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2/28/23 Capitalist Times Live Chat

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Roger Conrad

3:49

Hi Mack. You're right to always question a yield north of 10%. And Crestwood is one of our more aggressive midstream recommendations. In fact, at the end of last year we took partial gains in CEQP and a number of other recommendations in the model portfolio because of our concerns about weaker energy prices and potential recession. At this point, however, I think CEQP is at a pretty good entry point. Despite the fair amount of noise in Crestwood's Q4 earnings--in large part driven by factors relating to M&A (more recently asset sales)--the baseline numbers were pretty good, including the still substantial free cash flow after dividends. This is still a company that needs to cut debt--the January issue of 2031 bonds wasn't cheap at a rate of 7.375%. But I think the next move on the dividend will be a mid-single digit percentage increase in April.

Loralie

3:57

What is your opinion of Coterra?

Roger Conrad

3:57

Hi Loralie. We continue to rate the stock a buy on a dip to 22 or lower. As noted in the feature article of the current EIA issue, Coterra is an oil and gas producer paying a variable dividend. The payout was 68 cents per share in November--the highest on recent thanks to robust selling prices. It was reduced to 57 cents for the March payment. The base portion of the quarterly dividend is now 20 cents per share, which is a 33% increase from last year's level. The company continues to generate substantial free cash flow, in part by realizing cost synergies from the Oct 2021 merger of the former Cabot Oil and Cimarex Energy. And it has multiple levers to pull to boost production and maintain balance sheet strength--one of which is adjusting the dividend with profitability. It will pay more if oil and gas prices rise later in the year. Another dip will probably push the share price below our max recommended entry point.

Ann Rice

3:59

As we drive from San Luis Obispo to the Bay Area here in California the number of rigs we see actively pumping oil in the area seems to be increasing. Additionally, we are told that household gas stove usage may be prohibited or perhaps subjected to a "retrofit" costing $35,000. What is happening and what does it portend?

Elliott Gue

3:59

Thanks for the question. So, much of California's oil production is from mature fields (many now over a century old), so I suspect what you're seeing is actually sucker rod (horsehead) pumps rather than actual rigs used to drill new wells. These are all over California (I remember seeing a vast field of them outside Ventura, CA a few years back) -- they're used to produce oil from wells that don't have sufficient pressure to drive primary production output. Also, California oil is geologically different than crude produced in a state like, say, Texas or Oklahoma. So producers there need to resort to secondary and tertiary production sooner in the life cycle of the well. These are called "stripper wells" which basically just means they don't produce much oil and are highly sensitive to commodity prices -- when oil prices are relatively high (like now), you'll see a surge in activity. California is also a unique State in that it's heavily dependent on seaborne imports from places like Saudi Arabia; imports

Elliott Gue

3:59

have risen as CA production has fallen from 0.5 million bbl/day in mid 2017 to 400,000 bbl day in early 2020 to 325,000 bbl now. So, because California's own production "competes" with expensive imported Saudi barrels, it's probably quite profitable to produce even pretty high cost wells at this time there. The actual Calif. rig count -- rigs actively drilling new wells -- per Baker Hughes is just 2 active rigs down from 7 last autumn and 10 in late 2021. California does have some interesting shale plays -- particularly one that's gas-focused -- but the State isn't particularly friendly to the industry from a regulatory standpoint, so I don't think you'll see much development of many of these new plays. Re: the gas stove issue, that's a proposal at this time from the Federal government, but that doesn't mean it'll go into effect. And even if it were to do so, the actual hit to demand of natgas would likely be largely immaterial for 2 reasons: 1. Gas stoves comprise a very small portion of overall US gas

4:00

demand (less than 5%). 2. Some of any demand loss in terms of gas-burning stoves would likely be offset by an increase in electric demand, much of which is produced from gas.

Don C.

4:11

Eliott/Roger--on of my subscriptions you have recommended Newmont Mining (NEM) at the right price. Do you have an opinion on the streaming and royalty companies such as Franco Nevada, Wheaton Precious Metals or Royal Gold? Their business model seems less risky than traditional miners.

As always, thanks for all that you do to help us in these uncertain times.

Elliott Gue

4:11

Actually I think we both recommend NEM in various products. It's a high-quality, low-cost gold producer and it's the best-of-breed in the industry in my view. I also like the royalty/streaming names -- While I am not currently recommending one in Creating Wealth, I have recommended FNV in the past and that's usually my go-to name, though both Wheaton and Royal face similar fundamentals. Generally I think gold and precious metals will be driven by the macro/big picture over the next 6 -12 months and the sector can be a little tricky to navigate in the early stages of a recession. They all got a boost amid expectations for the Fed hike cycle to end late-2022/early 2023 and have since come down as peak Fed funds rate expectations have risen. My view is that you'll continue to see some volatility until the recession comes into view (I believe that's likely by Q2/Q3 of this year) and then gold should bottom and these stocks will get a boost as the Fed actually does start to ease.

