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2/29/24 Capitalist Times Live Chat

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Elliott Gue

3:19

RE: Exxon. Yes, the stock has been pretty flat since late 2022. Total return since the end of 2022 is -1.3% including dividends compared to the S&P 500 Energy Index up 1.2%. However, XOM has handily outperformed its closest peer (CVX) over this time with CVX down about 11%. However, I think you need to put that into context -- in the two years prior (end 2020 to end 2022) XOM was a standout -- up 195% vs. 155% for the S&P 500 Energy Index, 132% for CVX and 81.4%/69.6% for BP and Total in Europe (US $ returns). So, we believe XOM's recent consolidation simply represents a bit of consolidation after a long period of outperformance. We actually recommended taking some XOM off the table in late 2022 and warned against chasing the stock (its traded as high as about $120 over the past 12-18 months). However, its back down to a more reasonable level now and XOM still has superior production growth prospects to any other producer because they

Roger Conrad

3:20

That's just based on price, as CEG, NEM and VST are all in great shape based on business results and what they're likely to do in 2024 and beyond. But those with particularly heavy positions in CEG and VST may want to consider selling a partial position into the current momentum.

Elliott Gue

3:20

were one of the only ones that invested during the lean years for energy leading up to 2020. That’s how they ended up with Guyana, a world-class play, while many of the European majors were pouring billions into energy transition projects that simply haven’t offered the returns a company like XOM gets from oil/gas. Now, names like BP are cutting new energy CAPEX and trying to walk back plans to allow oil/gas production to fall, basically trying to play catch up to XOM 5 years too late.

Roger Conrad

3:20

Sorry to interrupt the flow there.

Jimmy

3:27

Hi Elliott, can you give us an update on your analysis of SLB stock action? It continues to behave poorly since the Saudi Aramco announcement, which we discussed at length in last month's chat.

Elliott Gue

3:27

Fundamentally, there's no real change -- I think we'll get some clarity on Saudi plans when Aramco reports around the middle of March (I don't think we have an exact date, but March 11th is the tentative date). My sense is that the actual change in plans isn't as negative for SLB as the market's initial reaction. Also, I see no real change in the service cycle growth outlook more broadly.

As for the stock, SLB has underperformed its peers year-to-date but not by a huge amount (roughly 3% underperformance year to date vs. HAL after 5.7% of outperformance last year). Technically, I see multiple layers of support between $42.50 and $47.50 and the stock continues to hold up above those supports.

Dan E.

3:29

Hi Roger, I'm puzzled on the market's reaction to what seemed like a great earnings report and guidance by AES, any thoughts that I'm overlooking? Thanks for your insight.

Roger Conrad

3:29

Hi Dan. I don't think you're overlooking anything saying AES had great numbers. In fact, they actually raised long-term earnings growth guidance to a new range of 7-9% from the previous 6-8% for adjusted earnings per share--as well as for adjusted EBITDA to 5-7% from a previous 3-5%. That's after a third straight year for signing 5 GW plus of new contracts--the vast majority to corporate buyers under long-term deals not subject to regulation. And equally importantly, the company outlined and affirmed what I consider a low risk financing strategy with minimal reliance on difficult capital markets.

So why not a big lift on this news? It wasn't because of a lack of Wall Street support--the only change in advice was an upgrade. Insiders have been heavy net buyers. And company bonds have rallied as well. AES is, however, a member of 168 indexes including the DJUA--and utilities as a sector are pretty unloved right now. So are renewable energy stocks and companies with emerging market exposure.

Roger Conrad

3:33

Continuing with AES, it's possible some selling could have to do with the company's focus on self funding and the likelihood more CAPEX means slower dividend growth. But I think the weakness is much more related to being part of all three groups and therefore related indexes and ETFs. That I think is what sellers paid attention to--not the numbers or the bullish guidance from management. It's frustrating for shareholders like us. But on the other hand, AES now trades for less than 8X expected next 12 months earnings and trades below our Dream Buy price. For the long-term minded without positions, this is great time to build one,

Fred W.

3:41

Hi Guys,
Just wanted to thank you again for all of the great work and time that you both put into The E&IA News letter. It is my Bible on how to grow my wealth as I wholeheartedly believe that, at least for the next few years, Energy is where the action will continue to be.

Hopefully, we can continue to realize increasingly great yields and corresponding price appreciation for the best of your picks in the oil patch over the next few years.
Do you believe that a mix of oil majors, ie, XOM and CVX as well as major pipeline companies like KMI, ET and EPD, etc are a good mix for someone in their late 80’s?

I understand that one has to be “nimble" in today’s World, and that it’s definitely not a Buy and Hold and forget environment.

I also believe that, near term, we should have our Portfolio's positioned to guard against the many International risks that are out there that could send oil prices rocketing upwards.

