JotCast | 3/28/24 Capitalist Times Live Chat

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3/28/24 Capitalist Times Live Chat

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Roger Conrad

5:36

I really think the consensus is far too bearish on both of these companies, especially Hannon Armstrong. That company just extended its guidance for dividend and earnings growth through 2026, while providing pretty much unprecedented color on its investments and financing. NEP is always at the mercy of its parent's patience to be a viable financing vehicle again for growth. But there's little real financial risk through 2026, and no sign NEE won't remain supportive.

The reason for the bearishness is the lingering belief that higher for longer interest rates will eventually crash the business. The operating results say otherwise, But I think it will likely take a real Fed pivot to lower rates to light a fire under these stocks.

Roger Conrad

5:37

Continuing with Sohel's question, I don't see a lot of recession risk for either company. Hannon's investments are basically in projects and assets that help companies cut energy costs. NextEra Partners' revenue is secured by multi-year contracts. And both had been growing long before the Inflation Reduction Act tax credits started kicking in.

Sohel

5:46

Does either of you have a view on AMTX ... speculative bio fuel company? Some on Seeking Alpha think it is a 10-20X bagger in a few years.

Roger Conrad

5:46

This isn't one we currently track but I have a few comments. First, whatever its future promise might be, this company is even by its own projections more than a year from making money--with a negative net income margin projected for 2024 and 2025. Revenue actually dropped in 2023, though its expected to rebound this year. It's also expected to burn through $262 million more cash than it earns this year and nearly $200 million next--so it will depend on outside capital to make up the difference. Second, fuels is a volatile business including biofuels and that definitely shows up in results. Third, interest expense was up 34.6% in Q4, also indicating dependence on outside capital. And the company has delayed filing its Form 10-K, not necessarily a sign of trouble but the cited reason of challenges with "internal controls" is a little disturbing. The stock got a bounce recently basically from winning $200 mil from the US government, which is significant for a company with $236 mil market cap.

Roger Conrad

5:47

Maybe this one goes up as the Seeking Alpha author believes. But it could easily revisit the 52-week low around $1--if say there's a bigger accounting problem than revealed so far.

Aaron S.

5:53

Hi Roger ! I am currently a subscriber to the CUI, Utility , and Reit sheet and well pleased. Buy, sell, hold, Xcel Energy?

Roger Conrad

5:53

Hi Aaron. I actually wrote a bit about Xcel Energy (NYSE: XEL) in the March issue feature article. It's not yet a portfolio pick. But I do rate it buy at its current level, mainly on the belief that investors are pricing in far too much wildfire liability risk. I certainly understand the sentiment, with the PG&E bankruptcy in the previous decade, Hawaiian Electric's precarious position following the Maui wildfire and the massive jury rulings against Berkshire Hathaway's PacifiCorp unit. Xcel in a worst case, however, could simply put its Southwest Public Service unit--which is only 17% of ratebase--into bankruptcy and force plaintiffs to come to the table for honest negotiations. And more likely, Texas will enact legislation that prevents anything regarding the Smokehouse fire from getting that far. I rate Xcel a buy up to 70.

Hans

5:58

Roger: GLD is doing great, but what is happening to NEM. Thanks

Roger Conrad

5:58

Hi Hans. It's not uncommon for gold mining stocks to under perform the commodity at the beginning of a major turn higher. In Newmont's case, 2024 is very much a transition year, where it integrates the assets of the former Newcrest while cutting operating costs and debt. As part of this process, they reduced the variable portion of their quarterly dividend to zero, while holding the base portion to 25 cents. The savings will fund a $1 bil stock buyback. The stock has come well off its lows over the past month. But that's a lot of noise for a stock to overcome, particularly with the Federal Reserve still holding interest rates high. My upside target for NEM is still 100 plus--it's very much a potential beneficiary of the inflation I believe we're likely to see in coming years. And the dividend I believe will rise significantly from here. But I think we're going to have to be patient with it--as I've said in CUI Plus/CT Income.

