JotCast | 2/25/21 Energy & Income Advisor Live Chat

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2/25/21 Energy & Income Advisor Live Chat

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Elliott Gue

3:22

Energy cycles tend to last for years once they get started and, since energy reached record-low valuations and a record low weight in the S&P 500 in the recent downcycle, we expect there's a long runway for growth and returns in the years ahead. I think our sell decisions would likely be based on a few factors factors such as some shift in the state of the cycle such as supply growth accelerating like we saw back in 2013-14 or company-specific issues. Again, though, I think these problems are likely to be years away.

Guest

3:22

Are the oil majors like XOM and TOT getting ahead of themselves here in the short term? Just wondering if it's worth taking short term profits for re-entry later with a small part of the positions? I'm in those names for the long haul ie next several years. Retired investor looking for income and potentially taking this opportunity improve my basis in those names.

Roger Conrad

3:22

Actually, I think you can make a pretty good case they're not really even pricing in $50 oil yet, let alone $60. Total ADRs for example traded well north of $50 pre-pandemic while ExxonMobil was north of $70. That was the last time investors were arguably comfortable with the sustainability of $50 oil.

My view is once that comfort level is established, we'll see further gains in these stocks back to those levels. In the meantime, anyone who bought these stocks in the past year is in at very good prices that we believe are unlikely to be revisited. Maybe there's a market crash and you improve on basis but we think it's more likely the lows from the cycle are in.

Jim

3:27

What is your opinion for some good plays for $20K from a closed-out position toward a higher-yield MLP?

Roger Conrad

3:27

Hi Jim. I guess that depends on what you'd consider to be a high yielding MLP. Certainly by historical standards, Enterprise at 8.2% would be considered astronomical and it is a strong recommendation as I've said. But now it's kind of low-end for the sector. I try to highlight some of the highest yielding names in the "High Yield Energy List." MPLX yielding upwards of 11% is one I highlighted at the end of last year as a good candidate and we have about a 15% return since the beginning of the year. They had a very strong Q4, which I reviewed in the most recent EIA issue.

Guest

3:32

How do you feel about FRO?

Elliott Gue

3:32

We're not overly bullish on the crude tanker market right here. Rates were crushed last year due, in part, to weak oil demand and also by the fact that most VLCC tankers are booked to transport oil from the Middle East where shipment volumes were curtailed by several rounds of OPEC cuts. Of course, there's pretty much only one way for rates to go from here (Up) but we're more enthusiastic about other areas of the energy market right now.

Guest

3:33

In the current situation ie economic recovery potential improving and driving energy consumption higher is ET still considered an "aggressive" position - if some one has a horizon of 2-3 years.

Roger Conrad

3:33

I think so for several reasons. First, they're trying to complete a merger right now with another company we rate "aggressive," which is Enable Midstream. I like this deal a lot for both sides. But until it closes and Energy Transfer starts realizing cost and reach benefits, there's some additional uncertainty for its results. Second, ET still has a great deal of debt ($52.4 bil) to which it will add Enable's $4.3 bil when the merger closes. Yes I believe the company will generate a lot of free cash flow even excluding possible asset sales to cut that meaningfully this year. But S&P has its barely investment credit rating of BBB- with a negative outlook, so they don't have a lot of margin for error. And finally, there is some operating risk from the very broad diversification of the company as well as from regulation--with a potential court-ordered closing of the Dakota Access Pipeline looming large. Even that would shave less than 5% of ET EBITDA. I do think reward more than offsets but it is a risk.

Bups

3:36

When will the oil service cycle kick in positively impacting SLB? When will the oil equipment cycle kick in positively impacting NOV? (It appears one has to buy these stocks long before their cycle kicks in!)

Elliott Gue

3:36

SLB is correlated to international services spending and both SLB and HAL indicated a potential bottom in Q2 2021 with an upcycle beginning thereafter. So I think you could say that the seodnd half of this will mark the turn in the cycle, which is why we continue to like SLB. NOV could take longer to turn due, in part to the fact that I don't see much need for new rigs, especially new offshore and deepwater rigs, any time soon. So, we still think it's too early to get involved there.

Mack

3:39

DKL has had a great run in the last year. In the past you've been concerned about the parent co, and thus had it as a sell. Is that still the case?

Elliott Gue

3:39

DKL has several disadvantages including its shaky parent (DK) and the fact that its parent's refineries are disadvantaged in terms of crude supply. In the early stages of a bull market, the low quality stocks will often see some of the biggest price gains albeit from a low price level. But the fundamental weakness there remains.

Eric

3:40

It appear to me that there has been a valuation contraction (P/DCF and EV/EBITDA) for the high quality midstreams more than seen with other industries. Given the decrease in growth capex going forward, that doesn't seem unreasonable to me. Do you think this valuation contraction is overdone or is it accurately pricing in this slower future growth rate?