Roger Conrad

3:41

Hi Fred. Thanks so much for those kind words about EIA. We appreciate it. Those are five great companies--as you know, we hold all of them except Chevron Corp in the EIA Model Portfolio. And if that company does complete its planned merger with Hess Corp, we'll probably take the CVX shares for portfolio purposes.

As you've also noticed, we have taken partial and even full profits on some positions at times since this energy upcycle began back in mid-2020. And those moves have paid off for us, as stocks have come back to earth and we've been able to deploy cash into new positions at great prices.

We would anticipate continuing to do the same going forward when prices move what we view as too far too fast. And in fact, we currently view ExxonMobil as priced high enough for now to rate a hold--though we will take more shares when the Pioneer merger closes--expected by the end of Q2.

Fred W.

3:49

I Would like your thoughts regarding the best ways to hedge one's portfolio to maintain some degree of safety, while still being able to take advantage of significant Capital Gains if/when our worst fears are realized in the oil patch, ie, more War/Terrorist attacks, oil Pipeline sabotage, etc in the mideast.

Also, how should we be grooming/tweaking our Portfolio’s for a possible Trump win in November?

Thanks again

Roger Conrad

3:49

Per your previous question, we agree that "staying nimble" is key--even in a long-term bull market such as we believe energy will be in for a long time to come. And the best way to do that is to be willing to take money off the table when momentum runs well ahead of business value--as it did for some EIA positions in 2022 especially and we were able to capitalize.

Regarding the geopolitical threats you name, oil and gas stocks have historically been big winners when such events occur--most recently the panic following Russia's initial invasion of Ukraine in 2022. I would think we could expect the same if say there was an investor perception that Middle East sources of energy were at risk to event--though remember that thanks to the shale revolution in North America the damage would likely be to other countries and we could actually see more US dollar strengthening.

Roger Conrad

3:52

Regarding investment results from investment outcomes, the most recent experience in energy is that all the action in anticipation of policy changes will take place before Inauguration Day. For example, it's hard to argue the Biden Administration's energy policy hasn't been extremely bullish for renewable energy investment. Yet green stocks have been in freefall pretty much since their first days in power. Conversely, despite all the "drill baby drill" rhetoric, energy was in a deep bear market throughout the Trump years--just as oil and gas was in a bull market during the Obama years etc etc.

3:53

We think that as the election gets closer, we could see more enthusiasm for coal stocks and very likely oil and gas as well--if candidate Trump's chances of winning appear to be increasing. But at the end of the day, energy politics only have so much impact.

Guest

4:03

Hi Roger and Elliott: What's the story with Newmont? Looks as if they took all of us by surprise with their dividend cut! What do you recommend for the future - buy more, hold or sell? Thanks for your ongoing insights on all of our holdings! Barry

Elliott Gue

4:03

Thanks for the question. NEM did (partially) offset their dividend cut by also announcing a $1 billion buyback over the next 24 months. However the divvy cut and production guidance for 2024 was disappointing.

Gold is sitting at near $2,050/oz, basing just under all-time highs. What's particularly impressive about that is gold is holding up quite well so far this year despite the uptick in real interest rates and the fact markets were looking for 8 rate cuts by January 2025 as of the end of 2023 compared to more like 3 to 4 today.

Over the last couple of days, NEM has actually retested its 2018-19 lows despite the fact that in mid-2019, gold prices were sub-$1,300/oz. In 2018, gold was sub $1,200.

NEM's costs have been elevated relative to expectations, but I do think there's a pretty big disconnect between the price of gold and the price of NEM right now. The recent quarterly whiff actually derisks the stock as well because the company got a lot of potential bad news out of the way.

Elliott Gue

4:03

So, my view is that it's worth holding NEM -- the stock is at mutli-year lows and is pricing in a ton of bad news. And if gold prices were to break to all-time highs -- let's call it a close over $2,100 -- it's tough to imagine a scenario where NEM doesn't benefit.

Roger Conrad

4:04

Finishing up with Alliance Resource, I do believe all of those negative possibilities for the dividend are well priced in at a yield of nearly 15%--and after the stock's roughly 25% retreat since early Q4 2023. That limits downside risk and means upside--if coal and gas prices rally from here as we expect and the return to shareholders (dividends plus buybacks) stays strong. And good poll numbers for Republicans heading into November could create some excitement for coal--with ARLP a key beneficiary. So there's a lot of potential upside here as well as cash flow to shareholders--even on a dividend cut. But this is a stock for those willing to live with more risk.

