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2/29/24 Capitalist Times Live Chat
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AvatarRoger Conrad
2:03
There may also be a risk they sell it?—Jeff B.
 
A. I think they would offer some premium but the dividend after a CVX merger would be less. MPLX could conceivably be bought out by Marathon but less likely—so probably better for reliable yield.
 
 
Q. Dear Roger: I've been reading your newsletters for 30 years and strongly value your opinion. I was mostly in cash last year but now I should be building a portfolio of the best Utility stocks for the day the Fed lowers rate I have been reading the public posts of Avi Gilbert. Avi publishes a financial news letter on Seeking Alpha. He uses Elliot Wave Theory to determine mkt direction going forward. He has been posting the past year that we will be entering a very long term Bear Mkt, like 10+ years. He expects it to start this year and go as low as S&P 1k before it's over. His posts have me frozen and unable to do anything, staying mostly in cash. Do Elliott and You give his Mkt direction any credibility? Avi has had a newsletter for 12 years with many successes
2:04
along the way, or so he says! Is there anything you can say one way or another on mkt direction or Elliot Wave Theory? Thank you,--Bill G
 
A. Hi Bill. I think so long as the Federal Reserve is keeping interest rates "higher for longer," there will be a risk that meaningful segments of the economy will drop off into recession. The market leaders are extremely vulnerable on valuation. And it's hard to see the rest of the stock market holding up if there's a meaningful correction in the so-called magnificent seven, for example.
 
That's the bear case. But that said, it's equally true the segments of the market I'm most experienced with are actually selling at measures of standard valuation--yields, earnings multiples (P/Es) etc--that are actually pretty typical of bear markets. And that includes a large number of utilities, which are laboring under the misperception their investment led growth is about to be derailed by higher for longer interest rates. 
 
My approach has been to recommend keeping more cash
than usual on hand--but also to incrementally build positions in best in class utility stocks. And I think that's still the best way forward here. A conservative approach would be to wait until a company you want to buy has released Q4 results and updated on guidance, to ensure against a sudden reversal. But based on what we've seen from first reporters like NextEra Energy, Xcel Energy, WEC Group and Brookfield, there's no earnings Armageddon now for utilities or likely ever since borrowing costs have come down sharply from October. And that makes these stocks solid bargains in my view.
 
 
Q. One of my concerns with two of your major energy recommendations is their reliance on Guyana........ There are reports of Venezuela massing troops on its border...... What would happen if Venezuela made a play for Guyana? What would happen to our investments in Exxon Mobil, and Hess?......  Even if Venezuela didn't mount an invasion, I would think the geopolitical risk could be having an effect on Exxon's and Hess'
stock price ...... Your thoughts? Thanks,
Jack A.
 
A. Hi Jack. We would view a Venezuelan invasion of Guyana as a fairly low probability event at this time. For one thing, both the US and Brazil have moved military assets into the region to prevent military action. And an actual attack violating Hemispheric treaties would justify a military response from the US--which would almost certainly be the end of the Maduro regime. Rather, it looks more like this is the Venezuelan government trying to stir up nationalism in advance of elections, in which trying to prevent the main opposition candidate from being able to run is a sure sign of weakness. 
 
If there were to be an invasion, there would almost certainly be considerable market volatility initially. But at the end of the day, the Guyana reserve is very important to the world and the major powers will do what's necessary
2:05
to keep the oil and gas flowing--don't forget CNOOC is also a partner of ExxonMobil and Hess, so there's a Chinese interest here as well. Bottom line: We like how we're positioned here.
 
 
Q. Could you please give your current evaluation on Atlantica Sustainable Infrastructure (NSDQ: AY)? Would you add to a position at this point?—Eric
 
A. Hi Eric
 
Atlantica releases Q4 earnings and updates guidance on March 1. Obviously, we'll know a lot more then. And I will have a full recap of the numbers in Utility Report Card comments for the March issue. But based on what we
saw in Q3 and heard from the earnings call in early November, there were few if any contingencies that could trigger a real surprise one way or the other. Cash flow is affected from quarter to quarter by wind and solar resource conditions. But at the end of the day, all revenues are either from regulated sources or under contracts with an average remaining life of 13 years--and the company continues to steadily invest in new assets using internally generated cash flows to finance.
 
