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2/27/25 Capitalist Times Live Chat

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Elliott Gue

5:40

Question: From what you have written, seems like natgas volume growth is a "sure thing", but not price growth. Can Expand Energy succeed here? How can prices rise when the market know there are Expands out there with wells ready to hook up? THANKS Answer: I think Roger already covered part of this question, but leave me address this bit. Natural gas prices have already risen, particularly for futures due for delivery in late 2025/early 2026 and beyond. That's because market participants are reacting to incremental 4 bcf/day of incremental LNG exports between Q4 '24 and Q1 '26 with more terminals coming on thereafter. EXE and the other gas producers have been highly disciplined -- they're holding gas off the market when prices are low and there's inadequate demand and they brings these wells on when there's demand/price to support it. At $4/MMBtu gas, which is basically the calendar strip beyond Q4 2025, EXE produces significant free cash flow and our $140 valuation target is based on $4/MMBtu gas.

5:42

The price of gas rises because demand is rising and producers have not been growing supply into a weak market. Outside the US, of course, prices are much higher and places like the EU just don't have adequate reliable supply. So, the export demand growth is there, it's just a matter of building the capacity to export that gas.

Carol

5:45

Roger, What is your view on SOBO now that administration says it wants to proceed with XL pipeline.. Will SOBO be able to handle it? Thank you

Roger Conrad

5:45

Thanks for that question Carol! I kind of buried the lede on South Bow. The first Trump Administration made Keystone XL's northern leg a priority and I had thought before the election this would come up again. SOBO is a much smaller company than TC Energy but they do have the rights to build. My thought is if the project is resurrected seriously, South Bow likely has to be acquired or else partnered with a larger company. And I think the likelihood of building the northern leg of Keystone would greatly improve with a Conservative Party victory in Canadian elections this year. That at one time seemed certain. It's still seems likely though the ruling Liberals have apparently recovered a lot of ground thanks to comments from our president. In any case, South Bow is I think attractive without a resurrection of the northern pipeline--which makes it a very low risk bet the project is restarted.

Guest

5:48

What do you think would be a good hedge against the coming correction?

Thanks for all your insight!

Elliott Gue

5:48

Are you asking about a broader market correction or specifically energy? Assuming it's the former, I think fixed income -- or bond/preferred ETFs -- could continue to perform well if there's a broader market correction catalyzed by concerns about growth. In Smart Bonds, we've been adding to duration -- basically rate sensitivity -- cautiously for a while now and in the issue I have coming out next week I'm likely to recommend adding more. Names like VGIT -- intermediate-term government bond ETF -- offer a decent yield (paid monthly) near term and I think are likely to rally if the market sells off. Since most active portfolio managers are well underweight fixed income, you could see a faster rally as they rotate into the group. Absent a major market correction/economic growth scare, I still think fixed income does OK.

Phil

5:54

Hi Roger. Many thanks as ever for these Q&As. My impression is that Medical Properties Trust (MPW) has started to turn the corner after a major drop. Do you think it would be a good idea to start getting back in? A reasonable dividend to reward us while we are waiting.

Roger Conrad

5:54

You're welcome Phil. Thanks for joining us today. At the least, Medical Properties Trust appears to be slowing the bleeding. But it still faces two major challenges. One is higher for longer interest rates, which continue to impede deal by keeping cost of capital high and would be buyers and sellers on the sidelines--just when MPW needs to deal to reposition the portfolio and cut debt. Second, current and prospective tenants in the medical buildings sector (especially hospital chains) are still quite weak financially--and that includes several major MPW tenants. Management stated that fundamentals like occupancy and government reimbursement have been improving in both the US and Europe. And if true, it will help with re-renting properties as well as negotiating with bankrupt tenants like Prospect. Nonetheless, dividend coverage is narrow. The balance sheet is weak as the REIT works through tenant bankruptcies. And if the Trump Administration does something radical with Medicaid we could see another round

Roger Conrad

5:57

Continuing on MPW, we could see another round of tenant defaults. In fact, Cordiant Health Service cash flow to rent coverage dropped to just 0.7 times in Q4 from 0.9 times in Q3. Bottom line--There are still a lot of headwinds here and a lot of people who want to bet on recovery. That to me is a dangerous combination. And I want to see management's bullish words matched by positive numbers before jumping into this one--especially with much higher quality REITs like Alexandria REIT (NYSE: ARE) yielding almost as much.

Michael L

6:04

Current thoughts on MDU? Thanks.

Roger Conrad

6:04

As I noted in the February issue of CUI, MDU had strong Q4 and 2024 results, with earnings beating the high end of its guidance range. And the now electric, natural gas utility and pipeline company also issued strong 2025 guidance, while raising the 5-year CAPEX plan to $3.1 bil from $2.7 bil previously. I think the share price volatility of the past few months reflects investors trying to get a handle on what the company is worth after spinning off its construction materials and services units.

I discussed Everus and Knife River at length in response to an emailed question--and both stocks also have been volatile. As for MDU, however, I rate the stock a buy at 22 or lower--and with just regulated operations in favorable jurisdictions, it's suitable for even the most conservative investors.