John P

4:04

I have another question concerning ARLP. It has a high dividend but in the long term will it appreciate and how safe is the dividend? Thanks John

Roger Conrad

4:04

Hi John. I don't think anyone should buy a stock like Alliance Resource Partners (NSDQ: ARLP) on the basis that a particular level of dividend is "safe" long-term. Coverage of the 70 cents per share per quarter payout was solid in Q4, as we point out in the EIA issue that posted earlier this week. And management has said it has locked in pricing "comparable" to 2023 on a higher level of output with an expected reduction in costs, which coupled with the lack of debt should mean solid coverage at that rate in 2024. But this is a royalties companies that depends on the price of coal and to a lesser extent oil and gas to maintain revenue and cash flow. And while we're bullish on fossil fuels prices the next several years, they're likely to be volatile, particularly in global markets where ARLP now sells much of its output. It's also possible, management will choose to devote surplus cash flow to eliminate already greatly reduced debt entirely, or to stock buybacks.

Roger Conrad

4:05

Oops, mixed up the order of posting those answers John. Hopefully everyone can sort it out.

Victor

4:08

Hello guys and thank you for this service. CCJ has been moving sideways since Oct 2023. Do you see more of the same for the rest of the year?

Elliott Gue

4:08

The uranium story appears to be taking a bit of a breather after dramatic outperformance for much of last year. Uranium stocks were the top performers in energy for much of 2023. I suspect, however, that this isn't the end of the bull market there and that there's more upside to come. Look back at a chart of CCJ during the last bull market from 2000-07 -- the rally developed in waves over time with periods of consolidation/pullbacks along the way. I'd expect something similar this time around.

Guest

4:12

I have some GIC maturing at 5.25% next week. What is the safest place for short time, like an year I can park this fund with good return. Thank you. Pesi

Roger Conrad

4:12

Hi Pesi. The safest option I could suggest would be the Vanguard Federal Money Market Fund (VMFXX) we've recommended as a parking place for cash in multiple advisories. The current yield is now about 5.4% with distributions paid monthly at the end of the month. The holdings are mainly federal debt, the price/yield of which responds most closely to Federal Reserve policy--but which has basically no credit risk. And so long as rates are held higher for longer, the yield is going to very generous, with any Fed increases fully reflected almost immediately. I would not view this as permanent. But money funds unlike CDs can be withdrawn from expeditiously and without penalty or tax. If you wanted something a bit longer lasting if the Fed starts cutting, I would suggest bonds of investment grade utilities maturing in 2 years or less. Southern Company has a 5.15% of 10/6/2025 yielding 5.23% to maturity, for example. See also the December Conrad's Utility Investor feature "Big Yield Hunting in a High(er) Rate World"

Victor

4:18

Elliott, SLB has been underperforming for at least 9 months. What is your assessment short term? What would be your estimated target? Thanks.

Elliott Gue

4:18

Thanks for the question. SLB's recent underperformance is all down to the Saudi Aramco news -- specifically the company's decision to push back a planned increase in oil production capacity. January 26th was the trading day before the Aramco news and in the 12, 24 and 36 months ended January 26, 2024 SLB was beating the S&P 500 Energy Index by a margin of 0.6%, 1.80% and 9.3% respectively. The beats relative to the Philly Oil Services Index are even a bit higher.

In my view, the market has overreacted to the Aramco news and may well reassess the situation once Saudi reports in mid-March.

In the short-term, SLB needs to hold above multiple levels of technical support between $42.50 and $47.50. Intermediate to longer term I'd say we're probably in the third or fourth inning of the services cycle and if I value SLB on a mid-cycle multiple I don't think it's a stretch we could see SLB above $80 in the next few years.

Guest

4:20

Q - Environmentalists say that Offshore Wind platforms will harm birds/bird migrations and will disturb or ruin marine life in the areas. How serious a threat is the installation/operation of these structures to the natural habitat of these species? I'm a nature lover, too, but I think the offshore wind "windmills"

Roger Conrad

4:20

Honestly, I don't think this is a major issue for offshore wind development at this time--though arguably the regulatory burden of answering these questions arguably did help delay to death a large number of projects previously planned for the Atlantic Coast.

What is a major issue is basic affordability, and (so far) the reluctance of major buyers in unregulated states to pay more for offshore wind electricity output that they were a couple years ago when development costs were much lower. Avangrid's Vineyard 1 is now operating very profitably from all reports. Dominion Energy's Coastal Virginia Offshore Wind now has a partner and is on track to join it by late 2026. And so should a couple more facilities to serve New England. But they're going through because costs were locked in before the great inflation. And they're likely to be the last unless/until costs are reduced AND buyers are willing to pay more for the energy.

Victor

4:27

Elliott, what is your opinion on GLD now that we know that there is no recession in the horizon and that inflation is not as bad as it used to be? Will GLD continue to move sideways?

Elliott Gue

4:27

I always find a commodity's reaction to news more interesting than the news itself.

Since late 2023 rates are up, expectations for 2024 cuts are down -- that's bad for gold all things equal -- gold prices are basically flat, down 1%. So, why isn't gold down more, a LOT more.

