JotCast | 3/28/23 Capitalist Times Live Chat

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3/28/23 Capitalist Times Live Chat

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richard

5:05

ET at less than 12 seems like a reasonable buy--div at 10% your thoughts on a buy or should i have patience and wait for the market to go lower ? thanks

Roger Conrad

5:05

Hi Richard. My advice for some time has been to buy Energy Transfer LP at 15 or less. In fact, ET was one of my top midstream picks in EIA for 2023. Shares are actually flattish year to date. But management has restored the dividend to its pre-pandemic rate of 30.5 cents per share--in my view a couple quarters ahead of expectation. And the acquisition of Lotus Midstream announced this week is not only positive for earnings but affirms ET is a deep pocketed company ready to take advantage of consolidation opportunities--which are frequently greatest in turbulent financial markets. I think most stocks are likely to go lower if there's a recession as we expect, which means ET would at least be volatile and could drop under $10 short-term. But by the time this energy up cycle is over, I fully expect this stock to take out its June 2015 all-time high of $35 and change--and for the dividend to be 30-50% higher than it is now. So that's what patient investors are playing for.

Victor N.

5:15

Hello Roger and Elliot

Thank you for holding these live chats. They are most helpful.

It is my understanding that the current strategy is to continue to build dry powder as we wait for better pricing in the upcoming months. A number of strategies have been discussed in previous Live Chats as to where to hold that dry powder. Discussions have mentioned Schwab SWVXX, Vanguard VMFXX, and I use TTTXX also at Merrill. It’s my understanding that these Money Market Funds hold short term US Government obligations, 7 to 30 day maturities. It seems impossible that any kind of default could hit the Treasury bills but nothing surprises me anymore. Do you see any concern as we approach the Debt Limit deadline of continuing this strategy or would you sell before the deadline and just let the money go to the general sweep account and see what happens.

Thanks.

Roger Conrad

5:15

Hi Victor. Yes, we are still recommending investors keep a fair amount of cash, as we have now for several months. The yields are higher some places than others. But the most important criteria for any cash options are (1)That it hold value and (2) that it be accessible, at least with 24 hours.
The money funds we've recommended meet these criteria--as should almost any cash or money market account.
With regard to their safety in a potential US government default, the only experience we have to draw on is what happened a little over a decade ago--when what was then also a Republican Congress and Democratic president played chicken long enough for Moody's to cut the US government credit rating. Ironically, when the default happened, the one asset class that benefitted was US Treasurys--mainly because investors realized they were backed by the government's taxing power.
It's hard to imagine Congress and the White House not reaching a compromise given the weakness in the banking system etc. But I think

Roger Conrad

5:17

Continuing on Victor's default question, I think if the government does default even temporarily, we're going to have a lot bigger problems elsewhere in financial markets. And ironically, even if they stop paying interest temporarily, these money funds are going to be pretty good havens. But in any case, the purpose of the cash we're holding is to invest in stocks when the time is right.

Eric

5:19

What do you like better between NEE and NEP?

Roger Conrad

5:19

They're really apples and oranges. I think NextEra Energy Partners is obviously a better play for someone who's just looking for income as the yield is twice as much as for the parent NextEra Energy. But NEE does likely have more long-term upside. Both are Conservative Holdings in CUI and I expect them to remain so for a long time to come.

Guest

5:26

Hello, thanks for these chats. Do you have an opinion on PBF and RITM. Thx.

Roger Conrad

5:26

As a smaller refiner, PBF Energy is simply not as well placed as larger players like Valero Energy (NYSE: VLO) are for volatile markets. That's pretty clearly demonstrated by the fact the company eliminated its dividend from March 2020 up to November 2022--when it restored its payout at one-third less than the previous rate. Keep in mind that refiners basically profit from the spread between raw commodity prices mainly oil and refined products, as well as their own production efficiency. They're also pretty capital intensive and vulnerable to environmental regulation and litigation. All of those challenges are far better handled by larger companies, which is why we prefer Valero. And in fact, after this year's dividend increase, Valero yields more than twice what PBF does.

Regarding Rithm Capital Corp (NYSE: RITM), I think there's a very good chance of a dividend cut this year--which in fact seems to be what many expect with the yield at 12.6%. Rithm is essential a BDC (business development company).

