JotCast | 2/11/20 Conrad's Utility Investor Live Chat

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2/11/20 Conrad's Utility Investor Live Chat

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Roger Conrad

5:39

I have answered quite a few questions on this name today so I won't repeat what I said before. But it is hard to see too many near-term catalysts for AGL Energy, other than just showing resilience in what's been a really tough year as I've described. The positive reaction to long anticipated first half results (end Dec 31) was an encouraging sign that maybe that will be enough to create some gains in the stock--along with more strength in the Australian dollar. But AGL is really more of a play for patient investors who are willing to wait a year or two for this to be a $20 stock again.

Roger Conrad

5:39

Thanks for that question.

Robert

5:39

Hi Roger,

Roger Conrad

5:39

Hi Robert, thanks for joining us today.

Robert

5:47

I read that battery technology will reduce the need for natural gas as a complement to wind and solar. Will these batteries have an impact in the near future?

Roger Conrad

5:47

That's certainly what NextEra Energy CEO Jim Robo has been saying. And I think the most likely place to see those economics work first will be the south Florida service territory of that company's utility unit.

There are some real technological limitations right now to this happening on a wide scale. First, batteries aren't free, so the cost is going to have to fall far enough to make it worth companies' while to replace the natural gas-fired peaker plants that are now doing the job. Second, available batteries don't have the capacity to store enough energy to replace solar energy for more than a few hours after the sun goes down. And deploying batteries on a scale great enough to fully replace natural gas will require a massive draw on key resources, will drive up the cost.

Bottom line: Being able to match a battery with a solar or wind facility that's powerful enough to fully balance intermittency 24-7 is still pretty far from reality. And we're not likely to see it for some years. But doing so does help

Roger Conrad

5:49

with the economics of renewables already by using currently available technology. And that "repowering" does increase the value of wind and solar facilities such as NextEra and others own.

5:50

Bottom line--batteries aren't going to replace natural gas anytime soon if ever. But they don't have to be a profitable business with tremendous growth potential, just for making existing renewable energy facilities less intermittent and therefore more valuable.

Lawman

5:56

BEP or BEPC? Is the Biden bump over for these stocks?

Roger Conrad

5:56

As you know from reading me for a while, I think a lot of Brookfield Renewable and its business plan for steady and reliable growth. And we've done well with it as a Conrad's Utility Investor recommendation since 2013--and before that in Portfolios I ran at my former publisher.

I don't think they've done anything in their very successful expansion that's appreciably increased risk for the sake of growing faster. In fact, as they've added scale they've demonstrably cut risk by improving access to capital, increasing expertise and becoming more diversified/less dependent on US river flows for example. But nothing grows to the sky and I would only buy on a dip to 40 or less. In fact, those following my advice to take partial profits on boosts above prices I've designated have already had several opportunities to do so.

As for the Biden Bump running out, I would say it certainly looks that way, with the C-Corp BEPC shares coming down about 20% since late January. But again, I like this one for the long haul

Roger Conrad

5:57

and it does look like both BEP and BEPC are starting to come back to prices where they look interesting again.

Dennis

6:02

Hi roger. I am about to retire and saw AEP is a perfect mix of safety and yield for someone who hoped to live off the dividend and leave the principle to my children. Today it is down to $79.00 and near its post March low. Can you tell me why AEP has sunk while the utility ETF's have held their own. Can you give a near term prediction as well as where you see the stock in 20 years.

Roger Conrad

6:02

What you have to understand about utility ETFs is that most hold baskets of stocks that are heavily weighted toward the biggest cap companies. And with $165 bil or so of market cap, NextEra Energy is by far the biggest holding and therefore driver of returns. That's in fact why utility ETFs tend to yield so little, because NEE yields less than 1.7%.

That said, I don't think you want to get in the business of benchmarking utilities you buy against NextEra Energy's performance. it's really in a category of its own right now as THE utility big money wants to own as a bet on renewable energy. American Electric Power in contrast is an almost wholly regulated electric utility that is investing in renewable energy but only in rate base--whereas NextEra has the unregulated contract sales business as well. I think AEP is getting to an attractive price based on yield and dividend growth--while NEE is again at a stratospheric valuation.

