JotCast | 2/29/24 Capitalist Times Live Chat

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2/29/24 Capitalist Times Live Chat

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Roger Conrad

6:16

As I indicated answering an earlier question on offshore wind, the key issue for developers now is cost. And over the past two years, the combination of higher borrowing expense, commodity and labor inflation and scarcity of construction ships has driven up US costs to the point where only projects that had locked them in were still economic.

My understanding is on a global basis developers have been able to satisfactorily answer the principal questions regarding offshore wind facilities' environmental impact--including on fisheries, sea mammals and water quality. That includes Europe where the degree of project scrutiny is far greater than in the US.

Like Elliott, I've become active on social media the past couple years--particularly on X and Substack and increasingly on Instagram. It's a great place to express short form ideas as well as to hear what others are saying. And I cordially invite all of our readers to follow us there.

Roger Conrad

6:20

If you're active on social media on energy issues, it becomes clear very quickly how much politics has permeated the space--and many (if not most) opinions are now expressed with quasi-religious fervor. it's no longer what works to ensure affordable and abundant energy to Americans in the cleanest, most efficient and reliable way. Rather it's "good" versus "bad" energy--and never the twain shall meet.

6:24

In terms of offshore wind, I find most of the environmental arguments against to be basically red herrings--just as the anti-onshore wind and solar ones are, and just as the arguments against natural gas pipelines, nuclear plants are etc etc. But they do make their mark. And the result is less investment in energy, just as underlying demand from AI/data centers and other uses is taking off in a way we haven't seen since the 1960s. That's one reason we think this energy bull market will go on for a lot longer than anything we've seen in the past.

Alex M

6:29

Hi Roger. As a group, water utilities have come down recently. For a conservative investor, do you have any preferred favorites within the space? WTRG? SJW? ARTNA? AWK? All of the above? Thank you.

Roger Conrad

6:29

Hi Alex. The decline really has nothing to do with actual operations or business results, which have remained remarkably consistent. Essential Utilities (NYSE: WTRG), which we've favored in Conrad's Utility Investor, for example, affirmed its long-term guidance last week--as it's been able to offset a slower pace of acquisitions with heavier system investment.

Rather, it has to do with a sharp erosion of what was a very high premium in sector share prices. You may recall we've been very cautious on water stocks really for several years--with the exception of Essential--because of those very high valuations. Now that prices are coming back, the sector is becoming more interesting. And you'll notice more stocks trading below highest recommended entry points--the next issue is March 11.

Dan

6:33

Gentlemen, I think I see an increase in headlines speculating that smaller midstream energy cos (both MLPs and C-corps) are shopping themselves to be acquired, a narrative that matches what you have said about likely consolidation. ET seems to have earned its reputation as the happy acquirer and consolidator in the space, but I notice that some of the smaller firms (PAA for one) tout that they carry lower debt leverage. It would be counterintuitive, but could ET lower its leverage through acquisitions?

Roger Conrad

6:33

Energy Transfer has been consistently reducing debt leverage since late 2020, when management elected to cut the dividend in half to save cash specifically for that purpose. it's also made acquisitions in shares of stock--and most recently through its affiliate Sunoco LP (NuStar Energy)--building scale, free cash flow accretion and thereby reducing debt. I don't see any end in sight to the trend and rate it buy up to 15.

We also like Plains GP Holdings (NYSE: PAGP), which is essentially a play on Plains All-American. I think ET is probably lower risk despite the higher leverage, because of greater diversification mainly. But PAGP is a buy up to 26.50--and while management has stated the intent of being an acquirer, it's a takeover target as well.

Alex M

6:35

Hi Roger. As you know, AQNU will convert to AQN common stock in a few months. Any thoughts on how to proceed when that happens? Thanks.

Roger Conrad

6:35

I plan to just take the AQN common shares when AQNU converts. It will not be a taxable event. And while the yield will be smaller--currently 7.4%--we will get the upside I expect from the eventual successful execution of the strategic review. I will be advising closer to the date---including if anything changes.

Alex M

6:43

Hi Roger. Any opinion on CCI's recent discussions regarding selling their fiber? Do you feel the dividend will be maintained at the current level? Thanks.

Roger Conrad

6:43

I think Crown Castle is clearly responding to pressure from activist investor Elliott Management, with which management signed an agreement late last year to ward off a full-on Board challenge. That deal is now being challenged in court by CCI's co-founder as "unlawful," which casts doubt on any strategic moves. The co-founder Ted Miller has also launched his own bid to take control of the Board.

Selling the fiber unit would reduce debt but would make it more difficult to pay the current dividend level. And it would not address the real challenge faced by CCI, which is the Big 3 US Telecoms are winding down capital spending after years of accelerating it--and the hope new entrants like Echostar (formerly DISH) would pick up the slack is proving vain. I think the dividend should be considered at some risk until CCI revenue stabilizes. And in the meantime, American Tower (NYSE: AMT) is the better buy by far with a lower yield but also highly successful data center exposure.

