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4/27/22 Capitalist Times Live Chat
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AvatarRoger Conrad
2:01
Hello everyone and welcome to our April webchat. As always, there is no audio. Just type in your questions and Elliott and I will answer them as soon as we can comprehensively and concisely. We will send you a link to the transcript of the complete Q&A, which per usual will conclude when all of the questions in the queue are answered.
Q. Roger/Elliott---for years I have used some of your recommendations as "bond substitutes" in my portfolio. The dividends have been often higher (sometimes much higher) than bonds and the dividend usually rises each year. Yes, the value of the shares fluctuates but I rarely sell. Do you see this as a valid strategy? I have always been skeptical of the 60% stocks/40% bonds allocation that many touted for years. Thanks for all of your fine work over the years.—Don C.
 
A. Hi Don. I actually think the 60-40 stock/bond allocation approach for portfolios has been a dead end for many years. Mainly, bond yields have been far too low to compensate for either credit risk or interest rate risk. And the meltdown in the bond market over the past few months unfortunately demonstrates that pretty clearly.
I do think bonds and other fixed income will ultimately be attractive. And I have made numerous successful recommendations even in recent years for near-term maturity bonds of companies that are getting stronger as businesses. One good example would be the energy bonds we highlighted in mid-2020 in Energy and Income Advisor, which have since delivered substantial capital gains in addition to their high yields.
 
By and large, however, I believe long-term, income focused investors are going to be better off building a diversified portfolio of high quality, dividend paying stocks—drawn from a range of sectors to reduce volatility. Over time, stock prices will follow a rising stream of dividends higher—and the income stream keeps up with inflation as well.
 
I admit I cringed a bit when you referred to our recommendations as “bond substitutes.” I certainly don’t view dividend paying stocks as such—and despite the conventional wisdom that utilities, REITs etc are “interest rate sensitive,” there’s absolutely no
2:02
That said, however, I do think the stocks we recommend are superior choices for anyone interested in income. I still think odds favor more downside in the bond market. And in any case, even after the bond market selloff, fixed income yields are still by and larger lower than stock yields.
 
 
Q. Hi, Roger. I will be unable to attend tomorrow's chat session but I
wanted to be sure someone asked about NextEra Energy Partners (NYSE: NEP. It has dropped a lot in the last few weeks and I am wondering if it is a screaming buy at the current level or a red flag warning. I am aware the federal gov't is investigating the importing of solar panels. Is this part of the issue with NEP? Is NEP likely to be implicated in any wrongdoing in this
investigation? Thanks—James C.
 
A. Hi James. Hopefully you received the Income Insights I sent yesterday addressing the Department of Commerce and solar tariffs issue. The key piece of NextEra Energy/NextEra Energy Partners' Q1 conference call for me was the reaffirming of
earnings and dividend growth guidance through 2025 despite the solar panel supply issue. They can do that because the parent has a very deep pool of investment to support its growth rate, and as a supported financing vehicle so does NextEra Energy Partners.
 
At this point, I think we as investors need to wait to see where this goes--which is a lot of different directions. It's hard for me to believe someone in the Biden Administration isn't on the phone to Commerce ordering them to back off, considering the threat of a 250% retroactive tariff to future solar investment of any kind in this country. Unfortunately, the more we see of what goes on, the more apparent it is that one hand in this Administration doesn't always know or care what the other is doing. I feel pretty certain the solar industry led by NextEra is going to make sure everyone knows the consequences of this. But for me the key is that these companies are able to affirm guidance anyway, which is ultimately the driver of returns.
To your point about these companies being liable for back tariffs, that's a possibility. But it's never been done before and my view is it's still very unlikely here. These companies are big enough to handle it even in a worst case. But the real threat is from any solar panels bought from these countries going forward, which is why the supply chain has been so thoroughly disrupted now. So with the caveat that I never agree with really loading up on a particular stock, I do think the biggest US renewable energy adopter stocks are buys now.
 
 
Q. Would you consider placing Postal Realty Trust (NYSE: PSTL) in your REIT Sheet coverage universe?—John R.

A. Thanks for the suggestion. I’ll put it on the list for inclusion in the next issue. In the meantime, it looks pretty solid yielding north of 5% with regular payout increases and a steady business expansion plan. Earnings are expected May 11.
 
 
Q. Gentlemen do you cover Viper Energy (NSDQ: VNOM)? I’ve owned VNOM pre-pandemic and I am up 257%. Do you see any
2:03
reason not to hold onto this one? Cheers!--Chris E.
 