DAS

6:03

Where do you think midstreams are in the current cycle. They have had a very nice run up recently - do you expect more or have they peaked for now.

Roger Conrad

6:03

We're well off the lows. But we're also still well below the highs of the previous cycle, when the leaders we held were much smaller, paid far less in dividends and were overall far less valuable. I think by the end of this energy price upcycle, we'll see stocks like ET, EPD, MPLX and so on at new highs well above what they reached in 2014-15. The key is investment--it's still well below where it was at the peak of the previous cycle for producers. And for midstream companies, it's a lot closer to decade lows. Energy Transfer, for example, is easily one of the most aggressive midstreams so far as acquisitions. But the $3 bil or so it plans to spend this year is less than one-third what it spent in 2015--when it was a much smaller company overall. Less investment means long-term supply lagging demand. And while there will be ebbs and flows in the cycle, the long-term direction is up, even as we garner big dividends you literally can't get anywhere else.

Susan Pevear

6:06

Great Thanks to both of you. My question is on CrossAmerica Partners and your view of this small mlp that seems to have ample cash flow to cover its distribution. Thanks again

Roger Conrad

6:06

Hi Susan. I wrote about CrossAmerica's Q4 results and guidance at length in the current issue of EIA. And I would agree with you that cash flow is both sustainable and more than ample for continuing to pay the current dividend. Revenue from quarter to quarter is affected by the factors beyond the company's control including weather and the health of the economy. And I'm not seeing dividend growth this year--which means I'm not raising the highest recommended entry point. But I am comfortable keeping it on our High Yield Energy List for high yield--and a buy on dips to 21 or lower.

Mike C

6:14

Good afternoon gentlemen –
Two questions….as it looks like we’re not only into higher inflation and higher rates for longer, but also like the Fed is quietly abandoning its 2% target (at least according to Mohamed El-Erian and others’ perspective), do you see new tailwinds//renewed prospects for SRLN?
Second, do you see any Baltimore Harbor/Key Bridge risks to ARLP (as an export hub for coal, according to Bloomberg) or any other EIA-covered players?
As always, much appreciation for all of your services, and for the peace of mind your portfolios, insights, and approaches provide.
Thanks!
Mike C

Roger Conrad

6:14

Hi Mike. I'm not familiar with the SPDR Blackstone Senior Loan ETF (NYSE: SRLN). It looks like the monthly dividend is variable, which makes sense given different loans have different maturities and pay dates. The ETF is good sized, which means less risk of liquidation and value distortion. And diversification should be a plus so far as credit protection, despite the fact that many commercial real estate loans are distressed. At the end of the day, it's something of a black box. I think you'll get a nice cash yield out of it, barring a major recession. But I wouldn't put myself in the position of depending on it to generate a set amount of cash.

So far as the Key Bridge collapse, it's a horrible tragedy. It looks like the port of Baltimore is going to be hobbled for a while. And it's clear the size of these freighters is not compatible with much of the infrastructure we have now, which means potentially another big infrastructure spend in addition to the $1.2 trillion passed in 2021.

Roger Conrad

6:18

Continuing on Mike's question, it doesn't look like anyone expects much impact on Alliance Resource Partners from this accident. it's likely the company does export at least some through Baltimore. But Hampton Roads is also a major terminus for coal exports, and there are other places available for shipping as well. More important, as I mentioned earlier in the chat, AI-fueled power demand is delaying closure of coal-fired plants in the US that Alliance supplies. And as these are more reliable and steady priced contracts, that definitely works in its favor. I would also see limited impact on oil and gas companies, which comprise the balance of our portfolio in EIA.

6:19

I would expect to see more reporting of the impact of the Baltimore Harbor accident from individual companies in the coming days. And we will keep you posted for anything significant.

Jeff B

6:26

Hi Roger, are you still positive on BEP? You have it rated A, does the rating reflect the credit quality of the company or the prospects for capital appreciation or both. Long time subscriber.