The big issue as always will be what Algonquin Power & Utilities intends to do with its 42.16% ownership interest in Atlantica. Algonquin announces its results on March 8 and management has said several times it intends to sell. My view is a new parent would be bullish for Atlantica, as Algonquin has basically frozen drop down asset sales the past couple years. And it's possible a bid for its shares would include an offer for all of Atlantica, which currently has a market cap of barely $2 billion and sells for just 4.2 times
annual cash flow.
 
At this point, I'm not expecting any news on this front. And I expect Atlantica to maintain its current dividend of 44.5 cents per share when management updates guidance.
2:06
OK that's all we have from the emails. Let's get to the live ones.
Pete H.
2:13
Hi Roger,
In a context of decarbonization and carbon free future, the nuclear energy seems to be on a renewal path. Could you give us an overview up of the situation, and potential developments?
Which utilities have the largest part of their production generated from nuclear? Which ones are the best positioned to benefit from this trend? Which regulators are the most nuclear friendly?
Thanks for your insight
AvatarRoger Conrad
2:13
Hi Pete. I would say the most nuclear friendly regulators in the country have to be in Georgia--where officials have been consistently supportive of Southern Company's Vogtle project since it was announced in 2008. That's despite the bankruptcy of the contractor, which triggered massive cost overruns. Unit 3 is now running well and Unit 4 reached criticality in mid-February. And the state has granted the company it's final rate increase related to the project.

So far as a US nuclear renaissance is concerned, no company has yet stepped forward to announce a new project--either large scale such as Southern's AP-1000s or SMRs (small modular reactors). In fact, the only ongoing SMR project was actually cancelled late last year. And that's despite substantial potential federal support for new builds, including tax credits in the Inflation Reduction Act.

I wouldn't rule out a new project, with Constellation Energy a possible developer along with regulated utilities Southern and Duke Energy.
AvatarRoger Conrad
2:15
But the action now is mainly in keeping older nuclear plants running longer with license extensions, postponing closing of plants like Diablo Canyon in California and possibly reopening closed plants such as Palisades in Michigan. There just aren't that many companies willing to commit billions to multi-year projects in the US at this time.
Barry B.
2:23
Your comments on Chesapeake are always positive and optimistic however I see how incredibly low natural gas prices are and it makes me wonder. I greatly respect your opinion so please explain your optimism by telling us what will drive prices and Chesapeake higher and when do you see it happening?
AvatarElliott Gue
2:23
Simply put, there's a huge disconnect between popular/media perception of natural gas prices and the reality on the ground. Typically, the price of natgas you see quoted is the front-month contract, which is currently April 2024 futures that sell for around $1.88/MMBtu. That's pretty close to multi-year lows for front-month prices. There's not a single gas-focused producer in any field that can generate free cash flow at sub$2. The lowest cost gas-focused producer in the US is EQT right now and even they probably need $2.30 to $2.50/MMBtu longer-term to generate FCF. The good news is that the front-month price of natural gas -- the gas price you'll see
AvatarElliott Gue
2:23
see referenced most often -- is irrelevant in isolation. Think about it like this -- the April futures stop trading right at the end of March, so the only thing that can impact the price of April futures is something that happens over the next 4 weeks or so. This is not a good time of year for gas prices (winter heating season ending, summer cooling season not started yet). CHK has already likely hedged some 60% or so of their gas production over the next few months, so they've locked in much higher prices for their output. Meanwhile natural gas prices for delivery in July 2024 are still north of $2.50/MMBtu and Dec. 2024 gas is at $3.50/MMBtu, a level at which CHK can delivery significant free cash flow. The average price of gas for delivery in 2025 is $3.47 this afternoon and for 2026 it's $3.78/MMBtu. These aren't theoretical prices -- these are pretty good approximations for the price levels CHK can lock in using hedges right now. So, CHK's value as a business is based on its ability to generate free cash
Over time – not just in April and May 2024. The reason we like names like CHK and EQT is that these companies have significant near-term hedges in place to protect cash flow short-term and can generate significant FCF at those calendar “strip” prices in 2025-26 and beyond.
Also note that comparing natgas prices today to the lows in spring 2020, something I see done all of the time on various websites, is nonsense. In 2020, the futures curve was flat as a pancake – prices across the curve were flat at depressed levels. This indicated that market participants saw the low gas price environment as a long-term structural issue. This also made it very difficult for producers to hedge their output at prices high enough to lock in any level of free cash flow.
 Today, the curve has a large upward slope – higher prices the further out you move. In gas markets, that’s a signal that markets see the current depressed prices as a short-term weather related issue, not a structural issue with the US gas market.
Apologies for the long replay, but I hope that helps!
Rick P.
2:25
Roger, please give your opinion on Evergy (EVRG).
It seems like a high quality stock at a reasonable price.

