JotCast | 2/24/22 Capitalist Times Live Chat

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2/24/22 Capitalist Times Live Chat

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Roger Conrad

3:02

I don't think this is a good time to sell oil or mining stocks. In fact, many are lower today and actually better buys than they've been in a while. That includes the best of the biggest miners BHP Group, which just boosted its semi-annual dividend by almost 50%.

Eric

3:08

Midstream stocks have come down the last couple of weeks despite the increase in oil prices, including today with the Ukraine situation. What's driving this? Is this a good buying opportunity?

Roger Conrad

3:08

Hi Eric. Midstream stocks are not going to get the benefit from rising oil prices unless producers start raising output in a meaningful way to increase midstream volumes. And despite the action in prices, E&Ps are devoting their record free cash flow to cutting debt, paying dividends and buying back stock, rather than ramping up CAPEX.

That said, I think the latest round of earnings and guidance shows clearly the best in class midstreams are now well adapted to this environment--in fact, all of our recommendations are generating free cash flow after all dividends and CAPEX, meaning they have surplus to pay down debt, boost dividends and buyback stock just like the E&Ps. I do think that producers will ultimately pick things up, which will lift midstream volumes, cash flow, dividends and ultimately share prices. And the midstreams we've been recommending are cheap and good buys--and pay you big to wait on the eventual capital gains.

Jim N

3:11

The News commentators keep mentioning that the US can’t drill for much oil because of the restriction imposed by the Biden Administration. What are they besides not drilling in Alaska and getting new leases on Federal land? Can companies continue to drill on federal land if they leased it before Biden? Would appreciate more detail on the restrictions.

PXD has been doing very good. Is their land Private or Public? Any limitations? I understand a lot of the land in west Texas is private. What other companies have good oil, private property yet to be drilled?

Elliott Gue

3:11

The Biden Administration put a halt on new federal leases in the early days, but producers can still drill based on permits they've already acquired. There was a sort of mini "boom" in permitting in the last couple years of the Trump Administration, so most producers have enough permits in hand to cover inventory for a few years even with the process halted. There are no federal lands in the Texas portion of the Permian Basin where PXD operates, so it's immaterial to their business.

Bob T

3:17

Hello Elliot,
I appreciate the thoughtful guidance you have been giving us on the oil cycle upturn for the past many months.
The likelihood of a Russian invasion of Ukraine and sanctions on Russian oil exports has been in the news daily for the last several weeks. Economic news reporters and President Biden have repeatedly warned that such sanctions would cause a significant increase in the price of oil. At the same time, the stock price of Exxon has been falling daily since February 8th, including this morning after Russian began its full scale invasion. Why do you think the
stock prices of major western oil producers would fall in the face of an increasing world oil price?
Thanks for your insights

Elliott Gue

3:17

I covered some of this in response to an earlier question. But, basically, energy producers are valued based on long-term average oil prices -- E&Ps sell their output as its produced over the course of a year. Thus, they don't benefit from short-term price "spikes" such as we're seeing right now. Looking at the WTI curve, for example, I see that the April futures sold for $83.31/bbl one month ago and are now at justy under $93. In contrast, the December 2022 futures were around $76/bbl on January 24th and are now at just $81.50 or so. So, the market is saying that the Russia-Ukraine conflict will have a diminishing impact on oil prices as time passes and, perhaps, the late January/early February "spike" for producers was a little overdone.

Maureen Brunner

3:21

Hi Roger: I own Energy Transfer Partners, EnerPlus, Enterprise Products and Kinder Morgan--rather large positions in each. All 4 stocks have disappointed for a very long time. Can you offer me some insights as to the future of these holdings? Perhaps it's patience but I'm running out.

Roger Conrad

3:21

Hi Maureen. While I can't say I blame you for running short on patience with these stocks, I think you'll be even more disappointed down the road if you sell now. For one thing, several of these stocks have noticeably recovered off their bear market lows and are now outperforming--Enerplus for example was up 242% last year and is up another 12% so far in 2022, a year when the S&P 500 is so far down -11%. EPD's numbers are less impressive at 21% in 2021 and 8% this year but they're also paying you to wait with an 8% dividend. ET is up 20% this year on top of 43% last. And Kinder was up 24% last year and 6% this year.

