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12/30/24 Capitalist Times Live Chat

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Elliott Gue

3:51

In my view, 2025 will be the year of natural gas. Not to say I'm not bullish on oil/oil-levered names, but I think we're going to see a dramatic shift in the US gas market. There are a handful of major drivers but I'd say the 3 most important are: 1. Ongoing AI-driven growth in US electricity demand, 2. 4+ bcf/day of new LNG export capacity coming online between Q4 of this year and Q1 of 2026 -- this increases the current capacity of 12 bcf/day by about 1/3rd. 3. production discipline in a shrinking number of major US shale producers like EXE, EQT. Today, front-month natgas prices are moving sharply higher based on a series of weather models for right around the 10th of January showing some of the coldest weather, especially in the mid-west, south and eastern US, that we've seen in 30 years (mid-90s). US gas storage levels are still above average for this time of year but, of course, extreme cold can both drive heating demand and cause well freeze-offs that impact production. Of course, a surge in near-term

Elliott Gue

3:51

gas prices will drive the stocks higher in sympathy, which is what you're seeing today with names like EXE and EQT up 4%+/-. However, that's really not the core fundamental that drives my bullish thesis on natgas-related stocks in 2025. If the weather is as cold as some models forecast, we could see more upside in February gas futures (current front month) however there's also a chance the weather models shift a bit warmer and then you could see those gains evaporate. What's interesting is the gas futures curve -- H1 2025 the average price of gas futures was $3.13 as of last week's close (before the recent jump), rising to aroudn $3.70/MMBtu in the second half of 2025 and $3.90 into 2026. That's due to the fundamentals -- AI demand, 4 bcf+ day of LNG export terminals -- I mentioned earlier, not these recent January model runs. That's also why stocks like EXE were already looking very strong long before we started seeing credible forecasts of extreme January cold snaps.

Victor

3:52

Guys, On the Dec EIA issue you commented on the huge demand of energy due to AI datacenters. You mentioned names like KMI and ET that will benefit from that. How do you feel about ENB in this space? Is VST at a good level to enter a new position?

Roger Conrad

3:52

Hi Victor. I think Vistra is probably still more in partial profit taking territory--especially for anyone who's held it as long as we have in Conrad's Utility Investor--than at a real position building level. True, there aren't so many operators of nuclear plants that can sell energy directly to data centers. But this is also a stock with a lot of bandwagoners, as is Constellation Energy. In contrast, basically no attention is being paid to Brookfield Renewable--despite the fact it owns 50% of Westinghouse and is actually adding contracts and revenue in real time from data center business, whereas nuclear earnings are basically being fueled by tight supplies and higher regional power prices, along with IRA subsidy.

As for delivering gas to power data centers, TC Energy is in better position than Enbridge, serving northern Virginia for one thing. ENB should ultimately get some benefit. But its focus has been more oil-centric--a good business also.

Guest

3:56

can you give me some insight on BEP.
Thanks for doing a great job helping the small investor

Roger Conrad

3:56

Thank you! I think Brookfield is shaping up to be a big winner next year. The stock is cheap yielding 6% plus--after losing ground in 2024 due to general disinterest in renewable energy investing and weakness in the Canadian dollar. The business is growing and healthy, adding new business and expanding assets without having to access capital markets. And there are multiple catalysts for upside--from the 50% ownership of Westinghouse to the waning of political worries that appear to be hanging over the stock. I think the partnership units (BEP0 are the better deal now but even the C-Corp shares (BEPC) are trading below my Dream price.