Roger Conrad

6:26

Hi Jeff. Yes, I think Brookfield Renewable continues to execute prudent investments in cash generating assets that are accretive to shareholder value, as well as finance them economically by a range of means including green bonds, parental support from Brookfield Asset Management (BEP itself has a BBB+ rating) and sales of non-core assets at premium prices. The investment to buy half of Westinghouse with Cameco already appears to be paying off, with the company picked by Poland in partnership with Bechtel for a $20 bil contract to build three nuclear plants. Like NextEra Energy, BEP avoided US offshore wind in its early stages and so has an opportunity to get in far cheaper now should it find the right project. I think this stock will eventually go a lot higher--it got the renewable energy run-up in 2020-21 and has been caught up in the fall since. But it's more valuable than ever in my view and that will eventually show up again in the share price.

rick p

6:32

Roger, apologies if this is a repeat. What do you make of the recent announcement by WES to significantly increase distributions to shareholder in 2024? The market seemed to like it as the stock popped. Do you think this distribution level is sustainable?

Roger Conrad

6:32

Hi Rick. I actually wrote a bit about Western Midstream in the EIA issue that just posted. I think the higher dividend rate is sustainable because of savings from the Meritage acquisition, debt reduction resulting from recent asset sales--including stakes in pipeline assets to Enterprise Products Partners--and the lack of asset expansion opportunities in its core operating area, which primarily serves Occidental Petroleum (NYSE: OXY). OXY has made no secret of its intent to focus free cash flow on shareholders, rather than ramp up CAPEX--which even after the Anadarko acquisition is still one-third less than it was at the peak of the previous cycle in 2014. OXY is reportedly considering selling its 48.79% stake in WES--which would be the opposite of what many producers are doing by buying in midstream serving their wells to cut costs. I think either way WES probably comes out ahead and we now have a buy up to 35 on the stock.

Alex M

6:38

Gentlemen, where do you see long-term interest rates landing as the Fed begins decreasing rates this year? Do you anticipate the 20-year and 30-year treasury bonds still yielding over 4%, or as the yield curve adjusts, do you see the yields on longer-term bonds declining below 4%? Thank you for your insights.

Roger Conrad

6:38

Hi Alex. I answered this identical question earlier in the chat. But in brief, we've already seen a pretty big drop in long-term borrowing costs for investment grade and junk rated corporations. And in fact, utility Entergy Corp's bonds due in 2066 actually have a lower yield to maturity than bonds maturing this year! Long rates tend to follow inflation expectations pretty much exclusively. The rates that will really come down if/when the Fed pivots are likely to be short term rates, which have not moved much at all. If the Fed pivots and inflation expectations are still falling--say if there's a recession--long-term rates could drop further.

Guest

6:39

Hello, Gentlemen. Thank you, as always. any

Roger Conrad

6:39

Thank you for joining us today. It's been quite a robust session.

Domenic

6:39

I am confused and concerned regarding AQNU. I have acculated a sizable position in AQNU based on the following understanding:

6:40

2/9/23 7.75%preferred 6/15/24 convertable into AQN common at the rate of 3.33333 shs at $15 per preferred, the # of shs must produce a final Value of $50/ preferred!!! EX. if AQN is $10/sh then we will received 5shs of common/ for each sh of preferred we hold
8/8/23 scheduled Div payment dates are: 9/15/23, 12/15/23, 3/15/24,final and last 6/15/24. The amount at each date is .9688 x 4 =3.8752/ share. X 3500 shs = $13,563.20 Plus 3500 x $50/share of AQNU into $50.00 of AQN shares. 3500 X 50 = $175,000 -

Roger with regard to AQNU converting into the common AQN, I have been under the following concept since 2/9/23. AQNU 7.75% preferred 6/15/24 convertible into AQN common at the rate of 3.33333 shares at $15 per preferred, the # of shares must produce a final Value of $50/ preferred!!! EX if AQN is $10 /share then we will receive 5 shares of common/ for each share of preferred we hold. With the price of AQN at $6.30 today at 3:30 PM Is it correct to expect to receive $50 / 6.30 = 7.9365079 shares of AQN.

