JotCast | 2/29/24 Capitalist Times Live Chat

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2/29/24 Capitalist Times Live Chat

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Pesi

4:45

Hello Roger, I have GIC maturing next month. Where is the safer place I can park this fund for 1 year with good dividend or growth? Thank you

Roger Conrad

4:45

HI Pesi. I mentioned a Southern Company bond and a money fund in my last answer to you. By way of stocks--which are going to be more volatile, no matter how cheap they are and how solid the underlying businesses--I think Southern itself is in a good place for buying as well. So is Energy Transfer LP (NYSE: ET) in the midstream space. You might also want to check out the CUI Plus/CT Income Model Portfolio, which is a diversified portfolio of high yielding stocks drawn from multiple industries.

If you're interested in CUI Plus, please call Sherry Roberts at 1-877-302-0749, Monday through Friday 9-5 ET.

Hans

4:46

Elliott: Is ARLP an MLP?

Elliott Gue

4:46

Yes, though they eliminated their incentive distribution rights (IDR) structure back in 2018 when they bought in their general partner. They also issue a K-1.

Victor

4:49

Elliott, You mentioned before that OXY was lacking an upside catalyst. Do you still feel the same? Do you anticipate any changes in the next few months?

Elliott Gue

4:49

My outlook for OXY is pretty much unchanged. They acquired a private producer called CrownRock late last year with the deal expected to close in Q1. So, the one potential catalyst I see for them is closing that deal and then issuing updated guidance on their ability to generate free cash flow from the new assets.

Guest

4:50

Roger: AY remains below your dream buy price of 20, and its yield is 10% when it hits $17.80 per share (earlier yesterday it dropped to that price). For those of us readers who are new at this like I am, can you explain the relationship between AY and AQN? i have been hammered on AQN and need to make sure I know the risks, if any, on owning AY. Thanks! Barry

Roger Conrad

4:50

Hi Barry. Atlantica Sustainable announces earnings before the market open tomorrow morning. And it's expected to declare a dividend at the same time. So I think some of the recent volatility has to do with people trying to guess what they'll report. As I said answering a pre-chat question (posted at the beginning of the chat), I don't think there's been anything happening to indicate the company will not meet guidance and hold its current dividend level--though notably wind and solar conditions do have some impact on quarter by quarter results. The same is true for Algonquin Power & Utilities, which reports its results and declares its next dividend on March 8.

Algonquin owns 42.16% of Atlantica and has said it wants to sell, along with the rest of its contracted renewable energy portfolio. What investors want to know is the progress of the prospective sale. I'm not expecting any announcements at this time. But if there is one, it could be very bullish for both AY and AQN. So I'm prepared to be patient.

Roger Conrad

4:52

I also think it's potentially meaningly that David Levenson--a former Brookfield exec--has been appointed as a new independent director of Algonquin. My view is it's yet another sign we're going to see some action.

Victor

4:57

In the last 3 months USO has been showing higher lows. Do you expect this trend to continue?

Elliott Gue

4:57

Yes. USO tracks WTI oil and my view is that oil prices have upside from here.

The market narrative late last year was that US oil production was soaring. That's not true -- it's up, but most of the growth was really due to the Energy Information Administration's decision to change the way they account for US oil production in the middle of last year. So, current production figures in EIA aren't comparable to the year-ago #'s.

Also, the EIA's "Unaccounted for Crude Oil" data has been consistently negative each week since November. This suggests that EIA is now substantially overestimating US oil production.

At any rate, IEA and others were talking about an oversupplied oil market in Q1 2024 and the opposite is true -- it seems that inventories are drawing. I think the supply/demand balance will remain tighter than most expected through the year and there's risk you see $90+/bbl in the next 3 to 6 months.

Victor

5:00

BKR is trading well below it's 200MA. What is your opinion?

Elliott Gue

5:00

BKR is sensitive to the outlook for LNG and there's a market perception that demand has slowed. I think we'll see significant upside in US (and global) gas prices, probably by the summer as the LNG export ramp comes into view and the market starts to factor in (for example) Golden Pass volumes by early 2025. That would be a powerful upside catalyst for BKR. I am not very bullish on US gas prices the next few months but I think mid-to-late 2024 and early 2025 could be very interesting.