Lee

4:03

there was a question at 2:24 by a guest concerning CQP and your answer was about CNQ, I would like your thoughts on CQP Please

Roger Conrad

4:03

Hi Lee. Sorry about that. We rate Cheniere Energy Partners LP as a buy at 60 or less. Its model for growth is pretty simple--they build new LNG export capacity that's long-term contracted to extremely creditworthy customers. Cash flow rises and that enables management to raise dividends, which it intends to do in 2025 after temporarily reducing outlays in 2024 to fund more growth internally. The Trump administration is likely to resume approval of more LNG export capacity, which should help CQP with further expansion. But the Biden administration's freezing of new permits also gave CQP a head start to completing its already permitted projects, which should ultimately improve their profitability. This company doesn't offer the explosive upside of a producer like EXE for example. But for someone who wants a more utility like investment, it's a solid choice.

Mike C.

4:08

Good morning gentlemen and Sherry –

Elliott’s written about liquidity in the past, as a driver of market action. Is liquidity drying up? Does liquidity at the Treasury provide any clues for the year ahead?

CVS is in dream buy territory with a pronounced three-year downward trend. Is this a golden opportunity, or do you see reasons to be wary?

In years past, you had an energy cycle diagram. Where do you think we are in that cycle?

As always, thanks for the great insight and solid analyses. Wishing all of you a healthy and prosperous new year

Elliott Gue

4:08

Thanks for joining the chat and for the question. I think Roger addressed the CVS piece, so let me talk about liquidity and the energy cycle a bit more. Right now, liquidity conditions are quite supportive -- bank reserves at the Fed are holding up and we've seen growth in deposits for both large and small/regional banks. Janet Yellen recently announced that Treasury is going to have to use extraordinary measures to avoid breaching the debt ceiling starting in January. So, there's going to be another debt ceiling deal/fight. Depending on how long that takes to resolve, I'd expect to see Treasury spend down their General Account at the Fed (TGA). Last time that happened (early 2023) reserves remained ample so, for now, I don't see any huge near-term concerns. The problem is that I think the market is too complacent long-term about Treasury's (rather ridiculous) funding needs. The Fed is constrained somewhat by Treasury's massive borrowing needs -- i.e. if the market feels rates are likely to stay elevated long

Elliott Gue

4:08

term, they demand high rates at Treasury auctions to attract demand. This raises Treasury's borrowing costs and also, eventually, leads to a decline in bank deposits and reserves at the Fed. This can quickly tighten credit conditions and because the exact relationship between rates, reserves and deposits is very tough to model, this process is unpredictable. And given the leverage in the system, tightening credit conditions can have a huge impact on the real economy lightening fast. I suspect that the Fed would probably prefer to keep rates elevated as inflation is in danger of a renewed surge, but if they stay too tight for too long, you could easily face a scenario where yields spike, stocks slump, credit conditions sour, the economy tanks and in that scenario, I'd expect the Fed to favor shoring up liquidity and cutting rates/ending QT to addressing inflation.

4:09

What has happened with Pembina Pipeline, in addition to the general decline in all midstream companies and what do you see happening with this stock over the next several months?

Roger Conrad

4:09

Hi DB. Pembina is in great shape as a business heading into 2025, as indicated by the solid EBITDA and CAPEX guidance issued earlier this month. Management's growth model remains as conservative as it was 20 plus years ago when I first started tracking the stock. And the venture with KKR to build out natural gas transportation infrastructure feeding LNG and NGL exports on Canada's Pacific Coast is starting to ramp up.

The stock's return in home currency (CAD) terms is 22% year to date--10 points higher than its USD return--meaning the CAD's decline explains much of what's happened lately. I suspect it's also come under pressure because of concern of disruption of US/Canada oil and gas flows by the incoming Trump Administration. I think those concerns are overblown. But even if that does happen, Pembina's system is contracted and in any case is wholly in Canada. This is not a time to sell a high quality name this early in the energy upcycle.

