that selling stocks that are underwater since entered s a good way to shelter capital gains, which many of us have this year. And as I've said in several answers during this chat, midstream companies like Magellan Midstream Partners (NYSE: MMP) and even TC Energy Corp (TSX: TRP, NYSE: TRP) while in the black this year have been relative outperformers, as investors have been disappointed in the rather subdued guidance for volumes at least for the next few quarters.

That said, I don't see MMP and TRP as being that similar, despite being considered midstreams and operating high quality businesses with strong balance sheets. Differences start with TRP's far greater size and diversification--it has renewable energy investments as well, while Magellan is pretty much focused on crude oil and refined products pipelines. TRP is also far more geographically diversified, with assets serving both US and Canadian basins. And its dual-listed in Toronto.

Roger Conrad

4:04

That means TRP is priced in and pays dividends in Canadian dollars.

4:08

If one were to sell MMP and buy TRP, one would probably get the benefit of any midstream rally we see as well as the benefit of a tax loss. I also think it's likely the 30-day wash rule will probably pass before we see a big midstream recovery, though equally we could see a rush into midstreams in January from bargain hunters. As for Nabors, we've rated it a hold recently and believe in general that service companies will do better at a later stage of the cycle when activity picks up and rates start to rise. The stock is up at bit more than 40% this year, so I guess a loss depends on when it was purchased. Our favorite services company, however, is Schlumberger (NYSE: SLB), which we continue to rate a buy up to 42.

Fred

4:09

Is your opinion of FANG similar to Viper

Elliott Gue

4:09

Yes, it's definitely a quality name with good assets. We have PXD in the portfolio, but I'd put FANG in a similar class as PXD.

Michael L

4:13

Elliott, is PXD still your favorite/most leveraged name in the producer space? Thanks

Elliott Gue

4:13

It's definitely one of my favorites. I would say that I think OXY is probably more leveraged in that if oil prices behave as I expect they should be in a position to pay down their debt to target level next year and could then initiate a larger dividend. I think that could be an upside catalyst. What I'm saying is that I think PXD is the better company but in a bull market for oil OXY would probably rally more.

Dan N.

4:17

Hi Roger & Elliott- I’m interested to hear your opinions on the relative values and attractiveness of major US midstream players EPD, KMI and ET, and why valuation of ET looks to be so out-of-step with its peers. Is ET really as cheap as it looks and generating as much steady cash flow as appears? Even setting aside the Uri storm windfall, it looks like a huge discount in the shares.

I see this morning the headline that ET will owe over $400M to WMB for the aborted merger, which follows other recent headlines for a recommended $40M penalty, a $4M penalty, a $2M penalty… is this discount mostly from a reputation for being a uniquely bad actor? Do you think this reputation is deserved and/or justifies the discount?

Thanks and happy New Year!.

Roger Conrad

4:17

Hi Dan. Thanks for those well wishes. For a company that's expected to generate almost $8 billion in free cash flow this year and roughly $6 billion next, even the recent fines for alleged operations violations and now the busted Williams Companies' (NYSE: WMB) merger are not a particularly tough blow, though obviously management would prefer not to pay them. And given the lack of movement in the shares today, this was not a wholly unexpected outcome of this long-standing case either. In fact, it's actually removed some long standing uncertainty that may be helping ET stock today.

Rather, the big news the past couple weeks for the company is successfully closing the Enable merger and apparently better than expected results exporting ethane to Asia at the Nederland facility--twice last year's volumes and far better prices. Also, the sale of units to former Enable owner Centerpoint and the latter's immediate sale of a good chunk of them has apparently been absorbed successfully by the market.

Roger Conrad

4:18

Bottom line: Despite these setbacks in the courts and with regulators, I think the stars are aligning for ET's business and share price to have a big year in 2022.

Jason

4:25

Do you ever short stocks? If pressed, what are some candidate shorts you might consider now?

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