Dan

5:00

Roger, reading your above answer regarding market skepticism on NEP (worry that NEE might just roll up the 45% of NEP that it doesn't own), I have a quick question about an alternative NEE move: why not buy back NEP shares incrementally at market rates, increasing their stake at depressed prices? Are they somehow forbidden from doing that? Or is the worry that the market would interpret increasing their stake as a prelude to rolling up NEP? As an NEP shareholder, I don't think I would view increasing the stake so skeptically, since a higher NEE ownership stake would 1) provide clearer incentive for NEE to keep dropping down assets under terms beneficial to NEP; and 2) lower the float so the share price should recover faster, and also make it easier to one day issue shares again after the price rebounds. Thoughts?

Roger Conrad

5:00

No NextEra Energy can definitely buy NextEra Energy Partners shares incrementally if they wish--in fact, they have done that in the past to support the stock. Remember NEP IPO'd in June 2014. And within a year, the MLP meltdown had already caused investors to conclude a roll-up was inevitable. NEE believed market conditions would ultimately change enough for NEP to be an attractive funding vehicle again and did not roll it up. And that bet has really paid off, as NEE has ramped up CAPEX dramatically in line with rising renewable energy demand.

I think at this point, it's unlikely NEE will spend cash to buy in NEP, given its opportunities elsewhere and need to fund them economically in tough capital markets. They could do a roll up with stock. But now that NEP's refinancing needs through 2026 are essentially resolved, I think it's far more likely they're patient as they were in 2015-16. Having NEP as a funding vehicle again would potentially make a huge difference for capital cost.

Roger Conrad

5:02

I would view any incremental buying of NEP with cash to be bullish though.

Hans

5:09

Roger: With gold prices high,Why does WPM not reflect that.

Elliott Gue

5:09

WPM is a streaming/royalty company, not a pure gold producer. So, basically, producers of other metals like iron ore or copper agree to sell ancillary ounces of gold/silver they produce as a by-product of their core business in exchange for an up-front cash payment. The good news is that under these deals, WPM's costs are under control because they're contractual -- the miner bears all the risks of cost overruns and sells WPM the product at a fixed cost. The downside is that WPM doesn't really control volume growth -- if the miner decides to slow expansion or reduce CAPEX, for example, that means it'll produce less gold/silver for WPM. The gold/silver ounces are a by-product of the miners other operations. So, what happened with WPM is that their near-term production guidance for 2024 was lower than the market expected because the mines over which they've signed streaming agreements aren't producing as much as expected a few quarters ago. So, the stock got hit on that news. The good news is that looking out

Elliott Gue

5:09

over the next few years they've pretty much maintained their gold equivalent ounce production targets, so this is a short-term issue. Also, their production growth is among the best in the industry over the intermediate term. So, I still like WPM. It also appears that the bad news is out of the way now as the stock bounced off technical support in the high $30s.

Guest

5:10

Roger: Do NEP, BEP, AY and CWEN all focus on the same thing - renewables? If so, could you kindly provide perhaps a brief description of their differences as companies. The reason I ask is that BEP's and NEP's dividend yields are substantially different, and I am trying to figure out how I allocate fresh money among these 4 companies when all are trading below their dream prices. For example, you know how you list MPLX and EDP as "conservative" vs. ET as "aggressive"? Could you designate these 4 renewable companies as well please? Thank you for helping all of us readers throughout the years who are trying to provide/secure a retirement for ourselves. Best, Barry

Roger Conrad

5:10

Hi Barry. Brookfield Renewable is a Conservative Holding in Conrad's Utility Investor, while Atlantica, Clearway and NextEra Energy Partners are all Aggressive Holdings. So that's how I would view them from a risk perspective.

The main point of demarcation is that Brookfield is basically a standalone entity at this point--with investment grade credit ratings on its own. The other three are best thought of as funding vehicles for parents. NEP has by far the best relationship with its parent NEE in my view. Algonquin hasn't been a drag, as Atlantica's former parent Abengoa was. But it really hasn't done anything to help either, which has made Atlantica a defacto independent company. Clearway has two strong partners in TotalEnergies and soon to be acquired private capital firm Global Infrastructure Partners--which have been supportive with drop downs to date. But all three are dependent on parental support, whereas Brookfield is arguably supporting parent Brookfield Asset Management.