Elliott Gue

4:13

As for the energy cycle, my guess is we're around 9 o'clock -- about midway through the up-cycle. I say that because the early cycle recovery -- say 6 to 8 or so -- was from 2020-23/24 and now we're seeing a stage in the cycle where the supply and demand balance is more in equilibrium. In my view, the next phase of the rally will come due to a supply shock -- when the market realizes that non-OPEC production growth prospects, particularly from shale, are inadequate to meet demand. This will prompt higher prices and a new uptick in CAPEX/spending that will eventually bring us to high noon on my cycle chart. But I'd expect that process to take a few years. Also note that the last supercycle -- I'd say late 90s to 2014 -- also when through some mid-cycle digestion (or indigestion) phases. I think that's what we've seen this year.

Frank

4:14

I currently own BEP; CWEN; and AES and would like to add to my position in at least one. Which of these is the most compelling at this time?

Roger Conrad

4:14

Hi Frank. They all have their appeal. And my ideal would be to add a bit to all three. I've talked about Brookfield earlier in the chat. And I think it has the most potential upside for this year--mainly because of the Westinghouse ownership. AES has been under pressure from tax loss selling--made more intense by the fact it was dropped from the Dow Jones Utility Average. But all three are basically under pressure because there's a narrative the Trump Administration is going to shut down renewable energy. And I think that headwind will steadily lose force next year, bringing back the buyers.

Dudley

4:14

Happy New Year Roger,Elliott & all,

Roger Conrad

4:14

Thank you and the same to you!

Jeffrey H.

4:19

Seasons Greetings, Folks, I hope it will be a good year for you and yours. Before I ask my question, I would like to thank both of you for your helpful and courteous advice over these past 10 years.

My question concerns Prologis (PLD) and W P Carey (WPC). I know you have recommended both in your various advisories. If you were to pick one of them for fresh money right now for total returns over the next two or three years, which would you choose and why?

Again, Thank you

Roger Conrad

4:19

Hi Jeffrey. If I had to guess which of these two companies were most likely to really hit the cover off the ball next year it would be Prologis Inc (NYSE: PLD). Not only are we likely to bigger dividend increase in February. But there's just too much pessimism about its core business of warehouse and logistics compared to the actual operating numbers the REIT continues to post. I think a good bit of that is due to overblown political worries that are going to fade next year as the new administration takes shape. I also think WP Carey will continue its recovery track. The key is going to be investment--and how close its 2025 guidance comes to the $1.5 to $2 bil/year target it set when it spun out the office properties. Fortunately, we're getting paid to wait by an already high and rising dividend.

Gary L.

4:26

To support the continued demands of AI, energy supply infrastructure will need to be significantly expanded. This will include development of small modular nuclear reactors. What are your recommendations to participate in this investment opportunity? I am specifically interested in ETF's.

Roger Conrad

4:26

Hi Gary. i would be very careful with stocks now being touted as bets on small modular nuclear reactors. The concept is great and there's money to back development. But there are also no firm orders for commercial scale facilities. And there won't be until industry is able to produce a model(s) that adopters can be confident about fixing the all-in cost. That means companies like NuScale (SMR) and Oklo Inc (OKLO) won't have actual earnings for some years yet, even in a best case.

As for ETFs, Wall Street is producing them to the hype. But if you look inside, you're going to find a lot of companies with no earnings--and therefore trade purely on hype. That means the ETF is basically selling on a hype factor as well.

If you want a bet on SMRs, I would suggest Brookfield Renewable or Cameco (CCJ), which are the 50-50 owners of Westinghouse--the only company with a working SMR, the AP300. They're also strongly profitable outside the SMR business--which means real earnings and dividends.

Don C.

4:34

Roger/Elliott--if the Conservatives take over in Canada in 2025, will this be a positive for Canadian oil and gas equities?
As always, many thanks for these chats and I wish you both a great 2025

Roger Conrad

4:34

Hi Don. First, let me say I generally think politics-based investing is a very bad idea. And I think a lot of the bets investors are making now by trying to long distance mind read the incoming Trump administration are going to end very badly.