A. We cover Viper in our MLPs and Midstream coverage universe, and we’re written about it/recommended it off and on over the years—most recently in a piece about energy stocks paying variable dividends. The company’s fortunes are securely tied to Diamondback Energy’s (NSDQ: FANG), which is a very good thing now.
 
The only reason to sell Viper now would be to book a partial gain. We see this stock as likely headed a lot higher the next several years as the energy cycle unfolds. But if the overall stock market rolls over, it will not be immune and could easily drop under $20 in the near term. If that happens, we would expect a rebound.
 
Q. Greetings gentlemen. I would appreciate some guidance concerning Occidental (OXY). You have a buy under price of $40 and the stock currently (as of this writing on April 20) trades at $60. You have already recommended some profit taking. Do you recommend more now? 
? Realistically, where do you think the stock will be in two years or so? Many thanks for your advice, Jeffrey H. 
 
A. Hi Jeffrey. We think OXY will ultimately go a lot higher during this energy cycle, very likely to a new all-time high well past the old one at $113 and change in mid-2011. But the history of even the most robust energy cycles is that the gains don’t come all at once. And if the overall stock market does continue to drop this year, energy stocks won’t ultimately be immune.
 
One way to play a super cycle is simply to buy and hold the best names in a sector. But you’re going to do a lot better by tacking every now and again—taking profits on a big gainer or adding to stock that’s temporarily cheap. That’s what we’re trying to do in our Model Portfolio and is the reason for taking the partial profit, though we’re not inclined at this point to take more off the table.
2:04
Q. Hello Roger. With the current macro backdrop we are facing, your experience and insight is greatly appreciated. Thank you for your quick reply to our concerns and questions. The Alerian MLP ETF (NYSE: AMLP) recently hit a new 52-week high. Is it now overvalued? Kayne Anderson Energy Infrastructure (NYSE: KYN) is reaching your limit also. It seems this entire space is getting crowded, yet other names like Consolidated Water (NSDQ: CWCO) and CLP Holdings (Hong Kong: 2, OTC: CLPHY) are getting left in the dust. Your thoughts? Thanks again—Rob N.
 
A. Hi Rob. I think North American midstream stocks have a lot further to run before this energy upcycle ends. As you point out, even the averages have been strong, namely the Alerian index for MLPs. Relative to stocks of oil and gas producers, however, they’ve remained relative laggards, the reason being we’ve yet to see the kind of volumes recovery we have during past energy price cycles. I think we will eventually. But for now, the strength in this group is
2:05
primarily due to companies being able to make good adjustments to adapt to the current stage of the cycle, which is still subdued volumes.
 
I do like the Kayne Anderson closed-end fund as a way to get exposure to the group. I generally prefer individual stocks, however, to ETFs like AMLP—which I think expose you to the bad and ugly of sectors in addition to the good. But a portfolio of strong midstream companies is a good place to be now, recent gains notwithstanding.
 
As for stocks in the coverage universe that are lagging now, the important thing is being sure the underlying business is strong. I think it is for both Consolidated Water and CLP, and I think we’ll see it when they report Q1 earnings next month. So long as that’s the case, we’ll eventually see money coming back to their stocks.
 
 
Q. Regarding the spinoff and merger of BHP Group's (NYSE: BHP) petroleum business with Woodside (ASX: WPL, OTC: WOPEY), what would your thumbnail sketch point of view be in regards to having a position in WOPEY?
Thanks in advance.--RBB 
 
A. At this point, I’m advising CUI Plus/DDI Income members to plan to hold the Woodside shares they’ll receive with the spinoff/merger. The merger will create a company with scale in production and a strong balance sheet with reserves in a valuable part of the world, while we’re still in the early stages of an energy price upcycle. I think shareholders can look forward to considerable upside and big increases in the dividend—the indicated rate based on the current price is 9.5%.
 
The big decision in the CUI Plus/DDI portfolio eventually will be whether we want to scale up our Woodside, since what we’ll receive will be only a small portion of the portfolio. I’ll have more on that in the weeks after the merger/spinoff. Note that we also cover Woodside in our Canada/Australia coverage universe in Energy and Income Advisor. It’s currently rated buy up to 25.
Q. Hi Roger. In the last chat you discouraged me from buying AT&T Preferred stock. Thank you.--John T.
 
A. It’s been a tough time to own fixed income of any stripe, with the 10-year Treasury note yield surging toward 3%. And I don’t think its likely the bond market has bottomed at this time. At some point, essential services company fixed income becomes attractive. But with inflation on the move, common stocks offer both higher income and the possibility of increases to stay ahead of inflation. And I think even AT&T will at some point return to a policy of regular increases.
2:06
Q. Thanks for hosting these chats! They are very beneficial. Question: What is your current advice on AT&T Inc (NYSE: T) and Warner Brothers Discovery (NYSE: WBD)? Thank you—Pam M.
 