If bought these stocks between 2014 and 2019, you may still be sitting with losses, which has a way of making investors less patient. But as I pointed out answering a couple earlier questions on midstream companies, the likes of EPD, ET and KMI have adapted to the low volumes environment and are generating the highest levels of free cash flow in their history--ET paid out some of that surplus

Roger Conrad

3:23

continuing on Maureen's question--ET used its surplus to raise its dividend 15% last month, and there's almost certainly more on the way. It may be months or even years before midstream companies get that volumes boost that will really drive their share prices higher. But in the meantime, you're getting good appreciation in a weak, high priced overall stock market--and you're not going to find safe dividend yields anywhere close to what these companies pay. Hang in there.

Elliott Gue

3:28

in the portfolio remains Exxon Mobil (XOM

Lou E

3:30

Should investors adjust their holdings in "super" oil companies such as BP, Total and Shell as the unfortunate conditions created by Russian aggression move forward? For example, I believe BP has many close ties with Russian oil and its national oil company. Could US sanctions create significant problems for BP? Or, will the perceived worsening of shortages actually benefit them? Any general wisdom on this crisis as it pertains to our investments would be highly beneficial.
Thanks

Elliott Gue

3:30

Generally, I would expect WTI and Brent prices to remain higher for longer driven primarily by recovering global demand and inadequate supply growth. This was true before Russia-Ukraine and it's true today. The Russian invasion hasn't been the main driver of the bull market in oil -- it's mainly acted as an accelerant over the past week or two. And, as I wrote in a flash alert last week, sanctions that disrupt Russian oil and gas supply will hurt Russia, but they'll arguably hurt other countries even more via the consequent rise in commodity prices/inflation. So, long and short, Russia is more of a sideshow to my commodity price projections beyond the next few weeks rather than as a leading driver and I don't expect sanctions to disrupt Russian supply longer term to the degree some had feared. My view is that generally the intermediate to long-term impact of "higher for longer" oil prices on the prospects for the super oils outweigh any exposure to Russian energy projects. That said, out top super oil pick

Elliott Gue

3:30

in the model portfolio remains Exxon Mobil (XOM) thanks to its superior production growth profile and exposure to new projects in places like Guyana, which will likely remain insulated from the Russia-Ukraine-US-Europe conflict.

Harvey F

3:34

Considering the likely maintenance of higher long term 'WTI & Brent' pricing, would buying an ETF such as XLE or RYE (Invesco equal wt version of XLE) be an acceptable option, along with individual holdings within the sector... Its sometimes difficult to outsmart an index, and these seem to be doing well.
any opinions on AGLXY .. Thank you

Roger Conrad

3:34

Hi Harvey. We recognize the allure of ETFs as being an easy way to buy into a sector. But consider this. XLE has 43% of its portfolio in two stocks ExxonMobil and Chevron. It yields half a percentage point less the two giants together. And it's up 19.5% this year, versus 24% for Exxon. Why buy it when you could just buy equal lots of XOM and CVX--two of the largest and safest energy stocks around and earn a higher yield and higher return?

The marketing machines that dominate the ETF space--Blackrock, Vanguard et al have been spinning the yarn that you can't beat the indexes for years now--so long that a lot of people have come to accept it as fact. It's demonstrably not true. Worse, what they don't tell you is sponsors frequently roll up ETFs that are less profitable to operate--mainly low capitalization ETFs but sometimes surprisingly large ones. And when that happens, you're cashed out, whether you want to be or not.

I'm not saying ETFs can't be useful. I want to know what I own--particularly when it's in

Roger Conrad

3:36

a market I know like energy. The other dirty little secret of ETFs is you never know what's inside--only a snapshot of what holdings and percentages were the last time the sponsor was compelled by regulators to publish something. You might have the good, but a lot of bad and ugly too. And again, you'll never know.

Lee

3:37

Greetings,

Roger Conrad

3:37

Hi Lee.