Elliott Gue

4:11

In Creating Wealth I've recommended a small position in NEM to which I'll likely recommend adding on dips. I'll also look to add exposure to other gold/precious metals names once the recession comes into view including names like FNV.

James

4:22

What do you believe is the fair value of SLB stock over the short, intermediate, and long term? I have a good size position in SLB and want to be ready to sell partial positions if the stock gets ahead of itself while at the same time being patient and letting it reach the price targets.

Elliott Gue

4:22

Generally, the short-term is driven more by technicals and the charts than fundamentals. SLB has support in the mid to upper $40s and we do recommend buying on dips below $47 or so. My view is that SLB will actually generate higher margins this cycle than in the last cycle and the stock could trade to $80 to $100 over the next 3+ years. In the portfolio, we created our position size recommendation mainly in an effort to offer guidance on when to book partial profits on names like SLB and when to take advantage of dips.

Elliott Gue

4:22

It's tough to recommend specific price levels for taking profits because, generally I'd say that our decision to recommend taking profits would be dependent both on the company-specific fundamentals for a name like SLB and the broader market outlook. For example, we have some concerns about the broader market and the global economy right now, so if SLB were to see a big spike towards the upper $60s and the macro picture remained subdued, that might be the sort of spike that would prompt us to recommend selling some. Longer term though we see a major upside re-rating for this name and will endeavor to manage around the short-term via making recommendations to increase or reduce the position in the model portfolio.

Tom H.

4:40

Roger, should we continue to hold AT&T spin-off WBD?

Thanks

Roger Conrad

4:40

Hi Tom. Warner Brothers Discovery shares have certainly had a good start to the year, though they're still quite a bit below where they were at the spinoff last year. The key to where they go from here is I think how effectively they're able to deal with the $54.7 bil in debt on their books--$10.5 bil of which is at floating rates. The company has multiple levers to achieve that, including potential asset sales. But the $4.9 bil in free cash flow expected this year ($6.7 bil next) is the most important weapon. And meeting those targets will depend on continuing to generate salable content. I dropped WBD from coverage in CUi because it's not a utility and doesn't pay a dividend. But the question of whether to sell or hold really boils down to whether you need a dividend and don't mind holding a stock that may take a couple years to get back to the original $25 per share level. I think it will get there. But this year's start notwithstanding, it will likely take time.

Alex M

4:41

Hi Elliot. What's the reason there is usually such a disconnect between the price of gold and major gold miners like FNV or NEM? Shouldn't their stock moves resemble movements in the price of the underlying resource? Thanks.

Elliott Gue

4:41

There's definitely a close relationship between gold prices and the price of a name like NEM. If you do a simply regression of weekly changes in NEM and gold since January 1979, a simple trendline shows positive correlation and an R-squared of about 25%. That means that the price of gold "explains" roughly 25% of weekly moves in the price of NEM. That might not sound like it, but it's actually not a bad r-squared for financial time series like this. However it does imply that 75% of changes in the price of NEM can't be explained by gold prices alone. Over the past 5 years, the same regression does yield a closer correlation and a higher r-squared of 53% -- even then, almost half of NEM's movements can't be explained simply by the price of gold.

Elliott Gue

4:41

There are many reasons for this but I think the most important is that while NEM produces gold, it's not a commodity, but a stock. So, when the stock market sells off sharply, NEM can still decline in sympathy with the S&P 500. For example, the price of gold fell 12.5% in March 2020 and the S&P 500 was down 30%+. Gold recovered all its March losses by early April and then soared almost 25% to its August peak over $2,000. The S&P 500 didn't recover its own losses until late August. NEM was a sort of hybrid: It fell far more than gold in March 2020 (about 25%) but then saw a major rally (72%) as the stock market and gold rallied into mid May 2020. In the 2007-09 cycle, gold traded near $1,000 in March 2008 and near $1,000 in March 2009, a period when the market declined 50% -- NEM was down 30% over this time. In effect, over the long haul there's very little correlation between the S&P 500 and NEM, but during extreme sell-offs the two can become positively correlated for a time.

Ron

4:48

What is your view on DVN after the stock's recent decline or is it a buy at this time?

Elliott Gue

4:48

I think the market didn't like DVN's higher CAPEX guidance in their earnings call though that appears to be primarily a function of recent acquisitions. Longer term, we see DVN as a decent buy near the current quote and given likely free cash flow over the next 5 years or so. We also think they have some good leverage to a recovery in natgas prices over the intermediate term. Generally, though, we continue to prefer other names to DVN -- CHK, for example, is a name that we think has more upside catalysts from a recovery in natgas prices. Also, we did generally pare back our E&P exposure late last year in the model portfolio in favor of services names and over fears about near-term oil price risks as we approach recession.

