JotCast | 2/28/23 Capitalist Times Live Chat

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2/28/23 Capitalist Times Live Chat

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5:41

Do you still like OXY after this quarter results

Elliott Gue

5:41

Fundamentally, we still like OXY. I think there were some modest concerns around their upward CAPEX guidance but this is not unique to OXY and some of it probably reflects ongoing cost inflation. Like many of the producers we think OXY is reasonably valued and has strong long-term prospects but lacks a near-term catalyst due to concerns about recession/macro outlook for stocks.

Bill G.

5:41

Hello Roger: I'm always on the lookout to add another 1 or 2 Utilities to my Portfolio (like NFG, CEG, or T) for the long term.
But with the possibility of higher for longer Interest Rates maybe Utilities are not the area to be adding, at least this year?
Your thoughts?
Thanks as always for your sound advice

Roger Conrad

5:41

Hi Bill. There really is no meaningful correlation between returns on utility stocks and changes in long-term interest rates. Last year, for example, the Dow Jones Utility Average had a positive return of 2.1%, versus the -18% decline in the S&P 500 and a 157% increase in the yield on the 10-year Treasury note, from roughly 1.5% to almost 4% at the end of the year. Any company with large CAPEX to finance has earnings exposure to rising interest rates--but here too utilities are protected, by regulation that adjusts return on equity (and customer rates) to changes in interest rates. The main question is always regulator support, and companies with big ongoing projects to finance (offshore wind etc) are always at most risk. But neither National Fuel Gas, Constellation Energy nor AT&T carry that risk. I think CEG is expensive now. But the other two are not. And NFG would be a huge beneficiary of a recovery in natural gas prices.

Don R

5:46

Thanks for doing these monthly chats. They are very helpful. Are SHEL and XOM still long term buys?

Elliott Gue

5:46

We like the majors as long-term buys and our top pick in the model portfolio is XOM. The stock is priced a little rich and above out target right now, but it's the sort of name we'd look to recommend buying more on dips.

Fred W.

5:48

Hi Roger,
Wondering what your thoughts are on PXD at these levels? Do you think their dividend is safe? Where do you believe the stock price will be going over the next year?

Thanks

Roger Conrad

5:48

Hi Fred. Pioneer pays a variable dividend as we highlighted in the feature article of the most recent issue of Energy and Income Advisor. Of the $5.58 per share payout for March 17 (shareholders of record Mar 6), $1.10 per share was the "base" and $4.48 was the variable portion. That was almost as high as the $5.71 declared for payment in December and topped expectations, a good sign for the year ahead. The stock has been negatively affected recently by rumors (denied by management) that the company is pursuing a major acquisition. But this is a company hitting on all cylinders and we recommend it at 230 or lower. We think it's going quite a bit higher this cycle.

Mike C.

5:54

Good morning, everyone! Three questions for today’s chat….first, I read about a dividend cut at BHP, although it still leaves the firm with a generous yield. Do you have any concerns about the firm after their earnings?

Second, HASI keeps getting mentioned by some of the bear-raiding outfits as a target, with allegations of “unconventional accounting”. Any concerns there?

Finally, as a long-time holder of VLO and XOM, I keep wondering about taking (more) profits, as prices seem pretty strong. I appreciate that a recession will hit everything, and that timing said downturn is not easy, and that some market technicians see XOM setting up for a new leg higher, sooner rather than later. Curious about your thoughts.

Thanks for holding these chats, and for such excellent insight and value across all of your services

Roger Conrad

5:54

Hi Mike. Starting with BHP, they pay a variable dividend that's basically a percentage of its free cash flow, which in turn depends on spending and realized selling prices for what it produces--of which iron ore and copper are the most important. The $1.80 per ADR declared for payment at the end of March was pretty much in line with what investors expected. But the real appeal of owning this stock in my view is where the price is likely to be as this commodity price cycle heads higher. We have no concerns about its financial health in the meantime with Moody's raising its rating to A1 this afternoon, for example.

The short interest on Hannon Armstrong has actually dropped consistently since last summer, when the company largely faced down the innuendo about its accounting. Shares are well below where they were a couple years ago at the peak of the renewable energy excitement. But insiders have stepped up buying. And 2022 earnings, guidance and the 2023 dividend increase matched up well.

