JotCast | 3/25/21 Energy & Income Advisor Live Chat

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3/25/21 Energy & Income Advisor Live Chat

Elliott Gue

2:07

Good afternoon everyone. We look forward to answering your questions today.

Jim C.

2:12

Elliott and Roger,

Since 1st quarter earnings were reported the price of oil has risen from the $40s to around $60 or thereabouts. Does the oil price ascension during Q1 2021 bode well for positive earning surprises when earning season begins starting in mid-April?

Kind regards

Elliott Gue

2:12

Looking at the upstream names, I think most analysts are penciling in long-term oil prices in the $50 to $55/bbl range in their earnings estimates. However, investors can pretty easily look at the price of WTI in the first Quarter of the year and derive an earnings estimate based off that number. So, I just don't think you're going to see a stock rally just because oil price realizations were a bit higher than expected driving EPS higher. I think what would act as a positive catalyst is if the producers continue to squeeze cost out and we see efficiency gains driving a beat on earnings or free cash flow.

Roger Conrad

2:15

Hey everyone. Looking forward to your questions.

Jack A.

2:17

Goldman Sachs is predicting that oil will reach $80 a barrel this year - (I'm not sure if that's Brent or WTI). You have predicted that oil will be in the mid-50 range. Do you feel that your estimate should be raised?

Thanks

Elliott Gue

2:17

Our estimate was for a long-term price in the mid $50's/bbl and for prices to see some spikes into the $60's this year. We have raised that outlook a little bit given OPEC+ decision to keep balances tighter near term and further signs of shale discipline. But, it's really the long-term average price of oil that drives stock valuations rather than a short-term spike to $70 or $80/bbl. And I think that a long term price around $60 is appropriate, if not a little on the conservative side.

Fred

2:17

What's up with the latest sell off in WTI?

Elliott Gue

2:20

In my view the sell-off in oil lately has little to do with fundamentals. Instead, the front month oil futures price had jumped about 85% from the end of October to the March 5th highs. managed money speculators have been steadily adding to their positions since late last year and that means they're sitting on some pretty hefty profits on what had become a significant long position. Thus, we're seeing a bit of profit-taking after a run of that magnitude. It's to be expected and normal in the oil market.

Barry J

2:24

1, Please comment on SJI’s and VST’s continued decline in price and increased volatility.
2. Do you recommend adding to our positions or purchasing either one if there is no position yet?
Thanks.

Roger Conrad

2:24

Hi Barry. South Jersey Industries (NYSE: SJI) the natural gas utility last week announced it was issuing 10 mil plus shares as well as equity units. Wall Street hates share issues and loves buybacks, so the result was purely predictable. The shares for the past week or so have been trading right around the issue price of $22.25 per. Vistra Energy (NYSE: VST) shares rallied initially in the wake of Texas' freeze after management stated its power plants' share of state generation had risen toward 30% from its normal high teens percentage. it gave up those gains and more following the announcement that keeping its plants running had required it to buy natural gas at peak prices, resulting in a hit to the bottom line of $900 mil to $1.3 bil.

In both cases, I think the selloff was an overreaction. There's no threat to dividends or credit ratings from share issue dilution in SJI's case or Texas freeze losses in VST's. I actually think VST will benefit long-term from this crisis as the state is forced to consider

Roger Conrad

2:25

To continue my Vistra answer--as the state of Texas has to consider a capacity a market as well as more energy storage deployment. I do still favor Atmos Energy over SJI as a natural gas distribution utility. But both stocks are a buy in my view at this point.

Michael L.

2:32

Gents, I like both of these stocks and need to add to one of these. Don't have enough cash to add meaningfully to both. Which of the 2 has the most potential price appreciation over the next 12-24 months?