David O.

4:50

Gentlemen,

After decades on this earth, and after thousands of hours of observation and contemplation, I have come to the conclusion that modern civilisation requires sufficient amounts of available and affordable oil and gas. Much of the “green stuff” in our portfolios are seeing deteriorating price action. Sold my Dominion position…had a belly full of watching AQN deteriorate. Nothing that I have seen in life is made easy with salt water…much less wind turbines.

Exxon I believe has basically said “we’re sticking with oil and gas.” Are their utilities in the conservative income list who wish to stick to their core businesses as opposed to trying to please the woke / ESG crowd with all things “renewable,” or is the herd mentality to “net zero” too overwhelming at this point?

Thanks

Roger Conrad

4:50

Hi David. We obviously agree with you about oil and gas--which are along with water and air probably the most important commodities in the modern world. We also recognize your frustration with Algonquin and Dominion Energy--though I would argue their underperformance has a lot more to do with trying to do big things in an environment of rapidly rising financing costs. In Algonquin's case, it was trying to close Kentucky Power with the Biden Administration increasingly hostile to mergers. For Dominion, it's the same classic big project/first mover economics that are burdening Southern Company as it tries to get its nuclear plants over the finish line. If you're looking for utilities that don't operate renewable energy, your best bets are going to be pure transmission/distribution companies like Edison International, Sempra Energy (which is a leader in LNG) or Atmos Energy (a nat gas distributor).

Hans

4:57

Pagp is still around $13 with a Buy advice of 26.50 is this feasible.

Roger Conrad

4:57

Hi Hans. it will not seem feasible unless/until the shares get there, at which time it will be a lot more expensive to buy in. But we think you should consider where Plains GP was prior to the pandemic ($20-$30) and before that at the peak of the previous cycle in 2024, when shares hit a high of almost $87. The dividend is somewhat lower now than then for Plains GP as it is for Plains All-America PIpeline (NYSE: PAA)--ownership of which essentially accounts for essentially all of its cash flow. But the asset base is actually almost 30% larger as the company has become a huge player Permian Basin midstream, with long-term debt actually about 30% lower. The key to Plains is volumes--we think they'll be much higher in a few years, as has been the case in every energy up cycle, and that will propel some big gains in the shares.

Theresa P.

5:06

For a long-term income-focused investor is it time to sell Dominion? If not, what data or event will you use to decide to sell? Thank you.

Roger Conrad

5:06

Hi Theresa. I think this would be a bad time to sell Dominion Energy. There's still uncertainty from an ongoing strategic review, which is likely to result in asset sales and probably a lower growth rate than the 5-7% management had been targeting. But the legislation on Virginia utility regulation now going to the state's governor is on balance very positive and eliminates a lot of uncertainty and potential threats to the balance sheet and dividend. And the stock is trading at its biggest discount to other utilities in decades. There is a risk of higher costs for offshore wind construction and if I saw serious deterioration there I might consider moving on. Also, I don't advise doubling down on any stock no matter how attractive or cheap it looks. But it looks more and more like the worst is behind Dominion.

Elliott Gue

5:14

Here's one I got via e-mail: Question: With rising demand from China as they continue to open back up and sanctions on Russia likely to further reduce their exports, is this a very good time to be investing in the Majors, and, if so, which are your favorites at this time, for both growth AND income, or, growth OR income, or, is it too late? Could the world be running out of “spare” capacity, and if so, when? What parts of the market have the most growth potential and who do you like?

Answer: In my view the world has very little spare capacity as it is. Most of the spare capacity you see listed is questionable – for example, Nigeria claims 1.6 million vs. current production of 1.35 or so, but they haven’t produced 1.6 million bbl/day+ in 3 years. Even Saudi probably can’t actually produce much above 11.5 million bbl/day for more than a few months comfortably. This is why you’re seeing a surge in spending from Middle East, including Saudi on new projects as they want to boost their spare capacity to give them more flexibility to manage supply in the face of growing global demand. Around 87% of the world’s population lives in the Northern Hemisphere so the summer driving season in Q2/Q3 represents peak annual oil demand – In my view, that June-September time frame is the most likely window every year for a spike in oil prices due to declining spare capacity. The major we have in the model portfolio – XOM – is above our target (which we may raise over the next few issues).

However, I don’t think it’s too late to buy the group, rather we’d rather recommend committing new funds on dips, which are likely from time to time amid broader market weakness. Services stocks – SLB in particular – probably have the most direct exposure to the spare capacity issue as they’re the companies helping OPEC build out new spare capacity.