A. Hi Pam. I really don’t have much to add to what I wrote in the April 23 Utility Roundup “Utility Bellwethers: Portents from Q1 Results. I don’t think the dust has really settled yet regarding the spinoff. There’s been selling of both halves of the company, which I think is in large part related to the turmoil in the broad market. But both companies have announced Q1 results that were actually pretty solid.
 
I commented on AT&T’s briefly in the April 23 article. I think they demonstrated strong business momentum from wireless and broadband fiber operations, which appears to be continuing in Q2. It appears some investors are concerned growth will slow later this year and into 2023 as the US economy possibly enters a recession. But the company looks solid and is certifiably deep value trading at 7.5 times expected next 12 months
earnings—which are growing along with revenue.
 
As for Warner Brothers Discovery, shares are down on management’s “warning” that 2022 would be “noisy,” which overshadowed a very solid Q1. That said, the numbers did show considerable business momentum, including 15% year-over-year revenue growth excluding foreign exchange. And every aspect of the business showed strength including advertising.
 
I think the current price of 11.4 times expected next 12 months earnings is also heavily discounted. And I would look for both stocks to be considerably higher a year from now. My view is entertainment content pure plays like WBD are outside the scope of Conrad’s Utility Investor’s coverage universe. So I’m looking for a good exit point down the road. But AT&T paying a nearly 6% dividend covered nearly 3-to-1 by guidance free cash flow looks very cheap.
 
 
2:07
 
Q. What was/is the recommendation for the 2nd half of our KOLD holdings? Thank you--Arthur
 
A. We’re still holding it, as we are the rump short position in UNG.
 
 
Q. I thought KYN was what I was holding, but turns out it's KMF. Hoping for your input.--Paul N.
 
A.Hi Paul. Kayne Anderson NextGen Energy & Infrastructure (NYSE: KMF) as of March 31 had Targa Resources as its largest holding at about 7.2%. Rounding out the top 10, 8 are major North American midstream energy companies and one is a contract renewable energy producer. Kayne Anderson Energy Infrastructure (NYSE: KYN) as of the same date had MPLX as its largest holding (11.3%), with midstream energy rounding out the rest of the top 10. Both funds use a great deal of leverage (KYN 32.12% and KMG 29.79%). Both trade a sizeable discounts to NAV (KMF at -19.1%, KYN -13.9%). And both pay high yields (KYN 8.9%, KMF 7.9%) and both are increasing payouts.
 
 
Bottom line, they’re both pretty similar and I think give you that triple play of a big discount, high yield and high quality undervalued stocks inside that are raising dividends. I don’t currently track KMF in the Utility Report Card coverage universe. But I would rate it a buy up to 9.
 
Q. Is the symbol “AESC” for AES Corp’s (NYSE: AES) notes of February 15, 2024?—John M.
 
A. There are unfortunately multiple different systems for trading preferred stocks. AES did have a Preferred C for some years that I recommended, which it eventually called. But I can’t find any confirmation that this security is traded under that symbol. There is a Cusip number, which is how fixed income securities typically trade. That’s 00130H204.
 
The other way to identify them is by the coupon interest rate (6 7/8%) and the mandatory conversion date of February 15, 2024. At that time, this preferred will be exchanged for common stock.
 
 
 
 
 
Q. Roger: The notes for CNP say "Regulatory Relations stable in Texas, regulators grant full securitization of $1.1 bil in extraordinary natural gas purchase costs during 2021 Winter Storm Uri." What does 'securitization' mean in this context? Thanks—Bur D.
 
A. Hi Bur. Basically what happens with securitization is a company will issue bonds in the amount of the expense approved by regulators. The company receives all of the cash up front and so is made financially whole. Customers pay off the principal and interest are paid off over a period of years as a special surcharge in rates. Fuel costs are typically passed through to customers as incurred. Securitization’s appeal is it allows them to be passed on more gradually, and therefore more affordably.
 
In this case, Texas regulators have approved $1.1 billion of extraordinary natural gas purchase costs from Winter Storm Uri in 2021 for Centerpoint Energy, or essentially the entire expense. CNP is issuing bonds that will then be paid off by customers
over a period of years.
2:18
Q. Do you have an opinion on Stellantis NV (NYSE: STLA), as an income and long term holding for Capitalist Times. How about British American Tobacco Co NYSE: BTI), paying about a 7% dividend?—Monroe J.
 