Roger Conrad

5:56

Continuing with Mike's questions, Hannon shares remain under pressure largely because of concerns about the impact of rising interest rates on its ability to attract and fund new business. But each time they report earnings, they show resilience. And so long as they keep doing that, I think the odds of an eventual short squeeze grow.

5:59

Finally, with Mike's question on Valero and ExxonMobil, XOM in particular is well above our highest recommended entry point. We haven't yet issued advise to lighten up on either, as they tend to be the kind of stocks that are resilient in recessions. And recent earnings and guidance are strong. I wouldn't rule it out if both keep rising higher. But at this point, we're happy to keep holding both--and waiting for lower prices to recommend fresh money buys.

Guest

6:06

With natural gas prices at lows, why are my electricity prices still close to highs. My understanding is that most electricity generation comes from natural gas.

Roger Conrad

6:06

Mainly, what you're paying now is the fuel electric utilities had to buy at higher prices in previous months, which is only now being passed through in rates. The main reason is very little new transport capacity for natural gas to utilities has actually entered service since the middle of the previous decade, as projects like the cancelled Atlantic Coast Pipeline have been delayed to death with court challenges. New England utilities, for example, actually had to compete with Europe and Asia for LNG imports this winter, as pipelines that would have brought them cheap Appalachian gas were blocked by state governments, including New York. Unfortunately, we could see a repeat this summer, if weather turns abnormally hot.

Aaron

6:17

Hi Roger ! You fellows are both doing a fine job. Roger, in your CUI Plus model portfolio there is a position in Newmont..Very recently Newmont cut the variable dividend. Are you still planning on keeping the position ? Thanks

Roger Conrad

6:17

Hi Aaron. Thanks you for those kind words. Yes I do plan to keep Newmont in CUI Plus/CT income, though it's unfortunately another good example of how variable rate dividends can be cut depending on where a company's profits are. In Newmont's case, the base dividend is 25 cents a quarter, and management stated in the Q4 earnings call that it intends to pay a total of $1.40 to $1.80 per share in 2023--of which the 40 cents most recently declared is right in the middle of the range. The new level is based in turn on production and cost guidance, and is solidly covered on conservative projections for gold prices ($1,700.oz). Mine planning is based on just $1,400. Of course, the real reason I want to hold NEM is I think it will take out the June 2022 high of $86 and change. The Fed's eventual declaration of victory over inflation should be the catalyst for a much higher gold price--and that will also push up the variable dividend.

Alex M

6:25

Hi Roger. CCI's share price has really come back down lately. Besides the interest rate environment, do you see any cause for this? Buying opportunity at these levels? Thanks.

Roger Conrad

6:25

Hi Alex. I think what's happening with the wireless tower stocks is investors are re-pricing them for a winding down of communications companies' CAPEX plans over the next few years--along with perhaps a realization that the Big 3 wireless companies Verizon, T-Mobile US and AT&T are rapidly increasing their share of wireless and fiber broadband consumer and business markets in the US--really at the expense of everyone else operating in the industry. To be sure, spending levels are still very high. But so have been the share prices of AMT and CCI--and the way re-pricing works (especially in an environment of elevated inflation and recession risks) is they overshoot. I think AMT is a good value under 200 and CCI is under 150. They could go lower in the near term. But both are very solid companies that will keep raising dividends reliably.

John C

6:33

Roger, would appreciate your comments on recent earnings of WTRG and CAPL. Thanks.

Roger Conrad

6:33

Hi John. Essential Utilities not surprisingly had a solid Q4 and full year 2022, with 6% earnings growth right in the middle of the target annual range of 5-7%. The pace of acquisitions is steady (up 2.7%) and could still accelerate this year depending on management's ability to close pending deals to add 400,000 plus users. I would expect a mid-to-upper single digit percentage dividend boost this spring. And I continue to rate the stock a buy for long-term investors up to 50.

CrossAmerica Partners yields almost 10%. So the key question is always how well the payout was covered and the answer in 2022 was quite solidly--1.77 times by full year distributable cash flow. That in turn enabled the company to cut net debt to EBITDA to 3.7 times from 5.1 times a year ago. The key was basically added scale, which enabled the company to boost margins despite flat to lower volumes at its distribution business. Management also successfully divested assets. I rate CAPL a buy on a dip to 20 or lower.