Guest

6:44

Hello Roger, and once again a hearty thank you for all your sane, drama free counsel over the many years that I have followed you [since well before your old days at your "other" publisher.

Roger Conrad

6:44

Thank you for those kind words! Much appreciated.

Alex M

6:52

Hi Roger. I am a bit concerned about BCE. In their most recent earnings release, they reported free cash flow of $3.14 billion for FY 2023. However, their annual dividend payout was roughly $3.52 billion for FY 2023. And they decided to increase the dividend for FY 2024 even though they are forecasting a decline in free cash flow for the year of between 3-11%. I don't view that is particularly prudent. At what point should we start to question the sustainability of the dividend? Your thoughts on the matter? Thank you.

Roger Conrad

6:52

I think we're a long way from BCE's dividend being at any real risk. The market environment is expected to be more difficult this year, as demonstrated by the conservative guidance. But this is a company with many levers to pull to keep paying (and raising" dividends. That starts with CAD4.1 bil in CAPEX planned for 2024, focused on relatively fast building projects with predictable costs that it could adjust. The roughly CAD3 bil in forecast free cash flow for 2024 is slightly less than the CAD3.5 bil in dividends contemplated. But this is a company with a very low cost of debt capital--bonds of Feb 2054 yield 5.6% to maturity. So it's not imperative they cover all CAPEX--which is after all an investment in growth--with operating cash flow. Keep in mind that CAPEX for long life infrastructure is typically funded by a combination of debt and equity. The fact that BCE covers such a high percentage is a sign of strength.

Roger Conrad

6:53

It's possible competition could weaken revenue the next few years faster than 5G and fiber broadband increase it. But again, this is not happening at this time. The stock looks pretty cheap and pricing in a lot of bad that's still unlikely to happen.

Pamela

7:01

Hi Roger, what on earth is going on with KREF? Is there any light at the bottom of it's tunnel? And please comment on ARTIS and Innergex. and AQN. Lovely to see BIRD come to life ... any idea on where it might be headed? I Know you cover most of these in EI, but I already subscribe to most of your other publications and am a little overweight in this sector. Also, what do you think a realistic p/e ratio for the water sector might be, and when might this sector end it's decline. Thanks as always for your thoughts.

Roger Conrad

7:01

Hi Pamela. Unfortunately, KKR Real Estate Finance Trust (NYSE: KREF) has now been forced to do what I feared it would--cut their quarterly dividend from 43 cents to just 25 cents. And even that wasn't enough to prevent S&P from cutting the outlook on its deep junk B+ credit rating to "negative" from "stable." The bottom line is--even with the expertise and financial support of private capital firm KKR--asset quality especially of the commercial loan is deteriorating rapidly. In fact, S&P cites "watchlist" loans are now 84% of KREF's total equity. Higher interest rates mean increased revenue as loans are at floating rates--but they also make them much harder for borrowers to stay current on. And that's a good reason to stay away for now--as well as from most financial REITs with very rare exceptions.

Artis is another one I've steered clear of recently, as higher for longer interest rates have complicated their ability to execute asset sales that are key to the success of the strategic review.

Roger Conrad

7:04

Artis' Q4 results were in line with what I expected. Unfortunately, dividend coverage again deteriorated with the AFFO payout ratio rising to 107.1%. That elevates dividend risk and is a good reason to look elsewhere for value--which is abundant in the REIT sector.

7:08

Innergex' halving of its quarterly dividend was something of a surprise. But it seems to be the right move for the power generation developer, which has decided to devote more cash to self-funding CAPEX plans. I think that ultimately makes it a stronger play and the yield is still attractive. it's also a potential takeover target. So this is one I'd stick with. Same with Bird Construction--a name we've looked at for a long time and has now raised its dividend by 30.4%.

Guest

7:12

Roger, Elliott - thanks for this continuing valuable service. I'm just jumping on now - if I'm repeating previous inquiries, PLMK but I'm holding losses in *SRE, *NEE, NGG, & SO. Recommendations on short term action appreciated on all them but in particular *SRE, *NEE where i hold biggest losses. I bought these for "security" with projections of upcoming recession, etc. and thought UTEs & dividends would be a buffer. (Not true in these cases).

Roger Conrad

7:12

Thank you for those kind words. There's no change in our advice on any of these utility stocks. All of them had solid Q4 results and either stuck with or raised their long-term guidance. Sempra raised its dividend by 4.2%, NextEra by 10% and Southern and National Grid are headed for meaningful bumps this spring--the surest outward sign of inner grace for these companies. Yes utilities have been out of favor and underperformed so far this year, and investors haven't seemed to care much about their strengths. But market fancies change. And we like the prices and prospects of these companies.