Roger Conrad

5:10

BTW, NEP has a much higher yield mainly because of the worry it will be rolled up by NextEra Energy, if capital market conditions don't improve meaningfully by the end of 2026..

Dan

5:19

Roger, may I ask you for a general impression about the quality of management teams in the utility space? Favorites and disappointments? Following/investing in many of these for years, I've been forming opinions of my own, and it would also be fun and helpful to hear your feedback. For management that impresses me regularly, AES seems to keep executing both in its utilities and its unregulated renewable operations despite what seems to be continuous market skepticism, and they've positioned themselves advantageously for lots of energy transition trends. Allete (ALE) is teeny, but tracking their infrastructure and CAPEX plans, it seems to punch way above its weight for execution, including for transmission planning and building that have frustrated other cos. (And I was surprised to read ALE might be shopping themselves.) And as a SoCal resident and EIX customer, I can offer that their reputation with consumers is attrocious, but EIX management clearly knows how to grow profits amidst big challenges.

Roger Conrad

5:19

Very good question. One thing I've noticed since starting to look at this space in the mid-80s is that this is an industry where many of the management teams are followers at heart. And that dates way back before my time as well. I think that's actually been something of a positive for the past 20 plus years or so since the fall of Enron. Mainly, the trend has been for companies to focus on strengthening relations with regulators, improving operating performance and maintaining conservative financial policies. Up until the past five years or so, we saw a lot of companies merge, becoming much stronger in the process. And companies have generally avoided businesses outside of their core competency--there was a time when utilities were buying savings banks and insurance companies, with disastrous results.

Lately, utilities have gotten behind the "electrify everything" drive--obviously in their self interest. And the focus of investment with few exceptions has been on projects that can be completed within a year

Roger Conrad

5:21

That's also cut risk, as short term projects like solar arrays and grid upgrades can be accomplished quickly and with highly predictable costs and ultimate returns. Nuclear plants and offshore wind facilities are two examples of exceptions to this rule--and the cost overruns have if anything reinforced the idea of sticking to what can be built faster,

5:22

I will also say I've been to several Edison Electric Institute annual financial conferences--and the follow the leader tendency is still very much alive and well. So who are the opinion leaders?

5:29

The former CEO of NextEra Energy was one--I don't think current boss John Ketchum is quite there yet, though this company is still clearly the leader. The former CEO of Southern Company was another. I think if Dominion CEO Bob Blue can bring the strategic review to a successful conclusion tomorrow his stock is going to rise a lot. But right now, Pat Poppe is very highly respected, both for the job she did at CMS Energy and what she's doing now at PG&E. So are Lynn Good at Duke Energy, Pedro Pizarro at Edison (as you note) and Dr Gluski at AES Corp (diverse operations mean more challenges)--all of whom I've met at EEI conferences in years past.

Frank

5:37

Any thoughts on Altus Power (AMPS). They seem to be small but growing quickly in the renewable space

Roger Conrad

5:37

Hi Frank. This is not one I've followed to date--for one thing it doesn't pay a dividend, and it's also only been around since December 2020, though it's been profitable. I think to survive in an industry ultimately dominated by scale, you have to thrive in a niche, which Altus appears to do by focusing solely on "Community Solar." This is a business that appears to depend on regulatory constructs. And quarterly results have been volatile versus expectations, most recently in Q3 when revenue and EBITDA surged but not as much as some expected and interest expense roughly doubled. But the company does have private capital funding and so far is finding growth. Definitely a stock I may add, though I would rate it a hold at this point.

Dan

5:44

For utility management disappointments, I really root for AGR and they way they want to expand transmission and renewable power generation to be much greener, but it's hard to ignore that seemingly nothing has been smooth, and they get blocked or delayed at each turn (PNM acquisition, NECEC, 2 of their 3 offshore wind projects). AQN management got caught completely flatfooted with their (in retrospect) too aggressive dividend hikes, poor debt management and a failed big acquisition. And D might get praise for knowing how to build projects and run good operations, but the rip-off-the-bandaid approach to transitioning the company away from gas (first unregulated ops, now some regulated too) to focus on electricity and greener power has been so much rougher than promised. Any cos where you think the management is just underappreciated for how good it really is?