Buddy

5:29

Elliott, Re your reply on the 25% pullback in NOV in particular; are you saying the stock is attractive in the 17-18 area, where it now resides? Thanks.

Elliott Gue

5:29

I would have to dive a bit more into NOV specifically. My comment was more general in nature. Also for some of our specific favorites including SLB they're now pulling back to a range where we'd start looking to put some of the excess cash to work in the model portfolio. NOV is one of a number of names I'm looking at as possible additions to the model portfolio but I don't think we've published a specific level for that name yet.

Roger Conrad

5:30

Continuing my thoughts on Rithm, it's organized as a REIT but is essentially a BDC. So it's a black box from an evaluation standpoint and we have to rely on management to make all the right moves. That includes in the extremely volatile mortgage market, where we've already seen a large number of operators cut dividends deeply. Next earnings are expected in early May and management may indeed elect to hold the payout level, since it only recently re-instated it. But I think we're far better off seeking high yield in midstream energy. Energy Transfer LP, for example, is paying more than 10% and there are more increases ahead.

James

5:32

When energy stocks exit their bear market and begin rallying up, what do you think will the first sub-sector group that will lead?

Elliott Gue

5:32

Generally speaking the producers are the first to rally as they're the most direct beneficiaries of rising commodity prices. This time around, however, I think you could see early cycle leadership in the refiners like VLO and the services names like SLB as well because of the more unusual circumstances of the current cycle.

Jon

5:39

Hi, two questions. 1) Can you comment on the despondent behavior of Altagas stock. Does this just reflect the lack of interest in utilities in general? Anything negative about the business, besides commodity exposure and hedging? And 2) I noticed you characterize Keyera as an aggressive holding - why? What are the biggest risks for this company? What are the catalysts for this stock? Thanks much.

Roger Conrad

5:39

Hi Jon. As I noted in my March CUI Utility Report Card comments for Altagas Ltd (TSX: ALA, OTC: ATGFF), this combination Canadian midstream/North American gas utility company appears to have solid business momentum this year. Results for 2022 were solid and beat guidance--and the company affirmed 2023 guidance for modest growth fueled by utility CAPEX and growth of its NGL export-focused midstream business despite "inflationary headwinds." The guidance supports this month's dividend increase as well. As you point out, there is some commodity exposure that management depends on hedging to offset. But I think the downside in the shares recently is due to macro factors, such as concern about global NGL demand, than anything to do with the company itself. I think the drop in price has produced a good entry point for Altagas, though with the understanding that if the market drops and there's a recession it will probably slip a bit more.

Keyera I think is aggressive because it's relatively small and

Roger Conrad

5:43

Continuing Jon's question on Keyera, cash flow is heavily impacted by volumes at a handful of facilities, particularly Fort Saskatchewan. The dividend has also been frozen at 16 Canadian cents per month since September 2019--indicating tight coverage. And while there are no debt maturities this year, the company does utilize considerable variable rate debt for its size--which means interest costs are likely to rise this year. Next earnings are expected around May 10. Note that we track Keyera in the Canada and Australia coverage universe in EIA.

Victor

5:47

Hello guys, EOG stock price is under the buy price. Would you add to an existing position or just wait for possible lower prices?

Roger Conrad

5:47

When a stock we like trades below our "buy" price or maximum recommended entry point, the advice is to buy. But given where we are with stock market headwinds, we'e also been recommending investors consider taking an incremental approach to adding to or establishing new positions. That is decide what you want to invest, then take one-third of it to buy now. Buy another third sometime after Q1 results and guidance updates, which for EOG is set for May 4. And buy the last third in summer. You can always speed up your time table if there's a meaningful market decline. And of course our Dream Buy prices are always a great entry point--as they'll only be reached under conditions of extreme market stress for a company as strong on the inside as EOG.

Guest

5:55

Hi Elliot, with all the news on the banking crisis, tightening credit conditions, coming recession, year long bear market, and layoffs in tech, it is amazing that general indexes, especially tech, are up in the last 2 weeks, up for this year, and up since October 22 lows. In the past, this usually indicates a market that is trying to bottom. Have you seen a time in history when this resilient behavior, that looks like a bottom, ultimately cracks and resulted in the start of another leg in the bear market?