Jon

6:14

Hi guys, a couple questions. 1) TRP seems to have a great mix of business and good future prospects, but leverage is higher than some of its big N. American peers. Does this give you pause? They still need debt and equity to accomplish their goals. 2) Any thoughts on Kimbell Royalty? 3) From what you have written, seems like natgas volume growth is a "sure thing", but not price growth. Can Expand Energy succeed here? How can prices rise when the market know there are Expands out there with wells ready to hook up? Which MLPs are most likely to benefit from higher throughput and of these, what is the best value? THANKS

Roger Conrad

6:14

Hi Jon. The short answer is I'm not really concerned about TC Energy's higher debt metric levels. Major US midstreams basically went to ground in the previous decade out of necessity--mainly they couldn't issue either debt or equity on economic terms. So they went to funding all their CAPEX plus dividends and debt service with operating cash flow. For all but a handful like Enterprise Products Partners (NYSE: EPD), that involved deep dividend cuts and only very modest expansion. Canadian midstreams like Enbridge, Pembina and TC Enetgy--in contrast--never lost access to affordable capital. They not only kept increasing dividends but they continued to expand as well. The "cost" is debt metrics are higher. But credit ratings are firmly investment grade because the assets they borrowed to build are fully contracted, mostly on a capacity basis so they're not affected by volumes or prices.

Also, I will point out that US midstream companies are gradually starting to ramp up CAPEX to take advantage

Roger Conrad

6:15

of the opportunities we're starting to see in LNG exports and power generation. And I think as interest rates come down, they'll likely step up their use of debt as well. Don't get me wrong. I generally prefer less debt to more. But TC is a very high quality stock and a buy at 50 or lower for those who don't already own it.

6:17

As for KImbrell Royalty, the same rules apply as for other royalty trusts like Black Stone Minerals. You'll do well if energy prices rise, not so well if they don't.

6:21

Lastly, Elliott has answered extensively on Expand during this chat, But the short answer is Expand is very well positioned to succeed as natural gas demand rises in the coming years. And the best midstream companies to benefit from rising gas use are the majors we hold in the EIA Model Portfolio--the handful of midstream companies that matter.

6:24

By the way, since the market closed, Pembina has released Q4 results that are basically in line with guidance--and management appears to be affirming 2025 guidance as well. The company also says it "does not expect any material near-term impacts" from tariffs. The stock is a buy up to 42 for those who don't already own it.

Dudley

6:25

Any thoughts on ARIS? It produces water from oil/gas waste I think. Thanks again DUDLEY

Elliott Gue

6:25

Fracturing oil and gas wells in the Permian Basin requires a lot of water and ARIS takes water used in the fracturing process and recycles it. Also, there's some water located in the reservoir itself and that too can be recycled for use in fracturing operations. They also recover some oil that's mixed in with this wastewater and can be sold as an additional source of revenue. This is all very important in West Texas, which doesn't have a lot of potable/fresh water supply. It's actually something that most of the big producers have spent a good deal of capital on over the years building out all the infrastructure needed to recycle, transport and reuse produced water. So, it's good business my only question Re: ARIS would be on the valuation here -- I'll take a more detailed look at it.

Roger Conrad

6:30

Also Edison International has increased 2025 guidance to a range of $5.94 to $6.34 per share--from the $5.50 to $5.90 set three months ago. Management also made encouraging statements during the earnings call regarding wildfire liability--including confidence the state Wildfire Fund would cover any liability if the company's equipment is found to have started the fire. Regulators have also approved the $1.6 bil settlement of cost recovery for earlier wildfires.

AL

6:36

You used the phrase ".... FFO is a better measure,..... " earlier in this chat session with regards to BEP. What does it stand for?

Roger Conrad

6:36

Hi Al. It's "Funds from operations," it's a standard measure of profitability used by entities like partnerships and REITs that takes into consideration the unique tax advantages of operating under that structure. A good example would be that it excludes non-cash items that can have a huge impact on earnings per share but basically none on actual cash flow--other than reducing tax liability. Depreciation and amortization would be a good example.

One thing I could have added to the Brookfield discussion is its ultimate parent is Brookfield Asset Management--which provides a great deal of access to very low cost private capital funding and limits the need to access capital markets other than when conditions are very favorable. Also, Brookfield's assets are all long-life, long-term contracted power generation facilities, meaning cash flow is highly predictable. And much of the debt you see on the balance sheet is at the asset level. That means it's secured by the value of that asset and is non-recourse to BEP.

Roger Conrad

6:38

Well that looks like all we have for today. Check your email inbox for a link to the transcript of the complete Q&A tomorrow morning.

If for some reason your question was not answered fully, we apologize. Please drop us a line at service@capitalisttimes.com and we will get to it as soon as we can comprehensively and concisely.

6:39

Thanks to everyone who joined us today. We really appreciate your questions and comments, and especially your business. We'll look forward to chatting with you all again next month. Have a great evening!

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