Roger Conrad

5:44

As I noted answering the first part of your question, I think AES' management is very much under appreciated--considering how they've had to manage balance sheet, CAPEX and dividends the past couple years while staying on track with long-term strategic goals. I also like CMS Energy and WEC Energy for depth of management teams, ability to get along with regulators and sticking to plan.

When you're talking about management of Avangrid, you're really talking about Iberdrola SA its 81.61% owner. But while I would agree there have been missteps--the failure to get the PNM deal over the line the biggest--I think you also have to give them credit for bringing Vineyard 1 over the finish line, warding off nationalization in New England while ironing out rate deals in New York, keeping the Canada/NE powerline on track and rapidly refocusing on AI/data center contracts after losing PNM. I think that proves Iberdrola is committed to Avangrid longer term--and investors are too down on management as well.

Roger Conrad

5:45

Agree on Algonquin as well--in retrospect, the tipoff that things were potentially amiss was when the long-time CEO left the firm and a more "corporate" team took over. Still think there's a lot of value with the assets, but management has to execute. Big day for Dominion is tomorrow--results of strategic review. Stay tuned.

Alex M

5:53

Hi Roger. I'm not sure if you've seen the recent headlines regarding XEL. There is a massive fire in Texas, and XEL stock is taking a hit today. The facts are still emerging, but I wonder if XEL is getting ready to be the next Hawaiian Electric. Your thoughts? Thank you.

Roger Conrad

5:53

Hi Alex. Yes, Xcel Energy (NYSE: XEL) is definitely trading at a "wildfire discounted" price at this time. Wall Street Journal reporting notwithstanding, it still doesn't appear their potential liability from either this Texas fire or an earlier one further north is anywhere close to the same ballpark as what Hawaiian Electric (NYSE: HE) is dealing with now, or PG&E did in the previous decade. For one thing, California is still the only state with "inverse condemnation"--in which the utility is basically the insurance company of last resort if its equipment is in any way implicated in a wildfire. That means to be liable, it will have to be proven not only that Xcel equipment played a role causing the fire, but that it was the result of company negligence. That standard is also proving to be a big problem for the plaintiffs case in Hawaii, where the utility has presented evidence its equipment was not at fault in the Maui wildfire--and has established a recovery fund with the state government.

Roger Conrad

5:56

Bottom line: At this point, a lot has to happen before Xcel Energy's potential wildfire liability should even be mentioned in the same breath with Hawaiian Electric's, let alone what happened to PG&E. I would expect the stock to remain discounted for a while. But this is an otherwise very solid company that's historically traded at a premium utility valuation. And after reporting solid Q4 results, guidance and a 5.3% dividend increase earlier this month, it's looking more like a buy for patient investors.

Ann Rice

5:57

Q. I've been relying on you & your fine staff for guidance & analysis for over15 years. Greatfull thanks. (I remember the days of Neil

Roger Conrad

5:57

Thank you Anne. We really appreciate it. Thanks for participating today!

Jim T

6:05

Roger, I currently hold ERF and AQNU and each has major events happening this year. What is your assessment of these stocks.

Roger Conrad

6:05

Hi Jim. Enerplus Corp (NYSE: ERF) now has a takeover offer on the table from Chord Energy (NSDQ: CHRD) that I mentioned briefly in the most recent EIA posted this week. The offer is a combination of stock and cash, with each ERF share exchanged for 0.10125 shares of CHRD and CAD1.84 per share in cash--basically a 90-10 split. ERF currently trades right around the offer's value, indicating an expectation of a successful close. The deal creates a Bakken player with scale. And I think in the context of an energy upcycle, there's meaningful upside for ERF shares, as well as limited downside risk from unlikely deal failure.

The Algonquin convertible preferred converts to common stock (AQN) June 15, 2024. The next dividend for payment March 15 has already gone ex, leaving one more payment before conversion. I had thought we'd see a conclusion to the strategic review by this time--and we may get more detail on March 8. But I'm now prepared to hold through conversion in CUI to receive AQN common stock.

Ann Rice

6:16

Question: Your position on the environmental issues involved in building & operating Offshore Wind platforms along US coasts. My family and friends (many of them) are dedicated environmentalists, 'tho they consume and rely on goodly quantities of energy. Thanks for helping in "navigating" this dispute.

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