Dudley

7:20

Hi Roger. Two questions: 1) Your thoughts on CEG eventually splitting and 2) EXC B

Roger Conrad

7:20

Hi Dudley. Considering a large number of Constellation shareholders are retail investors--carrying over from the Exelon Corp spinoff--I think it's likely they will spilt at some point. With the stock up 305% since the spin and clearly rising a big burst of momentum, it's fair to ask how much longer we want to keep riding. And at this point, I think it's prudent to take some money off the table, This is a free cash flow story--and growth is going to come from cost and debt reduction, energy prices and acquisitions for the foreseeable future. It's healthy and well managed but the stock is increasingly looking prone to overheating.

As for Exelon, I think it's substantially undervalued after what was an overreaction to an adverse decision by Illinois regulators. It's a buy up to 45.

Dudley

7:26

Hi Roger. Two questions: 1) your thoughts on CEG eventually splitting and 2) XEL fire problems. Thanks Dudley

Roger Conrad

7:26

Since I just answered you on Constellation, I'll just recap what I said earlier in the chat regarding Xcel Energy's wildfire exposure. Basically, weather conditions are getting more volatile. And people have moved to areas where wildfires have historically been common but were sparsely inhabited. That combination means we're likely to see more fires particularly in drier areas of the west. And there will be more lawsuits that attempt to extract money from utilities as happened in California. That means utilities operating in such areas are likely to trade at a discount--and Xcel Energy has gone to one from what's historically been a premium.

That said, there's no inverse condemnation as in California--where utilities are liable for damages from any fire involving their equipment automatically, That means plaintiffs have to prove negligence. And we're a long way from that with Xcel in Texas--just as we are in Hawaii, where the utility has presented evidence its powerlines didn't start the Maui fire.

Roger Conrad

7:26

I think owning Xcel will take patience. But it's looking more like a buy--expect comments in the March issue of CUI.

Don C

7:30

Many Canadian companies seem to be part of oligopolies. Does that make many of their banks, telcos and pipelines safer than many American companies? Thanks for your these very helpful chats.

Roger Conrad

7:30

Hi Don. Thank you for those kind words. I don't think there's any hard and fast rule that applies here. There are far fewer Canadian midstream energy companies than in the US, which I think has worked to the advantage especially of Pembina Pipeline (TSX: PPL, NYSE: PBA) over the years. And it's notable that PBA, TRP, ENB and others we track in the "Canada and Australia" coverage universe in EIA avoided dividend cuts entirely in the previous decade, even as US midstreams endured a bloodbath. But bottom line is quality varies greatly between companies in Canada just as it does in the US.

Jeff

7:36

Could I have your opinion on HCA

Roger Conrad

7:36

Hi Jeff. We don't currently cover it in any our advisories. And the sub 1% yield is generally lower than we like to go. Generally speaking, this company's scale appears to be helping it weather a growing crisis in hospitals' ability to pay rents, as much smaller Medical Properties Trust has been unable to do to date, And based on guidance issued last month, management expects to be able to do more of the same in 2024, very likely in part due to the demise of rivals. The biggest risk here is likley regulatory--as the US government scrutinizes taxpayer funded costs and the company's size. After the stock's recent runup, I would be cautious. And there are of course much better places to get yield.

Mack

7:42

Roger & Elliott -- You have done such a good job answering questions today that I no longer have any "questions." But I do have a 'worry' that maybe you can comment on. The worry is Kelcy Waren and the fact that he's still hanging around ET, which is one of my largest positions after the CEQP acquisition. I know ET is your top recommendation for 2024, but do you worry about Mr. Warren's influence? His past dealings were good for him but weren't always good for stockholders. Thanks.

Roger Conrad

7:42

Thanks Mack. I think it's fair to say there's still a Kelcy Warren discount for Energy Transfer LP shares. And as founder and still 8.87% owner--most recently purchasing in November of last year--he's still very much around, though no longer both Chairman and CEO. That said, the company is executing on strategy as it has the past few years. And in our view, we're now in an energy upcycle, fueled in large part by the fact that there are only a handful of companies making meaningful investment like Energy Transfer.

It's also worth remembering that may of the moves Warren made that investors remember negatively occurred during the deep energy bear market of the previous decade. And arguably those moves are why Energy Transfer is still around today, while the vast majority of its rivals are not.

BKNC

7:45

Both CWEN and AROW have been trending down. I was thinking about adding. Just curious aobut your thoughts.

Roger Conrad

7:45

I like them both. They're both coming off solid Q4 results in line with guidance. And the stocks are down on "guilt by association" rather than business developments--Arrow on weakness of community banks like NYCB and Clearway on the unpopularity of companies that depend on access to economic financing as well as renewable energy.

Bonnie Beth

7:45

Thank you Roger. We will start peeling off our position in POGAX gradually in 2024. Always look forward to your guidance. Thank you!

Roger Conrad

7:45

Thank you Bonnie Beth.

Roger Conrad

7:45

And thank you to everyone who joined us for today's chat. You've given us a lot of food for thought.

7:46

If for some reason your question was not sufficiently answered, please feel free to write us at service@capitalisttimes.com and we'll get back to you as soon as we can.

7:47

We will be sending you a link to a transcript of the complete Q&A, probably tomorrow morning. And it will also be posted to our EIA and CUI websites.

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