Roger Conrad

2:32

Michael, to some extent you're talking about apples and oranges here, Enbridge (NYSE: ENB) being a midstream company and ExxonMobil (NYSE: XOM) a super major with cash flows very much exposed to changes in oil and gas prices. Enbridge is the more conservative choice--key drivers this year are getting the Line 3 expansion project on stream as management expects in Q4, the Line 5 dispute with the state of Michigan and system throughputs, which will improve as the pandemic is rolled back. ExxonMobil has the more upside arguably, as it traded in the 70s the last time investors were comfortable with oil prices were holding over $50 a barrel, which was before the pandemic. It's also likely to be more volatile as it's more likely to move with oil prices. Both should do very well over your 12-24 month timeframe, however, by which time the oil price cycle should be at a more favorable point for investors.

Fred

2:34

What is your near term outlook for XOM?

Elliott Gue

2:34

The near-term outlook is likely driven by oil prices, which I see as well supported near current levels. Longer-term, the company put forward a pretty solid outlook on its annual investor day a few weeks ago. With very conservative assumptions of the commodity ($50/bbl real Brent prices through 2025), the company should generate some $20 billion in excess available cash AFTER meeting its current base dividend and meeting capital spending needs. The current valuation looks undemanding to me.

Michael L.

2:41

MPLX: Certainly like the yield, but wondering why it doesn't seem to be able to get any traction, as in price appreciation. What do you guys think? Thanks!

Roger Conrad

2:41

Actually, MPLX has returned better than 50% since the beginning of November 2020. That's despite dropping up about a dollar per share from its highs earlier this month--which is following a trend in the energy sector in general as oil prices have backed off. Shares right now are about 10% lower than they were the last time oil was over $50 for a sustained period. But the important thing is Q4 results and guidance show this company's resilience to the pandemic operationally. And management now expects to generate enough free cash flow in 2021 after CAPEX and dividends to buy back a significant amount of stock. We think that will translate into a lot more upside this year for MPLX shares. There's always the chance that parent Marathon Petroleum tries to buy in the 37.58% of the company it does not own. And it's possible that's still deterring some buyers. But at this point, they would have to offer a sizable premium to get that done--and insiders are buying while analysts are increasingly bullish.

Hans

2:42

In an article for Seeking Alpha you mentioned WTI oil possible could reset 76 bbl by the end of 2021 and that would imply USO to 52 do you still see this now.

Elliott Gue

2:42

Yes, this is consistent with what we wrote in the last issue of EIA as well. In the short term, oil will be driven by three factors: 1. reopening global economy, 2.Saudi/OPEC desire to drain inventories, 3. Continued shale supply discipline. As I've said, with all of those indicators pointing higher, you have the potential for a spike toward the mid $70s (a key technical resistance level). For the stocks, what matters more in long-term prices and our outlook here is also more Constructive over the intermediate term. I just don't see valuations for the producers being very demanding at current levels. This morning I was running a basic discounted cash flow model for PXD and if you use consensus free cash flow estimates through 2025 and then figure constant free cash flow at $2.5 billion in perpetuity thereafter you come up with an implied value of $172, a bit above the current quote even after a tremendous run-up since last year. If I plug higher estimates for oil prices it's easy to get to $200+

Buddy

2:46

Do you feel it is the Biden administration's goal is to deliberately drive oil prices so high that everyone will ditch oil/gasoline for electric? The auto manufactures like VW seem to think that is the case.

Elliott Gue

2:46

I am not really sure what the Biden Administrations goal is re: oil prices. However, given the time it will take even under the most aggressive assumptions to go electric, I think oil would have to go much, much higher to move the needle on adoption. And, at those prices, I think the Mid-terms in 2022 and 2024 would be pretty difficult to navigate for Biden and the Democrats. I am often reminded of a comment from the German energy minister years ago regarding climate policy -- he said something along the lines of "we know what we want to do to meet our carbon targets but we don't know how to do it and get re-elected."

Buddy

2:49

At this stage of the recovery, are there any other oil services stocks beyond SLB that we should be looking at? Thank you.