Mack

6:39

Re: CQP -- Price is down about 20% since Dec 1st. Other than the drop in nat gas, do you see and reason for this drop? Yield is up to 8.4% which is attractive if the payout is safe. Is it? Thanks....

Roger Conrad

6:39

We've seen a number of energy midstream companies retreat recently, one likely reason being the drop in oil and gas prices has cooled investor sentiment. In the case of Cheniere Energy Partners, the stock was in our view fairly pricey back in early December (low 60s versus our highest recommended entry point of 55), which has likely extended the drop. But it's hard to find a lot not to like in the Q4 results announced last week, and the dividend looks solid from here backed by contracts. Some of the more cyclical aspects of the business are likely to be affected this year by what happens in Europe, with the consensus expectation now that the market will be far less frothy. But the core of this business is asset expansion underwritten by long-term contracts with the world's strongest energy companies. And by that measure CQP is well on track.

Guest

6:48

Roger, i'm underwater on MPW but i'm ok waiting if you feel this is a good long term investment. It seems like the kind of business that should be more stable than it has been. Do you still feel the dividend is safe? and your thoughts on the long term.

Roger Conrad

6:48

We sold Medical Properties Trust (NYSE: MPW) from both CUI Plus/CT Income and the REIT Sheet Recommended list in late 2022 for mainly because the REIT owner of medical buildings faced two headwinds that we feared would only get worse. One was rising interest rates, which were making it increasingly difficult to fund new acquisitions without selling assets. And the other was rising recession risk, which appeared to be undermining the credit quality of several major tenants and simultaneously raising regulatory pressure on hospitals and their landlords. The REIT was also blocked by regulators from swapping tenants for its Utah properties, a worrisome sign. The good news is 2022 normalized FFO hit guidance and management continued to be able to work around weakening tenants. But 2023 NFFO guidance is just $1.50 to $1.65, -14% less than 2022 and raising the payout ratio close to 75%. Bottom line: The pressure isn't easing up. And while the dividend may hold this year, I still think we're better off out of MPW.

Barry J

6:52

Hello Roger:

Can you please provide the Ex-Dividend date for BEP?
Also, does that mean if I purchase BEP before the Ex-Dividend Date arrives, I still qualify for its dividend/distribution? Or does it mean if I purchase BEP on the Ex-Dividend Date, I still am entitled to its dividend/distribution?

Thanks.

Roger Conrad

6:52

Hi Barry. The ex-dividend date for Brookfield Renewable Partners LP's (TSX: BEP-U, NYSE: BEP) most recently declared dividend of 33.75 cents per share (up 5.5% from 2021) was Feb 27 with a payment date of Mar 31. To receive that dividend, you would need to be a shareholder of record on Feb 28. Those are also the ex, record and payment dates for the company's C-Corp shares traded on the TSX and NYSE as BEPC. I continue to recommend both at a price of 40 or lower, with a Dream Buy price under 30.

Guest

6:57

Could you comment on the relative merits of royalty trusts vs producers as a speculation on the future of oil prices? Royalty trusts should be less exposed to management risks and perhaps inflation risks than producers, but are there reasons to favor producers in a rising oil price environment?

Roger Conrad

6:57

I don't know if I'd agree royalty trusts are less exposed to management or inflation risks than operating companies. For one thing, are still decisions made, i.e. what lands to own, who to lease them to etc. Royalty trusts tend to be much smaller entities than the producers they lease their lands to, which means you're far more exposed to geology and weather than a more geographically diversified entity. Also royalty trusts' dividends are doubly leveraged to energy prices--as what they pay depends both on the selling price of the output and how much oil and gas producers choose to pump from their lands. If anything, I would say they're a more leveraged way to play rising oil and gas prices--which means potentially more upside but also more risk.

Joe

7:10

Hi Roger & Elliott - any thoughts why AES seems to be getting hit lately? Thank you.