Thank you.
AvatarRoger Conrad
2:25
Hi Rick. Like the vast majority of regulated utilities, Evergy Inc has been a relative underperformer (underwater -4.3% year to date)--mainly because of investor perceptions about interest rates' impact on utilities capital spending plans and therefore ability to grow earnings and dividends. The company also seemed to affirm those concerns when management reduced its long-term growth rate guidance to 4-6% per year from the previous 5-7%. My view is the adjustment mostly reflected the fact that Evergy had attained the forecast synergies from the Westar/Great Plains merger. And in fact the $12.5 bil 5-year CAPEX plan for 2024-2028 is a meaningful increase from the $11.6 bil target for 2023-2027. In any case, the 5% plus dividend is well covered and growing, the balance sheet strong and the stock cheap at 13X expected next 12 months earnings. I rate it buy up to 65.
Eric D..
2:33
Is cqp price at a good entry point? best
AvatarRoger Conrad
2:33
We rate Cheniere Energy Partners a buy up to 55. The stock has slid back a bit since late December, in my view largely because of the Biden Administration's freeze on permitting for new LNG infrastructure. But in a very real since, shelving of projects is very bullish for Cheniere as it ultimately means less competition. And in the meantime, the company is executing on its development and contracting efforts--achieving results in 2023 that were above guidance ranges. It's now also on the verge of winning an upgrade to Baa3 from Moody's, which would elevate the company to investment grade at all three major credit raters for the first time. I expect dividends to hit the upper half of the guidance range of $3.15 to $3.35 per share this year, which is on top of an 8.5% yield.
Marianna K.
2:42
Hi Roger,
Please let me know your thoughts on the following stocks
1.MPW-is it a turnaround time(seems like a lot of buying is going on) and is it time to get some?

2. NEM - keeps going lower even though the gold is around $2000now. Time to add or sell

As always, thank you for your advice
AvatarRoger Conrad
2:42
Hi Marianna. Medical Properties Trust is benefitting from a wave of turnaround speculation, primarily from retail investors. And that's squeezed the short interest a bit--now extremely high at 33.5% of float. On the other hand, the Wall Street analysts who cover the stock seem to view the bounce as a last best opportunity to sell--with just 2 buys versus 7 holds and now 6 sells as tracked by Bloomberg Intelligence. The only insider trade this year was a sell. And both S&P and Moody's have a negative outlook on their junk ratings.