Elliott Gue

2:49

At the moment, SLB is our favorite because of its international focus. HAL is a good company but I think growth will be harder to come by given shale producers' focus on capital discipline over growth. A lot of the other names have exposure to markets like deepwater, which I think could be slower to recover this cycle.

Jack A.

2:49

Hi,
I'm frustrated with the price action of EPD and KMI...... Because the premiums did not seem outrageous, I bought call options on both, but both seem to be stuck in a range significantly below their pre-pandemic prices........... For example, you have a buy below 33 for EPD,and pre-pandemic it was about 29, but it seems never to go above 23.. Since the revenue of both companies rely predominantly on volume rather than the price of oil, and since there is pressure to replace the use of oil and reject new pipelines, do you think analysts are re-evaluating the prices they're willing to pay for both companies?.

Thanks

Roger Conrad

2:49

According to Bloomberg Intelligence, all 26 analyst/research houses covering Enterprise Products Partners rate it buy, no holds or sells. The 25 covering Kinder are a bit less bullish at 9 buys. But there's no indication of any great retrenchment of opinion in the analyst community--and insiders are buying as well.

Enterprise has returned about 37% since the beginning of November and Kinder about 39%. As you point out, neither is trading at pre-pandemic levels, but as I pointed out in a previous answer in the chat that's actually pretty typical of this sector. Rather, there still seems to be widespread skepticism that either commodity prices or energy stocks will hold current levels.

Our view is the long-term energy cycle was accelerated by the pandemic and has turned up. Progress won't be immediate and bearish sentiment comes with the territory--and that may make it tough to bet with options. But the important thing is companies' results have turned the corner and they're generating free cash flows.

Roger Conrad

2:49

They're turned the corner and the best is yet to come.

Lee B

2:59

It’s tax season! Would you mind reminding us of the tax implications of liquidating MLP’s. Selling WES last year I’m afraid has created a big recapture issue, and adding salt to that wound is the loss taken on the position!

Roger Conrad

2:59

For the record, we still believe you're always better off having your capital in the most promising names and out of the riskier ones. And while Western Midstream Partners appears to have stabilized its operations and balance sheet--as has its major customer Occidental Petroleum--it did cut its dividend in half last year.

One key advantage of MLPs is a sizable percentage of distributions are considered return of capital--so you pay no tax in the year received. But what you do receive is subtracted from your tax basis, so if/when you sell it can result in a tax liability depending on the selling price and where you overall basis is at that time. Not knowing your entry/exit points and total ROC, I can't say what your hit it. But if there is a silver lining, it's that a lower selling price will directly offset the reduced tax basis.

Buddy

3:11

Please give your latest assessments on AM and WMB. Thanks.

Roger Conrad

3:11

Williams Companies (NYSE: WMB) has proven its resilience during the pandemic as a major, investment grade midstream company with a reliably growing dividend. The core business is basically shipping natural gas to regulated utilities under long-term contracts, and there's still considerable opportunity to expand assets incrementally on existing systems, particularly as major new pipeline systems are blocked in the courts and by state and local governments. It's done quite well as a member of our High Yield Energy List.

Thanks to the -27 percent dividend cut management announced in guidance last month, Antero Midstream should be able to generate free cash flow in 2021 after reductions in CAPEX and operating expenses. That still leaves the risk of being wholly dependent on a single small-to-mid-sized producer, Antero Resources. Shares appear to have stabilized but we still believe there are many better buys in midstream.

Buddy

3:18

Which pipeline stock would you rate higher for new buying, MPLX or WMB?

Roger Conrad

3:18

Hi Buddy. Owning and operating regulated long haul gas pipelines under long-term fee based, preferably capacity contracts is the lowest risk piece of the midstream business. Of the two, Williams has by far the larger pipeline business, so it has arguably the more conservative model, though it does have gathering and processing as well. MPLX has a big G&P business but also has pipelines and services tied to the refining operations of its parent Marathon Petroleum, which is a low risk business.