Dayton

3:41

I followed your advice @ buying 400 shares of QUID and 300 shares of SARK as defensive moves. Is it time to get more defensive?

Thanks

Elliott Gue

3:41

Good question, and one I've been considering a great deal over the past couple of days. Basically, a rule of thumb that's served me well over the years is that I don't invest or trade based on geopolitical headlines. A second, related heuristic is that my approach to portfolio management is gradual rather than dramatic. The reason for this is that geopolitical moves are often quickly and violently reversed -- in fact, we're seeing that today with oil, Nasdaq, even ARKK/SARK. Also, big one-day moves such as we've seen in recent sessions or like we saw in early December, can often end with violent, countertrend bounces. This favors gradual exposure shifts rather than dramatic reactionary moves. So, I'm planning a new issue shortly (probably next day or two) and I'll have more specific recommendations. But my sense is that I'll likely recommend waiting for a bounce to get more defensive on stocks.

Lee

3:45

EPD seems to be stuck in a trading range quite a bit lower than prices reached when WTI was last $100. You’ve helped me understand how midstream lags E&P in early stages of cycles. Would you say more about that, and where you think we are in this cycle! EPD is my largest position and I love the tax advantaged distributions. Looking forward to growing free cash flow and increased distributions.

Roger Conrad

3:45

Enterprise Products Partners returns have suffered by comparison to oil and gas producers since the commodity bottomed in spring of 2020. But again in an absolute sense, it really hasn't been a bad investment. We called EPD our pan of an MLP conference we went to back in 2014, on the basis of a very high valuation. But since we brought it back to the Model EIA Portfolio in January 2017, we have a positive return of about 18%. And the dividend has been increased by about 15%. That covers a pretty rough patch for energy stocks. In fact it beats the return on the S&P 500 Energy Index.

As you point out, we're in that point of the energy cycle where producers are not ramping up output. In fact, you could argue (and we have) that the combination of management fear of a price drop, pressure from the rise of ESG investing and government regulation have prolonged this stage of the cycle by making producers less willing to commit free cash flow to CAPEX--when they can buy back stock and boost dividends.

But while it

Roger Conrad

3:48

is impossible to say when this stage of the cycle will end and midstream volumes will rise, we can say that Enterprise is well adapted to this stage of the cycle as a midstream company. And while investors have been slow to bet on it so far, it's still expanding assets, cash flows and (at a modest pace) dividends. In other words, it's becoming increasingly valuable as a company. And that's really the standard for continuing to hold it and waiting on the the next stage of the cycle when E&Ps start to pick up the pace. And we will continue to watch for signs it is, mainly in plans of producers and drillers like Schlumberger.

Hans

3:49

Elliott, If sanctions on Iran are eliminated how will this affect oil prices

Elliott Gue

3:49

It's negative short-term because supply will increase. But I believe a deal with Iran is widely anticipated by this summer, so I think it's already somewhat reflected in the price of crude. In addition, I think the price impact on oil is somewhat less than important than some in the media suggest. Iranian production before sanctions was approximately 3.8 million bbl/day and is currently 2.5 million bbl/day, so the eventual supply impact will be (very) roughly 1.3 million bbl/day. Most of the estimates I've seen suggest it will take them 3 to 6 months to ramp output. So, effectively that's roughly a 300,000 to 400,000 bbl/day increase in oil production per month for a few months and then nothing beyond that. Now, interestingly, OPEC+ has said it plans to add 400,000 bbl/day to global supply over the past several months but it's falling well short because Russia is maxxed out, Saudi is already producing close to the maximum levels its comfortable with on a sustained basis and for most other countries -- i.e.

Elliott Gue

3:49

Angola, Nigeria and Libya -- increased production is basically a pipe dream. Given the recovery in demand, I just don't think the world will struggle to absorb an extra 300,000 tom 400,000 bbl/day per month for a few months. And, if prices were to weaken significantly, I suspect Saudi, among others, would welcome a chance to cut output somewhat.

James

3:56

How do you think the war effects BHP fundamentally? Technically, why is it down more than other stocks today? Do you like it more or less now?