But that said, I think a victory by the Tories next year in Canada as polls are now indicating would be a huge positive for Canadian oil and gas companies--as well as other industries like telecom and even utilities, REITs and renewable energy that have been the victims of creeping regulation under the Trudeau regime. A Conservative government would also surely deal better with the US.

Jay

4:34

Following up on the prior question on pharma, can you comment on what might be weak and strong sectors in general in the coming year.

Elliott Gue

4:34

Thanks for the questions. I am not an expert on pharma/healthcare (my strategy has generally been to try to avoid getting sick) and I really don't think I can provide you with much meaningful fundamental analysis on specific names. What I will say is that this group has been among the weakest in the S&P 500 on a relative strength basis but it's very idiosyncratic in my experience -- ie. there have been some moonshots like LLY and some truly horrible performers like PFE/MRK. From a purely chart/technical focus, one of the things I like to keep an eye on is the leaders in a group -- like LLY -- when they pull back. We've seen LLY pull back from near $1,000 to around $700 and that seems to be good support for the stock. Will be watching whether it can hold there or not -- if not, then we could well be in for another wave of selling. I mainly look at healthcare/pharma from a trading perspective though. As for other sectors to watch in 2025, let me highlight 3 for you. First up, the financials. Financial stocks

Elliott Gue

4:35

have performed well, particularly since the middle of this year. They're an important group within the S&P 500 in terms of weight and they're sensitive to economic conditions. That's particularly the case for the regional banks. Recent rate cuts should aid the liability side of their balance sheets (i.e. what they pay on deposits) so what I'm watching is factors like strength in loan demand and consumer credit quality. Often if there is an approaching recession, you'll see some of those issues show up in the financial sector first. However, if the economy holds up, many of these regional banks look cheap and the growth rate for names like Blackstone (BX) could really take off -- I think the financials remain a leader. Second, energy (I know, predictable). It's been a laggard of late, however, I see a growing disconnect between the reality of oil and gas prices, free cash flow and fundamentals and the stock prices. Right now, my favorite area in energy is natgas -- look at a name like EXE trading at the same

4:39

level as the summer of 2022; yet, gas prices are down 70% from where they were back then. That's because the market is beginning to discount the fact that natgas prices are likely to average closer to $4/MMBTu by 2026, a level at which US producers like EXE can generate huge free cash flow. EXE by my calculations is worth on the order of $130 at $3.75/MMBtu constant gas prices, perhaps more like $170 at $4/MMBtu+. Energy stocks are cheap, unloved and there are signs of a cyclical turn. Technology has actually been a laggard since mid-2024. Ultimately, it needs to hold up for the market to see more upside since its 30%+ of the S&P 500 -- In particular I'm watching the semiconductors and semi-cap stocks. They're down significantly since July and, in my view, a rally in the semis from here would suggest the group has priced in some bad news about chip demand into early 2025.

Susan P.

4:44

Heartfelt thanks to both Roger and Elliot for your hard work...

A question I have centers on state regulation versus federal for utilities. In CUI, a map is occasionally used that shows the differing state regulatory bodies' degree of favorability towards regulated utilities: In general, how impacted or independent are state regulators from changes on the federal level? And if any states/regions are easier on regulated utilities, which ones would you recommend given the increased demand expected for electricity and natural gas?

Additionally, the pros/cons of nonregulated versus regulated utilities is an aspect I have wanted to better understand. Do you have any generalized thoughts and/or specific names to consider or avoid in the nonregulated space.

Healthy 2025 to all at Capitalist Times

Roger Conrad

4:44

The long-term track record for utilities is regulated businesses generate more reliable earnings than unregulated operations, though long-term contracted power generation has come pretty close. Right now, there's rapidly rising demand for electricity--particularly renewables and nuclear. So expiring contracts tend to get renewed at higher prices. But profits at companies like Vistra Corp and Constellation Energy that sell into unregulated power markets in the 15 deregulated states have varied widely in the past. They're riding high now because tight supplies have pushed up wholesale electricity prices. But ultimately, it's a safe bet we'll see a drop in prices that will hit profits. And right now, the stocks are pretty high.