Bottom line, there's not a huge amount of difference in operating/financial risk between these two, as both proved with resilient 2020 results. The biggest difference is structural Williams is a C-Corp while MPLX is an MLP that also have a general partner. MPLX has tax advantages, Williams less complications at tax time. But both are high quality recommendations in EIA.

Buddy

3:25

Please give your assessment of TOT at the current price. Can one avoid the French withholding tax on the dividend if the stock is held in a tax advantaged account (IRA)? Thanks.

Roger Conrad

3:25

I don't think you can avoid the French withholding tax unless you're a resident of France, and then of course you'd have other considerations. The only country that has the IRA exemption that I'm aware of is Canada--and being sure to get it is almost certainly going to require educating your broker that it exists.

That said, our view is owning this high quality super major is worth paying the tax. For one thing, you're still getting about 6% net, which is about four times what an S&P 500 ETF does. Also, if you hold outside an IRA you can file to recoup the tax on your federal taxes as a credit.

Jeffrey H

3:32

HELLO FOLKS,
My question is more utilities than "energy" but I hope you will find time to answer it. I subscribe to both your letters. My question concerns CWEN, which has been steadily dropping. Do you see this as a good place to add a bit more to round out a position, or are you recommending a hold on purchases till the mess in Texas sorts itself out. I am assuming that Texas is at least partly to blame for the stock's downward trajectory. Thank you

Roger Conrad

3:32

Thanks Jeffrey. And again, if we haven't said so before, this is a wide ranging Q&A so everyone should feel free to ask what's on their mind, even if it's not technically Energy and Income Advisor related. That's what Elliott and I are here for today.

Shares of contract power generation company Clearway Energy are down roughly 25-30% since early January for 3 major reasons. First, in reaching that point, they had more than tripled off March 2020 lows. The overall market recovery was one catalyst. More important was major customer PG&E's emergence from bankruptcy and the subsequent freeing up of funds held at the project level to the company. And finally, there was the so-called "Biden Trade," as money poured into anything to do with renewable energy.

Shares were in other words overextended. That's why we took about half our money off in the table in the CUI Plus service and recommended some profit taking in Conrad's Utility Investor, where Clearway is covered. Catalysts for the drop have been an unwinding

Roger Conrad

3:37

Continuing the Clearway answer, downside catalysts include a partial unwinding of the Biden Trade and then the great Texas freeze, from which management announced a "direct cash" hit of $20 to $30 mil. The company reported that "some" of its wind projects in the state were "unable to operate" during the crisis, which forced it to temporarily cover power sales contracts by buying energy at spiking prices. The company moved quickly and got the facilities back on line. it also affirmed its guidance for the "upper end" of its long-term dividend growth target of 5-8% a year for 2021. And since then, it's successfully executing on long-term growth plans with acquisitions and a successful $925 mil low cost green bond financing.

3:39

And finishing up on Clearway: I think the Texas market has some challenges to work out. But this company's exposure to the state is in any case limited. And it is apparently taking steps to weatherize facilities to avoid a repeat, as well as more conservative financial management. I think this selloff will prove short lived and am sticking to my highest recommended entry point of 33.

john

3:45

What is your opinion & buy up to price for HASI?

Roger Conrad

3:45

We sold Hannon Armstrong Sustainable Infrastructure Capital from the Conrad's Utility Investor Aggressive Holdings back in January when it was trading in the low 70s and we had basically a triple from the initial entry point. My feeling then was that the Biden Trade had reached something of a silly stage. And while I still liked Hannon a lot as a business, I thought it would never hold that price.

Now that it's back in the low 50s, I've upgraded it to a buy again in CUI. The company's Q4 results and guidance were robust and demonstrate its leadership in the niche role of lending to small scale energy efficiency projects. It's successfully taken steps to provide more reliable cash flows by taking ownership stakes in long-term contracted wind and solar facilities--including a Clearway portfolio. And the dividend increase announced for next month's payment is twice the previous year's. In other words, there's enough meat on the bones to justify this price--not the case with much of the renewable energy universe

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