Roger Conrad

3:56

Hi James. i honestly don't see BHP being affected much by what's going on in eastern Europe--other than the minerals it controls potentially becoming more valuable should Russian supplies become constrained. In fact, today it was recommended by a Barclay's analyst on that basis. I also believe any restriction of Russian oil supplies will boost the value of the prospective combination of Woodside Petroleum and BHP's oil and gas unit, which still appears to be on track to close by summer.

One could make the argument that sanctions on Russia will make the global economy suffer, depressing demand for iron ore, copper, nickel and so on. But in my view, that would have far less of an impact than spiking prices, with BHP able to provide reliable supplies.

Rather, the drop in BHP shares appears to be due to a combination of stock market turmoil and the fact the company went ex-dividend today. That makes me like it more as a buy, though there's no change in my buy target of 75 or the current portfolio weighting.

James

4:00

When stocks have been heading down into the start of a war, has history shown that when the war starts, that was the low in the market? What typically happens after that? It would be very interesting review that as it can help us navigate the portfolios.

Elliott Gue

4:00

There's an old saw to buy the cannons and sell the trumpets -- buy the sell-off during the conflict and then sell on news of the victory. That may just be a second version of the old quote attributed to Rothschild to "Buy when there's blood in the streets, even if that blood is your own" (he said that in the early 19th century around the time of the battle of Waterloo). In fact, the market is now higher, recovering steep overnight losses. This could continue for a time given just how stretched markets were to the downside overnight. However, I'd be cautious in applying this sort of analysis over anything but the shortest of time frames. That's because if we exclude the last few days, the sell-off in the broader market has had little or nothing to do with the prospect for a Russian invasion. It's more due to other factors such as tighter monetary policy and extreme overvaluation in some parts of the market prompted by ultra-easy monetary policy. I believe the start of the 2000-02 and 2007-09 bear markets

Elliott Gue

4:00

likely offers a better analogy. Those cycles began with a waterfall-type sell-off, followed by significant countertrend rallies and then additional downside. Until the indicators I follow tell me something different, that's my base case for the next few months.

James

4:06

How do you think the war will effect SLB versus HAL or BKR? It seems that HAL is the strongest of the oil services, equity price wise. Have you consider switching out of SLB and into HAL?

Elliott Gue

4:06

HAL has beaten SLB year to date but not over longer time frame. For example, since the end of 2020, Hal is up 67% compared to SLB's 78.3%. I like them both but I continue to like SLB more both because I see more more upside to activity outside North America over the intermediate term and I think SLB will achieve its margin targets earlier than expected and will be in a position to accelerate capital returns to shareholders.

Elliott Gue

4:06

I don't see much impact on either from Russia-Ukraine.

Jeff

4:07

Hi Roger, do you have any idea with will happen to the SJI preferred?

Roger Conrad

4:07

Hi Jeff. I don't think anyone has said any definitive. But usually what happens when there's buyout that does not involve equity is the existing debt stays with the acquired entity, this case South Jersey Industries. That would presumably include one of the preferred stocks, though it would be the acquirer's option to refinance when it made economic sense.

The 8.75% of 4/1/2024 is mandatorily convertible. That means it's likely to be cashed out with the common stock. And it got a huge lift today on that basis because the offer price for SJI is well in excess of what's needed to ensure a closing value of $50. I think the thing to do is hold it for now as SJI's share price rises to the takeout price of $36, which it will do as this deal moves toward a close.

Jeff

4:09

Elliott in the last chat you stated you thought XOM would go to $100, do you still believe that? In CUI Report Card the buy under is $65.

Elliott Gue

4:09

I think $100 is a reasonable target based on long-term oil prices at about $60 to $65 Brent and expected free cash flow generation from the company's low-cost production base. In my view, $60 to $65 might be on the conservative side, so I actually see $100 as a conservative target. Of course, it will take some time to get there and it's not likely to be a straight line higher.

Tom

4:12

Hi Roger. Where are you parking cash these days? Do you see inflation continuing to rise, and if so, isn't any bond fund like VWITX exposed to more risk than its dividend is worth?

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