Roger Conrad

6:47

Hi Domenic. Algonquin Power and Utiities' preferred AQNU as we've pointed out in CUI on numerous occasions was issued in June 2021 with a principal value of $50 per--and a maturity date of June 15, 2024, at which time it will convert into common stock of AQN. The number of shares was set at between 2.7778 and 3.333. If AQN trades at $15 or less on that date--which at this point seems likely--shareholders get the higher amount of 3.333. If it trades at $18 or higher, AQNU converts to the minimum number of shares. The formula for conversion within that range is based on what adds up to a final conversion value of $50. For example, if AQN traded at 16 at conversion, the exchange ratio would be 50/16 or 3.125 shares. Hope this clears this up. To access what I've written on AQN/AQNU, please visit the CUI website and use the search function by typing "Algonquin" into the box with the magnifying glass.

Hans

6:50

Elliott: LOB, insiders have sold a lot of shares will this reflect the future outlook.

Elliott Gue

6:50

I don't see any real worrying pattern there. The size of sells lately has been tiny and the insider buys in January-February outnumbered the recent sales by almost 3-to-1.

Guest

6:52

Are there any companies that you feel are more unfairly beaten up at the moment than their peers?

Roger Conrad

6:52

I think a lot of investors have a more or less binary view on energy--in other words, that there's "good" and "bad" sources. And the way they tend to invest is as though only one source will prevail while the other becomes obsolete, for example that fossil fuels will be phased out by 2030 or all wind projects are boondoggles etc.

Reality is energy sources sink or swim on individual project economics. And if AI/data center projections for demand are anywhere close to the mark, we're going to need a lot more of everything--all of the above in other words.

Following that, I think stocks like AES Corp (9.4x expected next 12 months earnings) are extremely cheap because "renewable energy" associated stocks are unpopular--even if companies are growing rapidly by adding long-term contracts.

Sohel

6:57

With materials running hot is DOW a good idea at current prices?

Elliott Gue

6:57

The chemicals stocks I think are Ok longer term. One of my favourite Basic Materials stocks right now is WRK -- Westrock -- a company that makes cardboard boxes. They're going to be acquired by Ireland based outfit Smurfit with the deal due to close in July. The beauty of it is that once Smurfit acquires WRK, they'll be switching their primary listing to NYSE -- this is a nice catalyst for WRK. Smurfit is a (much) better operator with better margins and is undervalued relative to US peers because it's not listed in the US. The story is similar to a name I liked last year -- CRH -- which switched to an NYSE listing and then soared.

Hans

6:57

Roger: NPIFF why the drop in price and now back somewhat, is this all due to Executive changes. Thanks

Roger Conrad

6:57

The management change was clearly the catalyst for the selling in my view--though it seems highly unlikely the new CEO is going to do much different from the former one. In fact, Northland made a point of affirming 2024 financial and construction guidance--including the major offshore wind projects in the Baltic Sea and off the coast of Taiwan. The successful sale of the La Lucha solar facility for CAD205 mil will help fund these projects, which will be transforming for earnings when completed the next couple years. And the outlook should also support the dividend. Northland is considerably cheaper than it was just a year ago--I think that's guilt by association with offshore wind developers like Orsted that did become overextended. But at this point, Bloomberg Intelligence reports all 11 analysts covering the company rate it buy and insiders are strong net buyers. I think we want to stay with it.

Dudley

7:00

Hi Roger & Elliot. Would appreciate your thoughts on Darling Industries & their partnership with VLO. Been a rough year but seems the market may be starting to see the value of biofuels. Thanks for all you do. Dudley

Elliott Gue

7:00

I think it's an interesting story. Right now, we're playing it via VLO as I think their biodiesel project makes a ton of sense -- VLO, and other refiners, know the process because they've been working with chemicals for years. And they get some huge benefits/subsidies from US policy.

Side benefit -- the conversion of CA refineries to biodiesel is further tightening the already-tight US refining Market and boosting margins.

John C

7:03

Thoughts on APA please.

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