As for where each stock will be in 20 years, they've both been around

Roger Conrad

6:05

as long as I've been in this business, and I see no reason they won't be 20 years from now. I will say NextEra's unregulated operations will require more managing over that 20 years than AEP's regulated utilities--so one could say NEE is a riskier 20-year bet than AEP. For one thing, a lot of those contracts at its unregulated wind and solar facilities will need rolling over. But these are both solid companies. And when I pick between two strong utilities, I always look for whichever is cheapest.

Lawman

6:07

Is BCE a buy at this level? Compared to VZ and T, how does BCE compare?

Roger Conrad

6:07

BCE is pretty much to Canada what Verizon and AT&T are to the US. They combine cutting edge wireless with fiber broadband and later this year should see a bid uptake of their 5G service, lifting average revenue per user and earnings. It's my Conservative Focus stock for the February issue and a buy up to 50.

Lawman

6:07

If you could only purchase on MLP, would it be EPD?

Roger Conrad

6:07

It was my midstream stock of the year in Energy and Income Advisor last month. I also track it in the Utility Report Card, still a buy up to 33.

Lawman

6:12

Is Biden's disdain for pipelines, good or bad for pipeline companies?

Roger Conrad

6:12

I've said any policy that either restricts construction of new pipelines or requires shutting down operating ones is bearish for the owners of those assets--but by increasing scarcity at the same time the pandemic is receding and energy demand recovering, it's actually increasing the value of pipelines that stay running.

It's important to note that even the president can't order pipelines to shut at a whim. Keystone XL was an exception because it's not completed yet and construction requires a presidential permit. But anything else is likely to wind up in court. And keep in mind that Senator Manchin (D-WVA) is Chairman for Senate Energy--and therefore the gatekeeper for anything the president wants to do in energy other than what can be achieved by executive order.

Bottom line, I think what actually happens will be incremental rather than disruptive--but to the extent it's the latter it will benefit the best in class midstream companies.

Lawman

6:14

Should we continue to be worried about getting "Kindered" with KMI?

Roger Conrad

6:14

No. The dividend and CAPEX were fully covered by operating cash flow in 2020 and will be in 2021, with room to spare for stock buybacks and further deleveraging. The business is well diversified and focused in places like Texas where regulation remains positive. And management has identified new areas for growth like hydrogen and RNG--renewable natural gas. Kinder still looks cheap to me and I think later this year we'll see the share price back in the low 20s, where it was in early 2020 the last time oil held above $50.

Lawman

6:15

In that MMP focuses upon transporting gasoline, is this a dead stock walking?

Roger Conrad

6:15

I don't think so, though our outlook for gasoline is something we'll no doubt be discussing at the EIA live chat on Feb 25. Gasoline demand has in fact been recovering since early second half 2020. And it should continue to as the pandemic recedes this year. Electric vehicles are just not going to come that quickly.

Lawman

6:18

NTTYY is trading near a one-year high. Does it have more room to run?

Roger Conrad

6:18

They had great earnings as I noted in the February issue of CUI. The merger with NTT DoCoMo appears to be shaping up as a great success. And the company looks like it's on the verge of rapid uptake of 5G service this year, which again as we've seen in China with China Mobile will have a big positive impact on margins. My highest recommended entry point for the ADRs is 28 and I wouldn't go higher than that at this point--in fact you don't have to yet. But at just 11.2 times expected next 12 months earnings, NTT is definitely still a cheap and very high quality stock.

Lawman

6:23

PAA and PAGP's recent report seemed pretty bad. Your thoughts?

Roger Conrad

6:23

Another good topic for the EIA web chat and we will have a full recap of Plains' earnings in the next issue of EIA--along with other Portfolio and High Yield Energy stocks that have reported Q4 results.

For now, I would say the Q4 results reflect the tough market conditions midstream companies have faced from the pandemic. And they show again how revenues are leveraged to system volumes. But as far as basic financial metrics, I would not characterize these as bad numbers. starting with generating enough free cash flow after CAPEX to cover distributions--and guidance for the same in 2021. They weren't blockbuster numbers but they are enough to continue to bet on a Plains recovery this year.