As you know, I don't mind betting against the crowd when I have a high degree of confidence in a company's prospects. But in this case, management has not issued 2024 guidance, mainly because of a lack of visibility on its biggest tenants--including Steward--ability to stay current on rents. So far, management has avoided another dividend cut. But revenue and NFFO continue to drop. And the company's only realistic way to cover debt continues to be asset sales, that further cut
AvatarRoger Conrad
2:43
into revenue and thereby ability to pay dividends. I think MPW can avoid bankruptcy and a cut in interest rates by the Fed would be a big plus. But there are an awful lot of REITs right now selling at big discounts without this kind of risk. Why take it with MPW?
John A.
2:44
I have not read anything recently in any of the publications forecasting the probability of a recession along with a narrative on leading indicators and other factors. Could you provide a bottom line about the odds for 2024 and 2025 along with a brief narrative on the reasoning given the most recent data points on inflation, economic growth, etc. Thanks for all that you do!
AvatarElliott Gue
2:44
To say this cycle has been unusual is an understatement. Most of the more reliable economic indicators, including many I've tracked for more than 25 years now and studied going back to the 1950's have signaled elevated recession probabilities and that's just not panned out. Getting one or two divergent signals out of the dozens of economic  indicators I follow isn't unusual -- the economy is, after all, a very complex system -- however to get almost universal recession warnings and then no recession is  unprecedented. As you might expect, I've spent a good deal of time pondering the reasons why the indicators haven't worked as well as usual this cycle. There are lots of potential answers. but most center on the unprecedented level of monetary and fiscal stimulus pushed into the US market since 2020 -- a WWII level of spending in peacetime, for example. This has caused multiple distortions in the economy -- some of the more apparent include a step-change in inflation, divergent trends in the goods and services
AvatarElliott Gue
2:44
pieces of the economy, "bubbles" in certain corners of the market that have inflated and deflated, (in my opinion) misallocation of capital in some cases and the worst-ever performance for the US bond market in 2022. My sense in watching the data is the indicators aren't truly "wrong," but the timing is way off compared to prior cycles. That makes pinning down the start of a recession tough indeed. I am watching a few things, however, One is the yield curve -- the popular view is that an inverted yield curve means recession, which isn't correct. An inverted yield curve means the market thinks Fed policy is tight -- the signal for an economic downturn is a curve that regains its positive slope after a prolonged period of inversion. We're not there yet, but when that happens, I'd typically expect to see a recession start in 3 to 6 months. I'm also watching US bank reserves and the Fed's Reverse Repo facility -- US markets have become highly sensitive to liquidity and reserves and, until we see a meaningful
Decline in reserves and a consequent tightening in credit conditions it’ll be difficult for the US to enter recession or, for that matter, for the US stock market to see significant downside.
AvatarRoger Conrad
2:47
As for Newmont Mining, it's been following weakness in other mining stocks. I think shares will continue to face headwinds until there's either a more accommodative Fed policy--or inflation really picks up to the extent it becomes more obvious the Fed is actually stoking it by choking off investment in key sectors. The current dividend rate is basically the "core" rate, with the company intending to apply the excess cash flow to a stock buyback. I think that's a good decision. And I think we'll see Newmont improve profitability and balance sheet strength over the next year with targeted asset sales and improvements at its most promising mines--post the Newcrest merger. My price target is still $100. But again we're going to have to be patient.
Fred
2:53
Which would you prefer, CHK or EQT?
AvatarElliott Gue
2:53
Tough to choose between the two as they're my top picks on gas.

I'd probably give the slight edge to CHK because of two fundamental catalysts unique to the company:

First, the SWN buy, which will make CHK the largest gas producer in the US and probably propel the company into the S&P 500. I also think the market is underestimating the cost synergies.

Second, just last week, CHK announced a significant production cut. It's something I'll be writing about in an upcoming post on EIA, but the long and short of it is that they're delaying turn-in-lines (TILs). A TIL is an industry term that means the process of converting a new oil or gas well into actual sales of gas/oil/NGLs. So, a deferred TIL is basically a well that's good to go -- drilled, completed, fractured -- that CHK just isn't producing right away. This is different that a
AvatarElliott Gue
2:53
drilled uncompleted (DUC) well -- the more familiar DUCs are wells that have been drilled but not fractured. These wells take a few months to turn into production compared to a matter of less than a month to activate a deferred TIL. so this delayed TILs concept is pretty much uncharted territory in the industry -- it's a way for CHK to temporarily scale back output. That has two positive impacts -- one is that when you produce less, your hedge coverage goes up in percentage terms.  The second is why sell gas at $1.90 - $2.50 over the next few months when you could hold it in the ground and then produce it in early 2025 at a value of $3.50+. So, I think those are two big upside catalysts for CHK not shared by any other pure-play gas producer.
Tom L.
2:53
Roger,
Thanks for continuing to hold these Live web chats each month. Very much appreciated.

I am a long time subscriber to your Utility newsletter, and in recent years the CUI+. Up until recently AROW was called Arrow Financial Corp. Now my Schwab account lists this equity as Glen Falls Natl B &T. Is there a significance to the name change? Outlook on this equity that has not performed very well?
Thanks.
AvatarRoger Conrad
2:53
Hi Tom. The name of the bank is still Arrow Financial Corp, traded NASDAQ under the symbol "AROW." Glens Falls National Bank & Trust Co is a wholly owned subsidiary of Arrow.

As I noted in the February CUI Plus/CT Income issue, Arrow posted solid Q4 results as well as credit metrics, despite the continuing headwind of "higher for longer" interest rates from the Fed. For example, even while high money market rates have undermined deposits at many of its competitors, the bank actually ended the year with record retail deposit balances. Net chargeoffs of loans remained very low at 0.05% in Q4, demonstrating management's continuing focus on quality over quantity. And tangible book value rose to $21.06 from $19.37 a year ago.