Tough to say for certain. But, I wonder if it couldn't be related to concerns about a second way of inflation? Today's PCE report was pretty much in-line but if you look at some of the internals like PCE Core Services less Housing (widely watched at FOMC) then it was up 0.6% month-over-month, the highest since December 2021. Obviously CPI was hot too in January.

So, I suspect gold moves sideways short-term, but I think there's a good chance we see an upside resolution to the multi-month base at some point in 2024 and the upside could be $2,500 to $3,000 an ounce in that scenario.

Victor

4:32

Elliott, FANG has had an impressive run and it's been a top performer. Will this trend continue? What's your opinion on DVN?

Elliott Gue

4:32

I covered these two in answering a prior question, but let me summarize here.

I think DVN is OK long-term. Decent assets but it's just not one of my favorites primarily because they've been a chronic underperformer for so long. Their capital efficiency (CAPEX/unit of production) has consistently disappointed Street expectations and the stock seems to sell off after every earnings call as a result. There seems to be a view out there that they're getting a handle on their issues in that regard, but it always seems to be a question of next quarter. So, before I'd get interested in DVN for the model I think we'd need to see some execution in terms of capital efficiency of production.

FANG is a solid name. Good assets, low cost producer, strong execution. Not in the model right now but definitely a name we like.

Bonnie Beth

4:33

Dear Roger,

I am a longtime subscriber to both your Utility Investor and the REIT sheet. My husband recently received a substantial inheritance in a mutual fund, POGAX (Putnam Large Cap Growth Fund). From what I can see online, this fund pays no dividends but there are small capital gains annually. The fund did increase in value significantly over the past six months (9.28%) due to the tech run up. POGAX also has a four star Morningstar rating. However, we feel keeping monies in POGAX can be a risky investment. We believe we are still in short term capital gains territory until April or May of this year. We would like to sell the proceeds in POGAX and put the monies in a safe high yielding MM or CD account. However, my husband is concerned about the tax consequences if we sell the entire fund. What are your thoughts on this fund? We are in our late sixties and are retired. We greatly appreciate your suggestions. Thank you for all the great advice you've provided over the years.

Roger Conrad

4:33

Thank you for those kind words Bonnie Beth. As you've noted, the Putnam Fund is not an income fund. The annual capital gains returned to shareholders have sometimes been quite large--$4.921 long-term and 39.9 cents short term in 2021 for example. They've been taxable of course also.

Looking at the makeup of the fund as of the end of 2023, I would say there's reason for concern, as the top five holdings were all technology sector market leaders trading on strong momentum and at very high valuations relative to business value. Together, they were over 42% of the portfolio then--and with Nvidia up nearly 60% year to date, it's likely they're even more heavily weighted now.

Everyone's tax circumstances are different. And we don't really provide that kind of tailored advice. But I would say that even at the short-term rate, the tax on a 9.28% gain shouldn't be excessive. Also, unless there was a big change in strategy, performance is going to follow the current market leaders--so expect volatility.

Victor

4:38

Elliott, In past chats you said you were considering MRO. Do you still like it? Do you see it moving up from this level?

Elliott Gue

4:38

It remains one of a number of E&Ps on my radar.

One of the points we've noticed of late is that even though oil prices have outperformed gas prices, gas-focused E&Ps have beaten their oily peers. So, we added names like EQT and reiterated the buy on CHK last year rather than adding in MRO.

I think the main reason for that is that the gas E&Ps are just so cheap relative to the amount of cash flow they produce even at $3 to $3.50 while oilier names are more fully valued.

Today though I think the market is too bearish on crude oil -- it's a lot tighter than most people think as evidenced by the recent decline in inventories. So, we're definitely looking at the oily names as well for potential new additions.

Dan

4:41

Hi Roger - a few months ago you had said you would consider adding Brookfield Infrastructure (BIP / BIPC) to the report card. With your recent commentary on generative AI and the explosion in power demand, what do you think of BIP's expansion into data centers? Is that a business with major scale advantages and their timing to acquire and expand the business was good, or is BIP again spreading itself too thinly across its many business lines?

Roger Conrad

4:41

Hi Dan. Yeah, I haven't added it yet. I still might. But at this point, I still prefer the more focused Brookfield Renewable (BEP/BEPC) as a bet on that family. It's basically run as an operating company, while Brookfield Infrastructure's massive diversification pretty much makes it a defacto investing company. It will be interesting if BIPC's data centers are serviced with electricity by BEPC, which recently reported 90% of contracts signed this year were with corporations--a large share of which operate data centers. That said, BIPC had solid results in Q4 that fully support the 5.9% dividend increase announced earlier this month. It's also outperformed BEPC meaningfully--maybe because it's not so much associated with the out of favor renewable energy sector.

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