Roger Conrad

7:10

Hi Joe. AES had pretty solid Q4 and 2022 results, with full-year earnings actually coming in above the guidance range and management affirming 5-7% annual target growth through 2025. The disappointment that appears to be triggering some selling is management now projects 0.6 gigawatts of renewable energy projects in the US will enter service in 2024 instead of 2023 as earlier projected. That in turn reduced 2023 earnings guidance to $1.65 to $1.75 per share, basically flat with 2022--though management assured investors the earnings benefit would be felt in 2024. AES also signed 5.2 gigawatts of new long-term renewable energy selling agreements and completed 1.9 GW of projects in 2022, and it affirmed 3.4 GW of new projects would enter service in 2023. The Ohio utility settled several issues amicably despite the state's contentious environment. And its broad diversification again enabled the company to offset headwinds in some places with growth elsewhere, generating almost $1 bil in parent level free cash.

Roger Conrad

7:11

Bottom line to finish AES--it's still a buy at 28 or less. Look for more in the March issue of CUI next week.

Guest

7:20

Gents: What can you tell us about VICI? Aggressive or conservative REIT? Does this REIT own the physical buildings that house gambling establishments? Do we know what their lease agreements provide for regarding “overrides” - features that add additional amounts to the “base” rent? A different newsletter guessed that there is an override portion to their leases which meant the rental return can fluctuate with the market? They opined that a downturn would mean less or no override which meant a decrease in the return. Are VICI leases on a net/net/net basis where the tenant pays taxes, insurance (including insurance that covers the “owner”), and maintenance? I know you like GLPI. And I thought you may have felt GLPI could be more recession proof than other REITS? Your thoughts between the 2? Thanks. Barry

Roger Conrad

7:20

Hi Barry, I've started tracking VICI Properties (NYSE: VICI) in the REIT Sheet coverage universe per a reader's request--and I'd like to extend the invitation to other members to submit your suggestions as well. As with smaller Gaming and Leisure Properties (NSDQ: GLPI), the business here is basically buying facilities from resort/casino owners like Bally's and leasing them back. The bulk of rents are locked in as "building base" and "land base", with a smaller portion of what's called "percentage rent." But the bottom line is so long as the operator is healthy and able to pay rent, GLPI and VICI get paid. I'm not entirely sure that makes them more recession proof than other REITs and frankly neither company has been around long enough to have a track record one way or the other. Both did largely hold their own during the pandemic--which was arguably much worse for casinos and resorts than even the worst recessions of the past 50 years since there were actual occupancy restrictions. GLPI trimmed its dividend

Roger Conrad

7:21

continuing on GLPI, it trimmed its dividend from 70 to 60 cents a share in 2020--but restored it and then some the next year as business returned to normal. That should mean it will be resilient in a recession. But I would consider both GLPI and VICI as aggressive as compared to REITs with a track record.

Buddy

7:25

Is Dominion Energy"s infatuation with green energy killing the company?

Roger Conrad

7:25

Hi Buddy. First off, as I've indicated several times during this chat, I think Dominion is likely to turn a corner here, now that the state of Virginia appears to have passed solid re-regulation legislation. Second, their investment in renewable energy is basically following Virginia law--and it's still likely to be a driver of earnings in coming years. The challenge is the offshore wind facility, the total cost of which it's trying to lock in. And I expect the upcoming results of the ongoing strategic review to clarify how they're doing that. But what you have to remember about regulated utilities is they succeed when they have support of their regulators--and with this Virginia legislation, Dominion appears well set up in that regard.

Joe

7:30

Hi Roger & Elliott - I invested in PAGP last June when it briefly bottomed. I bought shares and call options. I was lucky how things turned out. It's still one of the lower priced positions vs the max buy price you recommend in Energy and Income Advisor. Do you have any opinion on events that may influence how the stock might do the rest of this year?

Roger Conrad

7:30

Hi Joe. I think there are two main drivers for Plains the rest of the year now that the dividend increase of 5 cents per quarter is in place. That's how much more debt they're able to cut to shore up credit ratings, and two what happens to oil and gas volumes particularly coming out of the Permian Basin where it has the bulk of its business. I think all in all it's likely this will be a year when the dividend is a major portion of returns--especially if there's a recession. But the dividend is now well protected by cash flow and the company is positioned for another flat year for volumes--even as it's well positioned for a recovery. I said earlier in the chat that I thought both PAA and PAGP have a good shot of taking out their highs of the previous cycle. And the possibility of that plus the dividend makes this a compelling investment, even if it takes time to unfold.

Joe

7:30

Hi Roger & Elliott,Thank you.

Roger Conrad

7:30

Thank you for participating today Joe.

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