Lawman

6:27

PBA have moved up as of late. Is PBA a buy, and do you prefer PBA to US pipelines companies?

Roger Conrad

6:27

My view on Pembina hasn't changed, US listing is still a buy at 35 or lower. I'll be very interested in Q4 earnings and guidance on Feb 24, particularly regards free cash flow and dividend projections, and how well volumes are holding up. But this company has shown us nothing but resilience, really since the energy downcycle began back in mid-2014. And now as Canada's number three midstream company behind Enbridge and TC Energy it has the scale and balance sheet to weather very tough conditions--while continuing to grow.

As for preferring it to US midstreams now, I wouldn't necessarily say that. But I would say that Canada's concentration of midstream asset ownership has been a plus for companies like Pembina--there are just too many owners of midstream in the US right now. That's why we generally prefer the best of the biggest midstreams in this country.

Lawman

6:28

RVRA is the last remnant of the old LINE, and is trading at .26. Is there any hope for this comany?

Roger Conrad

6:28

It's one I haven't looked at recently. Feel free to bring it up at the EIA chat on the 25th.

Lawman

6:32

Can you explain what is going on with SZEVY, and whether it should be bought, sold, or held?

Roger Conrad

6:32

I had a pretty extensive writeup on Suez in the February issue and I don't have a lot to add to that. Veolia is trying to buy the 70.1% of the company it doesn't already own for EUR18 per local market share, which equates to around $10-$11 per ADR at current exchange rates as ADRs are for one half of a Paris share. I think Veolia will have to raise its bid to get this done. I don't think it goes away either, given it already owns 29.9%. But even there is no deal anytime soon, Suez' preliminary results (final Feb 25) demonstrate the company's long-term strategy to boost shareholder value is on track--so it can do just fine by staying independent. That's always my number one criteria for betting on a takeover target Lawman. My current advice for Suez ADRs is buy up to 11.

Lawman

6:38

I have seen a lot of very negative articles on T, most of which focus on its debt, and the cost of the 5G auction it had to borrow more funds to buy. Do these negative arguments have any merit?

Roger Conrad

6:38

I answered a couple of questions on AT&T pretty extensively at the beginning of the chat. The gist of it is yes they apparently did spend big at the auction. The primary evidence of that is they secured a $14.9 bil loan from a major bank, almost surely to get that done. My view is that investment will pay off as they see 5G uptake later this year. But in any case, the company is conservatively expected to generate $26 billion in free cash flow this year (after all CAPEX), which means they'll have $11 billion after dividends to use to cut debt even if they can't sell DirecTV--which certainly looks like the plan after the writeoff. Anyway, Q4 earnings were generally solid and should get stronger as Warner Media recovers when the pandemic recedes. And in any case, this stock is trading at barely 9 times expected next 12 months earnings--so it definitely reflects those negative articles and opinions already. In fact, it's fair to say investor expectations can only rise on this company.

Lawman

6:39

VET is stuck at around $5. What are your thoughts on the prospects for this company?

Roger Conrad

6:39

It's a survivor for sure and that's the important thing for anyone who's held it this long. I think once investors start believing $50 oil has traction we'll see the stock back in double digits. Again, another good question for the EIA chat on Feb 25. I hope you'll join us then Lawman.

dudleycurtis@hotmail.com

6:42

Your thoughts on GM, F & Toyota with their EV push. Thanks Elmer

Roger Conrad

6:42

I think they're likely going to dominate the market for EVs eventually, all due respect to Mr Musk. They're more the kind of company that my partner Elliott Gue covers. But I think they're certainly all cheap stocks. And as this pandemic recedes and the economy comes back, I think we see more strength in their stocks. Don't expect EVs to immediately take over the roads though--despite the big CAPEX plans these companies have announced. We may see the kind of acceleration people expect for sales but I would take a show me attitude. Let's see it in the numbers before we jump on the hype.

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