Elliott Gue

5:55

The closest analog is 2000-02. That bear market was one of the longest in history and featured multiple powerful bear market rallies, particularly in tech that ultimately collapsed. I'd also point out that a handful (litterally 5 to 7) stocks are papering over a lot of weakness in the broader market. For example, the Nasdaq Composite is up about 15% from its cycle lows on December 28th, 2022; yet, only 30% of stocks in the index are above their respective 200-day moving averages and a paltry 23% are above their 50-days. About 76% of the year-to-date rally in the S&P 500 is due to 3 stocks -- AAPL, MSFT and NVDA -- almost everything else is struggling.

Roger Conrad

5:58

One from the email:

Q. Street seems to have no interest/love for Enviva Inc (NYSE: EVA). It keeps adding revenue and booking future revenue as well as making capital investments for the future. What your thoughts on the stock/company. Is it worth holding or should I move on? As always thanks for your keen insight and hard work.—Jim N.

A. Hi Jim. We’ll see in early May how well previous business momentum is continuing. But I think a few issues here that have soured are (1)European Union rules on what is “clean energy,” and there appears to be a push to exclude biomass, (2)damage to facilities from storms that threaten production, most recently in Mississippi, (3)an adverse accounting opinion that hurt Q4 results and (4)what appear to be operational problems bringing facilities up to speed.

Victor

5:59

Hi Elliott. Sorry I just logged in an I'm not sure if you answered this question. If we deal with a recession in a few months how low do think that oil prices can go? Do you still think that XOM can drop to $85?

Elliott Gue

5:59

I covered oil in a bit earlier in the chat. However, the bottom line is that I think we're close to a low here -- you could see oil dip into the low-to-mid $60s -- but the 40% to 50% decline from last year's high already prices in significant demand destruction from recession. The speculative short position in oil futures is also at a level that historically marks lows. $85 for XOM might be a little on the aggressive side in terms of a downside dream price (though possible in a market-wide washout)-- I think we're likely to revisit some of our Dream Buy levels in the next few months and some might be revised higher.

Roger Conrad

5:59

Continuing on the emailed question:Against that are Fitch’s affirmation of the credit rating (though below investment grade) on the basis of long-term, take-or-pay (not volume sensitive) contracts and apparent market growth. Management also recently affirmed 2023 guidance, which supports the current dividend rate. I’m a little concerned that the 90.5 cents per share rate has not changed for nearly a year—and we’ll see if that’s still the case when the next distribution is declared with earnings in early May. At this point, the decline in shares looks overdone and I would continue to hold—at least until we see what’s in Q1 results and guidance update.

Victor

6:02

Elliott, I still have some units of WES. Good dividends. But it's been in a rolling pattern for a long time. What is your opinion on this one?

Elliott Gue

6:02

WES hasn't been among our top picks in midstream for a while now, but I think the last time we rated it we had it as a hold. Generally they have a bit less commodity exposure than many of the gathering and processing LPs and management is looking for a return to some volume growth in 2024 driven by the Delaware Basin.

Alex M

6:04

Hi Roger. What are your thoughts on DLR? There have been numerous bearish reports and the streak of annual dividends hikes appears to be coming to an end. Do you think the challenges are exclusive to DLR, or does this indicate risk for the broader REIT infrastructure space (EQIX, CCI, etc.)? Thank you.

Roger Conrad

6:04

Hi Alex. I think Digital Realty Trust (NYSE: DLR) operates in a very competitive business (data centers)--and up until very recently the risk was not really reflected in its share price. But I think after the recent decline, the yield of 5% plus is attractive. And while it's likely management will be conservative with dividend growth this year--given 2023 guidance for flattish FFO--I think there's a pretty solid value proposition. I think you could say the same thing about Crown & Castle (NYSE: CCI), which was also quite expensive up until recently but now yielding around 5% is more interesting. Equinix in contrast looks expensive to me and still trades at a premium despite declining off recent highs. I think it could drop further.

Victor

6:07

Elliott, what do you think about the geopolitics of the alliance brokered by China between the Saudis and Iran. What's going to be the impact on oil prices when we are more dependent on foreign oil?