The stock has been hit with other small banking stocks over the past two years. But so long as it reports results like these, we're looking at another mid-single digit boost in dividends later this year and a return to the 30s.
Mike C.
3:03
Good morning Sherry, Elliott, and Roger –

A few questions….

   Have you looked at next-gen enhanced geothermal energy? It seems to be getting a lot of “Inflation Reduction Act”/climate crisis attention.
   The market feels like we’re deep in the era of QE and the Fed Put of a few years ago, with bitcoin up 30%+, SMCI up 220% in a month, etc. Do you think this the Yellen Put/stealth easing at work (despite the Fed’s alleged QT)? What do you think ends it? And when?

Thanks as always for the guidance and excellent analysis!
AvatarRoger Conrad
3:03
Hi Mike. As we've commented before, the Inflation Reduction Act was the product of intense negotiations and compromise--and the result is basically tax credits to encourage investment in every energy source, including by the way coal with carbon capture. And we're going to need a great deal of investment to meet the massive ongoing increase in demand for electricity from data centers deploying extremely power intensive artificial intelligence applications.

Specifically, utility scale geothermal electricity generation is limited by geography. Ormat Technologies (NYSE: ORA) is a company I track in Conrad's Utility Investor that is seeing robust demand. And I rate it a buy at 80 or less. Distributed geothermal--drilling holes in the ground for specific facilities--is right now not cost competitive with solar in most places for those who want to go off the grid. But it is a potential niche at least. And again, we have a long term supply challenge with electricity, even if EVs never reach projections.
AvatarRoger Conrad
3:08
Regarding your question on Fed policy, my view is we're going to look back on this round of higher for longer interest rates as a primary cause of elevated long-term inflation--as investment in key energy, housing and commodities infrastructure stalled, and supply fell further behind underlying demand. That's in fact what appears to be happening before our eyes in housing--as anyone who actually looks at REITs' development plans could see months ago. True there's a lot of money sloshing around and naturally trying to find momentum as in big rallies in bitcoin, anything related to AI etc--nuclear related bets in the utility universe etc. But it's not going into what's needed to keep supply and demand in balance in key areas for holding down long-term inflation.
Willy
3:18
Roger, I have a position in both Newmont and Vistra. One (NEM) acts terribly, even though the price of gold is firm. The other (VST) is reaching for the heavens. What gives?
Thanks
AvatarRoger Conrad
3:18
Hi Willy. In a word it's momentum. This is a market with little or no conviction--about what this reactive, market-watching Federal Reserve will do or the direction of either national or geopolitics. And a lot of money is as a result just sitting out with money funds yielding north of 5%. So a preponderance of bets appear to be on the short-term--and that means betting on what's going up now and avoiding what's going down, regardless of what business fundamentals say it's worth, what dividend yields are, long-term risks and so on.

I'm very happy we have Vistra Energy and Constellation Energy in Conrad's Utility Investor, one is up 154% over the last 12 months and the other 127%. That goes a long way to offsetting the -3.1% loss in the DJUA over the past year, as well as the -25% loss in Newmont.

On the other hand, I now feel a lot more comfortable holding Newmont--which appears increasingly undervalued relative gold prices and likely inflation--and a lot less so with CEG and even VST.
John P
3:19
Good afteroon guys, thank you for having this chat. I have 2 questions. FANG has seen a pretty good rally lately how do you rate it going forward? My second concern involves the Exxon/Pioneer deal. There doesn't seem to be much benefit to pioneer shareholders. Exxon stock is doing nothing and the Pioneers dividend was higher. Is it worth holding Exxon?  Thanks John
AvatarElliott Gue
3:19
Thanks for the questions. We generally like FANG --  a low-cost producer in the Permian, good infrastructure and well-run/good management. One thing I was looking at just a couple of days ago -- look at a chronic underperformer over the past yar like DVN and compare them to FANG. every single quarter since mid-2022 DVN has basically disappointed the street and the stock has fallen in the day after its release. Often that's been because DVN has missed on capital efficiency -- basically CAPEX/unit of production. FANG just the opposite -- just executes so well. So, FANG is a name we like even though it's not (currently) in the model portfolio. We like the Pioneer/Exxon deal and we really like XOM as a holding -- the upside you get from the deal is really just the ownership stake in the combined XOM/PXD firm.
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