Turning to your question on regulation--and this is a discussion we could have for a while--federal regulation has actually influenced state regulation of utilities very little historically. That's because the power all lies with the states--and they've resisted federal encroachment.

Hans

4:45

Elliott/Roger: NY and other States are implementing a tax on large oil companies to pay damage caused to the climate, How does this affect those companies. Thanks

Elliott Gue

4:45

Vermont and NY have passed laws in that regard. However, the big oil companies will challenge these measures in court, arguing that federal law/regulation supercedes state law. From what I have heard/read, that's legal challenges to these measures are likely to be successful and, as a result, it's more of a headline "gimmick" than a real threat to Big Oil. Theoretically, if NY and other States were successful fining big oil to the tune of billions of dollars the result would be an economic disaster -- for one thing, I think you'd see companies like XOM pull back entirely from states like NY, which would dramatically raise costs. So, I just don't see it coming to much of anything.

Roger Conrad

4:48

As for regions and regulation, the Southeast and Rocky Mountain West have generally been the most favorable to utilities--that is they've been more willing to let utility companies chart their own courses with oversight. But there are states that stand out in other regions as well--Massachusetts for example has been a positive place to do business even as Connecticut has at times been dysfunctional. As far as investment goes, regulatory/utility relations should always be considered in flux and critical to keep up with.

Look for an updated map in the near future.

John A

4:50

You commented on the oil majors but I do not believe you mentioned Shell, What is your take on it?

Elliott Gue

4:50

My favorites are XOM and CVX. My least favorite is BP. Shell in my view has some great assets and I like their LNG/gas exposure. In my view they cut CAPEX too much on traditional oil/gas projects, which means they have an inferior growth profile to a name like XOM. However, a quality company. One catalyst I'm following is some speculation that SHEL might ultimately switch primary listing to the NYSE (US). That could prompt an upside rerating. While I know BP hasn't been called British Petroleum in some time, I think a lot of us think that when we hear the company's name -- for this reason I don't think BP would ever switch primary listing. SHEL hasn't ruled it out.

Roy D

4:57

Good afternoon to all! Every time I turn on the news, they are reporting that Warren Buffet has bought more shares of Occidental (OXY). Do you think he's brave, or foolish? What are your thoughts on this stock?

Elliott Gue

4:57

Good afternoon and thanks for the question. First, let me just say I'd never be brave enough to call Warren Buffett foolish. However, I believe it was Buffett who once said that the market is a voting machine in the short-term and a weighing machine in the long term (or words to that effect) and I think that's true here. Right now, sentiment on energy is poor, especially oil, so OXY has been weak (though it's still up from a low of $8.20 or so in 2020). I also think that the market feels it's going to take OXY some time to pay down debt associated with their recent acquisition. That might delay capital returns (buybacks and dividends). However, given OXY's quality acreage and low production costs, I think this company can generate copious free cash flow at $75 to $80/bbl oil long-term. So, in my view if you believe (as I do) that $80+/bbl is a good long-term estimate, it's dramatically undervalued down here in the $40s. Ultimately value will out and I don't think it's hard to construct a valuation model where

Elliott Gue

4:57

OXY sells for $100+.

Susan P.

4:57

Newly spun-off South Bow is interesting for its yield and takeover appeal. Any thoughts on potential buyers? M&A activity, in general, can have confusing tax implications: e.g., EQT's acquisition of Equitrans did not create a taxable sale but ONEOK's deal with Magellan. Is there any taxation pattern you have observed over the years for how these kind of acquisitions are handled?

More specifically, Hess Midstream is a MLP that receives a lot of buzz around its relationship Hess, along with Chevron's acquisition of Hess. Any concerns for Hess Midstream v.v. ownership status?

Thank you very much

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