Roger Conrad

3:40

When stocks are yielding as much as high quality midstreams are, I honestly don't think anyone is pricing in any growth, or really cares about it for that matter. Rather, the important factor people are looking at these companies is free cash flow--how high is it expected to be? Will it cover dividends as well as CAPEX? What business projections is the estimate based on? What are the risks to it and so on. If a company can beat what people have expected, its shares are being rewarded in this cycle of earnings reports. If not, there hasn't been much of a move. The good news is at least the larger best in class names are beating what people initially thought, some quite soundly.

As for a reversal of the valuation contraction, the metric I would look at is simply yield at this point. Those will come down (shares prices will go up) as investors get more comfortable they're sustainable. In contrast, it's likely to be a while before people focus on growth in this sector--probably closer to the top as in 2014.

Jim T

3:41

Given the current state of the market do you recommend new money into the producer or pipeline area.

Elliott Gue

3:41

We continue to recommend buying in both areas subject to the Buy Under limits we ;list in the portfolio table. These limits are revised frequently and I suspect we'll be raising limits on some of our favorites further in coming issues given the ongoing fundamental improvement in this group. If history is any guide, there will be corrections but this recent surge in energy is only the beginning of a multi-year move.

Fred

3:41

Having current positions in KMI,EPD, MPLX and XOM,which of these would you suggest for NEW money, for both yield and Capital Gains?

Roger Conrad

3:41

Hi Fred. As I answered earlier in the chat, my high quality pick at the beginning of this year was Enterprise and my high yield pick was MPLX--so if forced to choose between these four best in class companies that's what I'm sticking with. But again these are all four buys at current prices in our view.

Barry J

3:51

Sorry – 1 more question. Did AGLXY raise their dividend suddenly to $0.95/share? The yield used to be7% and now it appears to be 12%
Thanks.

Roger Conrad

3:51

On February 11, they declared a semi-annual dividend for payment next month in two parts--10 Australian cents "special cash" and 31 cents "interim" for a 41 cents per share total AUD. That compares to 47 cents AUD in the year ago payment and reflects two things: Worse business conditions and management's commitment to pay out more cash in dividends. I'm not sure why that shows up as such a range of different "indicated yields" for AGLXY (the US ADR) and the home market shares AGL AU. But the payout is pretty much in line with what management has been saying. At least the AUD exchange rate is up to 78 US cents from 65 cents or so a year ago.

Barry J

3:53

Gents:
Is this a good time to buy AGLXY? Or is the company irreparably hemorrhaging and stay away?

Roger Conrad

3:53

Hi Barry. I won't repeat all of my long winded answer to a question at the beginning of the chat on AGL. The bottom line is this is a very high quality company that's maintaining its leadership in generation, retail marketing, renewable energy, energy storage and other services at what's arguably the bottom for Australia's power and gas market--and at a time of extremely erratic and often contradictory regulation between Labor/pro-renewable energy state governments and a firmly pro-fossil fuels federal government. The numbers aren't great and won't be for a while. But they are in line with management guidance. The company is committed to paying a big yield and as the leading company in an essential industry, it's in no danger of going out of business. The stock is very cheap, reflecting the current sector situation. But I intend to stick with it as an Aggressive Holding in Conrad's Utility Investor to wait on a recovery.

Guest

3:59

Im not sure if you cover this but it is income, is it too late for RIO?

Roger Conrad

3:59

We cover Rio Tinto as well as other major mining companies in Deep Dive Investing. Our favorite this year among the bigs has been BHP Group, largely because of its more focused portfolio and what's been a superior safety record that's kept its mines open (particularly in Australia) during the pandemic. But Rio has been a suitable alternative in the big cap, strong balance sheet, strong operations, wide diversification category. Our view on both is they may be little ahead of themselves as stocks--highest recommended entry point for BHP is 70. But these are both high quality outfits that should a lot more to run the next few years.

James

4:05

I believe KNOP is still on the endangered list. The stock is performing well lately. Have you revisited KNOP lately? Any new thoughts on it?

Roger Conrad

4:05

Knot Offshore Partners is one that could come off the EDL following its release of Q4 earnings, which is now scheduled for March 11. The parent/GP is still apparently supportive of the dividend. The recent dropdown of the Tove Knutsen will be financed with cash on hand and borrowings, so no formal equity offering. And conditions with offshore drilling where it operates have improved. But the GP has clearly lost interest in using KNOP shares as a financing vehicle--the low price/high yield being a clear disincentive. And that raises a concern that the GP could try to buy it in at a lower level. In any case, we greatly prefer the midstream companies identified in the Model Portfolio and High Yield Energy List--some of which yield nearly as much and don't share these concerns.

Jim T

4:13

Also do you know why PEYUF has moved up in the last few months?

