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

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3/25/21 Energy & Income Advisor Live Chat

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Robert P

3:51

Hi Elliott and Roger, again thanks for the live chat and answers that makes us more informed investors. My question is I currently have 100 warrants of Oxy stock that I have not exercised. Can you tell me if it is a better time/price to buy the warrants now versus waiting closer to the end of of the warrant date, which is August 2027?

Elliott Gue

3:51

Warrants are essentially options and I believe these particular warrants are basically a call option with a strike price of $22. OXY trades for $26.70 at this time and on my Bloomberg I see the warrants priced at around $11.72, which means that there's an intrinsic value of around $4.70 and a time premium of $7. So, if you buy the warrants today at $11.75, OXY would need to rise above $33.75 by August 2027 for you to break even. We're bullish on OXY but with warrants, like options, you're introducing a time element into the equation. So, it really depends on what you're trying to play re: OXY here. Personally, I prefer (and recommend in the Elliott's Income Options service) trading options -- usually selling puts for premium or trading spreads. For longer term investments, I tend to recommend buying the underlying instead.

Robert P

3:53

In a recent investor presentation, EPD was telling investors that their pipes can not only carry oil/gas, but they can utilize their pipes for other products. First thing came to mind was running hydrogen. Can we get your input on the options they may have at there inclination of such actions? Thanks, Robert

Roger Conrad

3:53

Hi Robert. Hydrogen is certainly something a lot of pipeline companies are talking about now, including Enterprise and KInder Morgan as well. And we're seeing a number of gas utilities and midstream companies test blending on their systems.

There are two things to remember about hydrogen, however. First, the cheapest way to produce it by far is still using fossil fuels, particularly natural gas. In fact, at this point, producing so-called "green" hydrogen through electrolysis has never been done at scale. Second, almost no appliances currently in circulation are built to run on hydrogen. That means there's no real market and limited supply at this time.

I wouldn't rule out mass usage of hydrogen at some point. For one thing, burning gas is a far more efficient way to generate BTUs than electricity--as anyone who's serious about cooking and who has compared electric and gas stoves will tell you. But a lot has to happen first. And that means what does will be gradual. I think there's a lot more near-term

Roger Conrad

3:54

Continuing that last thought on hydrogen--I think there's a lot more near term potential for RNG or renewable natural gas, which is basically methane harvested from farms.

Clint W.

4:08

What are your current thoughts/outlook on Energy Transfer?

Roger Conrad

4:08

There are a lot of moving parts with this company. And investors are right to be skeptical of management's promises that all is on track, especially given Energy Transfer's history of distribution cuts over the past five years or so. Right now, a lot of people are nervous about the Dakota Access Pipeline, which now faces an early April Appellate court hearing where the US Army Corps of Engineers will reportedly testify about a new Environmental Impact Statement that's been in production the past few months.

No one can say with any certainty what the upshot of that meeting will be. It's possible the Corps will report it's made progress with the EIS. It's possible the Corps will say it no longer supports a new EIS or DAPL staying open, in light of the Biden Administration's focus on CO2--and the Appellate Court will uphold the District Court judge's order to shut it down. Or it's possible they'll be some as yet unknown other outcome.

What we can say is that DAPL contributes less than 5% of EBITDA at ET

Roger Conrad

4:12

Continuing with Energy Transfer, that's not enough to affect ability to pay dividends or generate free cash flow after dividends to pay off debt and fund all CAPEX. And the company and the other developers can still appeal the case to the US Supreme Court, where the current makeup does seem to favor a better ruling. Bottom line is I think Energy Transfer's turnaround will continue this year with or without DAPL. The acquisition of Enable Midstream is a great example of management taking advantage of ongoing sector consolidation and will lift 2021 results as well. We still rate it a buy for patient investors who can handle greater volatility up to 10.

Nolan

4:21

I bought SVSAY in 2017 it paid no div. and only gone up a dollar in three years, do you see it going anywhere?

Roger Conrad

4:21

I'm not finding an SVSAY. If you mean the French global water and waste services provider Suez, which now trades in the US as an ADR under the SZSAY symbol, it paid a dividend of 65 Euro cents per share every year from 2017-2019. It paid 45 Euro cents in 2020 and will pay 65 Euro cents again this year. For ADR owners, that's translated into US dollars each years at the time of payment, with the exchange rate ranging from $1.10 and $1.20 per Euro.

The two principal drivers of the stock going forward are (1)the company's multi-year restructuring plan which showed solid results in Q4, and (2)ongoing negotiations for a merger with Veolia, which currently has a hostile bid on the table of EUR18 per Suez share (EUR9 per ADR). Oddly enough negotiations are apparently supported by the French government. I think we'll see a final offer near EU20, or close to $12 per Suez ADR. That's worth sticking around for.

marilyn

4:25

If China & Russia begin accepting each other's currency..and the U.S. Dollar is no longer the global currency what happens to our economy?