Elliott Gue

6:07

China (and India) both know their oil and gas demand are going to continue to increase and the Saudis/OPEC/Russia know it too and understand they're going to need to grow their productive capacity. So, I think you'll see both sides of that equation -- the big demanders and the big suppliers -- start to form more alliances. Generally I suspect this means a longer Supercycle for oil/gas as eventually the US and other western powers are going to have to wake up and start investing more in energy supply. Until that happens, prices will remain elevated just like the 1970's.

Alex M

6:19

Hi Roger. I was noticing that EIX has been outperforming the utility index lately. Specifically, EIX is up 12% over the last 6 months, while the XLU is down 5% over the same period. With EIX being a component of many utility ETFs and indexes, to what do you attribute this relative outperformance? Reduced wildfire risk in California due to all of the rain they've been getting? Thanks.

Roger Conrad

6:19

I do think reduced risk of wildfire liability has been a major factor for Edison being able to outperform most of the rest of the utility sector this year--right now that's about an 8% year-to-date gain not including dividends, versus -5.5% for the DJUA and even 3.9% for the S&P 500. But the reason isn't weather--it's the company's own success cutting risk. The latest evidence: California's Office of Energy Infrastructure Safety estimates probability of wildfires associated with the company's utility equipment has been cut 75-80% since 2018--primarily by "coating" wire and putting other wires underground in areas of particularly high wildfire risk. The company is also incorporating drones to constantly inspect facilities. And it expects to have replaced 7,200 miles or 75% plus of overhead distribution power lines in high risk areas by 2025. Edison has also avoided significant new liability during fire season since 2018. The stock still trades at a discounted valuation 14.4X next 12 months earnings.

Roger Conrad

6:20

Continuing on Edison, I think we'll see a price near 100 in coming years as it continues to resolve wildfire issues and harden its network--and following that by electrifying state infrastructure.

Alex M

6:28

Hello Roger. I don't own any LUMN stock because of the deteriorating fundamentals, but I do own some Qwest Corp debt (bought by LUMN a few years back). The debt price has been making some massive gyrations lately due to a "debt exchange offer". Do you have any insight into this? Are they trying to avoid bankruptcy by negotiating their debt with creditors? Thank you.

Roger Conrad

6:28

I think Lumen is trying to cut as much debt as it can as fast as it can. And proceeds from selling assets have given it needed funds to make a big dent recently. That said, the company still has $20.4 bil in debt, versus a market capitalization of less than $2.7 bil. Also, Fitch just cut the rating today to B with a negative outlook, citing vulnerability to inflation and rising interest expense. From what I can see, the only Qwest Corp issue is the 7.25% of 9/15/2025. Ironically, the local wireline assets that used to back that debt have now been sold to a private capital firm. I'm not sure if that issue is under an exchange offer. But I do view bankruptcy as a growing risk at Lumen--as revenue erosion at the remaining operations appears to still be accelerating. And with bonds of May 2030 yielding an elevated 11.3% to maturity, its debt is definitely selling at distressed prices that would indicate rising default risk. Bottom line: I don't like the bonds any more than the stock.

Victor

6:36

Biden already said that he will tank any efforts by Congress to increase domestic production that could lower energy prices. He said that he will not allow anyone to undo the "progress" he made in his green agenda. John Kerry called the Inflation Reduction Act the biggest green legislation ever and combined with executive orders from Biden they will transform the energy sector. We already heard about their efforts to ban gas stoves, impose impossible emission controls on car makers and the latest attack is on the air conditioning industry. Are we living in a parallel universe? How this insane agenda will impact the economy and the energy sector?

Roger Conrad

6:36

We believe these policies will actually have an extremely positive impact on the oil and gas sector stocks we recommend--by continuing to discourage the investment needed to close the growing gap between long-term demand growth and supply. Basically, less investment means a longer cycle, which means higher prices for our stocks by the end--in fact, we think we'll see higher prices than we did during the last cycle for producers as well as midstream companies.

I would point out that the Biden Administration did approve a major oil and gas project for ConocoPhillips in Alaska, so even they appear to acknowledge we're going to need oil and natural gas for quite a while. The efforts to ban gas stoves etc are likely to be successful in some localities as they have been already but the Administration has backed off from federal action. And many states have banned the bans. But again anything that stifles investment means shortage and that makes us bullish.

Fred

6:36

Hi Guys,

regarding Elliot's answer to the previous Saudi, Russia,OPEC

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