5:15

Also had a question Re: CHK's Dividend. They go ex-dividend on March 6th (Monday) and pay the dividend of $1.29 on March 23rd.

John R.

5:17

REITS have been depressed and on a roller coaster for some time now. If you had to pick one REIT to invest in now, which one would it be? Thank you for your many years of trusted advice.

Roger Conrad

5:17

Hi John. Thank you for those kind words. Given your interest in REITs, I invite you to check out our advisory specializing in them--The REIT Sheet. Sherry will be happy to help (877-302-0749). The advisory has a relatively short but i believe meaningful track record, considering what's happened in the economy and stock market since the end of 2019--this year we're up about 8% or 5 percentage points more than the iShares ETF. And we're about 45 points ahead to the ETF since inception by picking our own stocks as well as entry and exit points. Bottom line--it's certainly been possible to do very well in REITs and we've proven it with TRS. Like every month, the February issue highlighted a pair of REITs I believe cheap, MidAmerica Apartment (NYSE: MAA) as a conservative pick and Hannon Armstrong Sustainable (NYSE: HASI) as an aggressive pick. Check us out.

Lee B.

5:24

Pioneer is apparently making a move for Range Resources for their nat gas assets. At the same time units of Dorchester (DMLP) have been very well bid for….moving steadily up on volume. Do you have any thoughts on future M&A in energy?
Many thanks

Elliott Gue

5:24

Pioneer denied rumors they were planning a major acquisition. Scott Sheffield, PXD's CEO, is however, well-known as a dealmaker and made two major acquisitions in late 2020/early 2021. My guess is that PXD is always looking for opportunities and with gas prices currently depressed, gas producers are a logical place to be looking for just that sort of transaction. That said, the market is very hostile to M&A right now or any hint that producers are tempted to overpay for targets or move back to a "growth" mode, so you'll probably see more small bolt-on type deals rather than game-changing transactions. Longer term, as the cycle matures, and the need to actually grow production becomes apparent, I think you'll see a boom in M&A much like we see in every cycle.

Joe T.

5:25

Hi Elliott and Conrad,

I’m looking forward to today’s live chat. One question I have is the following.

If I were to decide to invest additional funds in the market today what are the top 5 positions you would suggest for those additional funds that pay a dividend and the stock price is not over extended?

Thank you

Roger Conrad

5:25

Hi Joe. First, a couple of caveats. Diversify rather than load up on something you already own. Second, think about investing incrementally rather than taking entire positions right away--buy one-third of what you intend to now, wait another 6-8 weeks to make a second installment and another 6-8 weeks after that to take the final position. We continue to believe there's a lot of danger in this market with inflation still high, the Fed pushing rates up to control it and recession risk elevated as a result. We've highlighted several stocks in today's Q&A that we believe are good places to invest, provided they suit the risk tolerance/income needs of investors. On the income side, I would suggest checking out our advisory CUI Plus, which is a managed portfolio of high dividend stocks drawn from a range of industries across the spectrum. Sherry will be happy to chat with you about it at 877-302-0749.
I do think the problem with income stocks is not over extension--it's that a rebound will likely take time.

sal

5:33

Afternoon I know this was a stock we use to cover TNK . I still have some left after selling way back when. it's an IRA surprisingly its showing a profit any suggestions .

Elliott Gue

5:33

After nearly a decade, the supply demand balance in the tanker industry is improving due to tanker retirements and increases in seaborne trade. Seasonally you tend to see some weakness into the summer for tanker rates and I think some of the recent rally in names like TNK may have been driven by short covering as some of these names had pretty high short interest in December. I think the recent rally is way ahead of the fundamentals. However, it's a group we're watching and would consider recommending if and when we get something of a pullback from recent levels.

David T.

5:34

Roger,

Just received a nice dividend from Enel (ENLAY).

BUT after the dividend are deductions for foreign taxes - 26% and ADR fees - 20% leaving the stockholder with only 54% of the gross payment. Then consider paying US taxes on the Gross dividend, only recouping a part of the foreign taxes, and not being able to deduct the Management Fee, doesn't seem a viable investment strategy - the stock price is slightly down during my holding period. Comments please.

Roger Conrad

5:34

Hi David. I'm not sure about your math here--for one thing Enel SpA is not an MLP, so you're only going to pay tax on the dividend you receive. Also, even if you use your math, from the current yield you're going to get about the same yield as the Dow Jones Utility Average. Second, the dividend is important here, but it's far from the only catalyst for the total return. The real play in my view is this company continues to successfully execute its strategy including cutting debt and raising dividends, and the stock benefits from a return to favor in emerging markets, in which it's a major player. It's been a major underperformer the past couple years. But from a severely discounted valuation of 10X expected next 12 months earnings, expectations won't be hard to beat. I still think it's a good shot for patient, risk tolerant investors.

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