Elliott Gue

4:25

First, neither the Chinese nor the Russian currencies are large enough to be acceptable as a global reserve currency. Second, the US is the world's largest economy (and a major customer( so from a purely self-interested perspective, I don't think either China or Russia would want to do that. In short, I think the probability of that is so remote that it's not possible to hypothesize the outcome. That said, I think there are certainly some potentially scary macroeconomic risks out there right now. One I am currently following is that a combination of an already-recovering US economy + record-setting fiscal expansion + super easy monetary policy could create a toxic cocktail of much higher than expected inflation. Alternatively, the Fed might end up behind the curve and forced to boost rates so aggressively it hits the market hard. Either outcome would not be good for the financial markets.

Michael L

5:39

Crestwood has just announced that it is acquiring and retiring 11.5 million units and the GP interest for $132 million and setting up a $175 million repurchase program. They say the retirement of the 11.5 million shares will be accretive and will save $29 million in distributions, while improving their credit metrics with the rating agencies. I realize you haven't read the release, but wondering if you have any initial thoughts.

Roger Conrad

5:39

Hi Michael. Everyone loves stock buybacks. But to me the most important thing about this announcement is it shows Crestwood is generating a lot of free cash flow after paying dividends and all CAPEX, and that management expects to continue to do so this year. Both S&P and Moody's have attached a negative outlook to their mid-BB credit rating, so they would obviously have preferred more debt retirement. But management is obviously comfortable with the maturities it has upcoming--nothing until June 2023. And the guidance calls for 15% DCF/share accretion, which means a lot more free cash to retire debt down the road.

We've been favorably impressed by Crestwood's resilience last year, when volumes became highly uncertain and major customer Chesapeake went into bankruptcy. Now that volumes are rebounding and dividend risk has diminished greatly, the only real question is how high are we willing to push our highest recommended entry point. We would advise a little patience given how fast it's recovered.

Roger Conrad

5:40

The last time oil was trading over $50 for several months, CEQP traded in the low 30s. We believe it can certainly get back there. But after the initial impact of this news, there's likely to be some "selling on news" action. Our highest recommended entry point is 25.

john

6:47

Should I sell my Centerpoint preferred B shares before the conversion or hold on?

Roger Conrad

6:47

Hi John. My advice is to hold on through the conversion. You'll continue to get the higher dividend of 87.5 cents per share per quarter. And so long as CNP trades under $27, you actually have more upside leverage to the common shares' recovery than the common does. I continue to believe Centerpoint is undervalued as a pure utility name. I think exposure to the Texas freeze is actually pretty minimal--mainly the high cost for natural gas paid by it Oklahoma and Arkansas gas distribution utilities that are likely to be securitized before the company sells them. And I think the shares of Energy Transfer from the Enable sale will actually wind up being worth at least 20-25% more than they are now by the time CNP sells them. My view is CNP common will be at a higher price by the conversion, possibly at $27. But if it's not, we'll still get the max shares in the conversion and I would expect more upside from the common going forward. So the plan is to stick in there.

Phil

8:11

What is your view on Chevron’s offer for Noble Midstream Partners?

Roger Conrad

8:11

Hi Phil. It's wasn't really a surprise. In fact, we wrote about the probability Chevron would buy the 37.55% or so of NBLX it didn't own when the super major announced the acquisition of Noble Energy. The terms are likely to disappoint investors who bought the first couple years after the September 2016, and didn't exit when Energy and Income Advisor did. But the negotiated price of 0.1393 shares of Chevron is about as good as it was going to get, given the regulatory constraints on the DJ Basin and the likelihood that even Permian producers will continue to adjust CAPEX to generate free cash flow. NBLX holders do get upside to further gains in Chevron, which we continue to rate buy up to 125. As for Chevron shareholders, this deal will be accretive to earnings and cash flow, just as the purchase of the parent Noble has been.

salvatore

8:11

Hi Guys What would you think about a swap out of oxy

8:15

in exchange for wmb oxy i have small profit where is my better growth looking forward considering wmb pays a nice dividend

Roger Conrad

8:15

Hi Salvatore. You're really talking about apples and oranges with these two stocks, both of which by the way are still recommendations of EIA. OXY as a producer is the more aggressive and has most upside. Williams, which we've discussed in this chat, one of the most conservative midstream franchises, focused on long-term fee-based contracts to ship gas to regulated utilities over pipelines. An investor who is very conservative at heart and wants dividends will naturally be better off with Williams. Conversely, someone who want upside may get bored with Williams--which has fully recovered its pandemic losses and looks set for incremental gains going forward as it raises dividends over time.

john

8:16

Great job Roger & Elliot. Thank you.

Roger Conrad

8:16

Thank you John! And thanks to everyone who participated in today's chat, which I am going to close at this time.

Roger Conrad

8:17

As Elliott said at the outset, we will be sending you a link to the complete transcript of the Q&A, probably tomorrow. So look for it in your email. And as always, the transcript will also be posted to the Energy and Income Advisor website. We also hope to have a new issue coming your way in the next few days so stay tuned for that as well.

RBB

8:18

Gratefully enjoyed this afternoon's session. Take care.

Roger Conrad

8:18

And thank you for tuning in as well.

Roger Conrad

8:18

Good night all. See you next month--or feel free to write us in between issues at service@capitalisttimes.com

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