Roger Conrad

4:13

I think there are three basic reasons. First, the company has proven its resilience as a very low cost natural gas-focused producer, most recently with its year-end reserves report released last week. Despite very difficult conditions, the company grew proved developed producing reserves by 3% on a per share basis, total proved by 2% and proved plus probable by 2%. Reserve Life Index for PDP is 9 years and the company replaced 127% of its proved developed producing reserves. Finding Development and Acquisition costs were the lowest in 18 years at just $1.06 per thousand cubic foot for PDP reserves.

Peyto has also benefitted from a recovery in natural gas prices in Alberta in recent months. That's in part due to cold winter weather but also because lower volumes of associated natural gas in the US due to reduced oil production freed up transportation capacity headed south. And finally, Peyto's value as a takeover target increased with the ARC/Seven Generations merger.

Roger Conrad

4:14

Taken together, this may be enough to boost Peyto--a stock I've followed since the early '00s to a buy. We track it in the Canada and Australia coverage universe.

Bups

4:23

Please give latest opinion on MMP; also, why does MPLX appear so cheap statistically with distribution coverage of 1.58x and a yield of 11%? Thank you.

Roger Conrad

4:23

I think it's likely a good portion of MPLX' discount has to do with uncertainty about what general partner Marathon Petroleum (62.24% ownership) will wind up doing with its shares. We continue to believe status quo is most likely, given how interconnected these companies' assets are and the tax hit separation would likely bring. But in any case, the GP is pretty much in the same boat as the limited partners--and as a result, we don't believe if anything does happen it will be in the best interest of everyone. That would include a potential conversion to a C-Corp--which the parties have denied is under consideration. In any case, the underlying business appears to be very healthy and they're going to generate enough free cash flow after all dividends and CAPEX next year to buy back a meaningful amount of stocks. That will increase coverage.

Regarding Magellan Midstream, there's no doubt investors were expecting a bigger lift in Q4 volumes on both the crude oil and refined products side,

Roger Conrad

4:28

continuing the answer on Magellan--but guidance was plenty strong to cover the dividend next year and there is good reason to expect a much stronger business recovery this year as the pandemic's impact subsides. CAPEX is likely to stay on the low side this year and quite possibly next. And that in turn is likely to keep the dividend flat. But the yield of nearly 10% is a compelling value proposition on its own and the company looks committed to the MLP model as well. I think Magellan is a takeover target as well but certainly worth staying with.

4:33

Thoughts on NEP. The stock is down about 15% from a couple of weeks ago after a big run up. Is it getting close to a good entry point

Roger Conrad

4:33

My highest recommended entry point right now for NextEra Energy Partners is 65. That's a number that will increase over time as the company continues its dividend growth of 12-15% a year. And I don't see any real threat to that rate of growth as parent NextEra Energy continues to support it with drop down and the opportunity to invest in contracted wind and solar remains immense. On the other hand, NEP in my view hit its most recent all-time high because of excitement about renewable energy stocks--rather than anything to do with business fundamentals. And that means despite the recent drop, it's still vulnerable to headline risk--such as any development regarding its Texas intrastate gas pipeline system. Consequently, as much as I like the NextEra family and the long-term prospects, I'm also not inclined to advise chasing it above my highest recommended entry point, which again is 65 for NEP as well as NEE.

Hans

4:43

Any comments and/or advice on LYSCF and NOPMF

Roger Conrad

4:43

So-called "rare earths" are definitely needed for an expanding range of uses. Of those two miners, Canada's NEO Performance Materials has paid a quarterly dividend now since March 2018. They're expected to announce earnings on or around March 12. Australia's Lynas Rare Earths is much larger at $4 bil market cap and just announced earnings this afternoon. Thanks largely to the strength in rare earths prices, they posted much higher EBITDA (up 82%) in their fiscal year first half (end Dec 31) than last year. With China making noises about restricting exports of rare earths and prices rising already, it's no real surprise both stocks are up quite a bit since the second half of 2020. And they could go higher in this cycle, particularly if this does become more political. The one thing to keep in mind with mining companies like these, however, is they're extremely volatile--and eventually if a particular element becomes too pricey and profitable to mine, users will find an alternative.

4:55

Do you think OPEC will increase production in the March meeting and if so couldn’t that move prices back to the 50’s per barrel?

Elliott Gue

4:55

I suspect any increase would be in April, not March. Moreover, I think some increase is already expected as Saudi is expected to take back some of its unilateral cut of 1 million bbl/day. Given those expectations I think some gradual return of OPEC+ volumes is already in the price of crude and as long as OPEC retains a bias toward keeping balances tight until demand improves, I don't think it will have any sustained impact on oil price trends. Given that WTI is at 63.33, a pullback to the mid to upper $50s would be just normal volatility and noise in the oil market and is to be expected. If it causes a move lower in energy stocks it would represent a buying opportunity.

Bups

4:56

If you have already answered this question, I apologize. Please give me your latest opinion on TOT. Thanks.

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