A. We do believe in holding dividend-paying stocks across a wide range of industries. Regarding Stellantis, two factors would hold me back from adding the stock to my growth and income model portfolio at this time. One is its business is highly cyclical, with sales depending to a large extent on the current health of the automobile sector and concentrated in Europe. They do have some interesting investments, notably in recently restructured hydrogen fuel cell development. But at this point, they’re pretty much swimming against the current—even leaving aside the hit they’re taking from exiting Russia. The other factor is the company basically pays a variable dividend. That’s not a bad thing when times are good. But it makes it very hard to count on getting paid any amount. And again, this company’s underlying
business is challenged now.
 
As for BAT, we chose Altria Group for its stronger balance sheet. It does have many of the same strengths, including very inelastic demand for its key tobacco products.
 
Jeffrey H
2:22
DEAR FOLKS, During DOW's recent earnings call, the CEO predicted that "natural gas production is going to come on faster than any LNG export capability" so that gas inventories are going to build pretty quickly in coming months. 

Presumably, that will mean lower prices. How will that affect producers like AETUF and VET? And if gas feedstock is cheaper, how will that affect users like DOW and LYB? And what about a Canadian midstream like KEYUF? Or is all this too simplistic, especially with Russia threatening to cut off natural gas to Europe? 

I know -- a lot of questions here for an uncertain future, but your present thinking would be helpful. Many thanx
AvatarElliott Gue
2:22
There is no scope for the US to increase LNG exports near term beyond the final phases of a new LNG export facility that should ramp up by September. The next facilities won't come onstream until 2024 and even if the US government is serious about helping to enable permitting of new facilities, standard construction timetables mean that new LNG capacity is unlikely before 2024 at the earliest. So, Europe is largely irrelevant to the US in terms of natgas. We continue to believe that US gas prices need to come down because with winter heating season largely over and production rising, US supplies are likely to normalize in coming months. So, this could result in some downside for Norther American gas producers; however, we see any downside as limited because prices are unlikely to retreat far below $4/MMBtu and at that price these companies continue to generate copious cash flows. As far as gas feedstock is concerned, many users of the commodity lock in prices under longer-term contracts, so they aren't fully
AvatarElliott Gue
2:22
exposed to spikes such as we've seen over the past two months, nor do they benefit from near-term downside volatility such as we believe we're likely to see later on this year.  The fact is that natural gas feedstock costs are rising generally and the question is whether a particular company has the demand to be able to push through price increases to offset that. It also favors companies that can buy US gas rather than paying up for gas in Europe or Asia.
AvatarRoger Conrad
2:25
Q. Elliott. Do you have an opinion on Magnolia Oil & Gas (NYSE: MGY). It looks conservative and should have a fantastic quarterly earnings report and possible a big dividend boost? Maybe you want to answer this on the next web cast? Thanks--Gary S.
 
A. Hi Gary. I don’t know if you’d call any company with a B+ rated balance sheet “conservative,” especially a stock with such a history of volatility—trading as low as $3 and change a couple years ago. They are in growth mode, with production up 15% last year. They’re also flush with cash, which they’ve used to buy back about 10% of their stock over the last 12 months. We’ll be interested in what the company reports for Q1 on May 9, as well as updated guidance. But at this point, we prefer the producers in the Model Portfolio.
 
 
That's all we had in the pre-chat questions.
Lani
2:30
Hello Elliott and Roger,

This is probably a stock you don’t cover, but I've had very good luck with RY and would like to own more. Any advice re: a price at which it would make sense to buy more?
And re: T, info. from ATT says if I do nothing I’ll have the RIGHT to WBD stock. I’m presuming I’ll get it automatically. Am I correct? Thanks for all your good work.
AvatarRoger Conrad
2:30
Hi Lani. You should already have received shares of Warner Brothers Discovery (NYSE: WBD) in your account--the amount is 0.24 shares WBD per share of AT&T you previously held. And as I indicated answering a pre-chat question, my view now is we want to stick with T and WBD in the immediate aftermath of the spinoff. Despite the weakness in both stocks, both companies reported strong Q1 results and generally steady guidance. So long as that's the case, they should ultimately move quite a bit higher from currently deeply depressed valuations.

We don't have Royal Bank of Canada (NYSE: RY) in any of our coverage universes. I used to track it when I produced an advisory Canadian Edge before founding Capitalist Times. It's solid, pays a decent yield and should get a lift going forward from a stronger Canadian dollar.
Jack A
2:35
Hi Guys:

I think Elliot stated that he felt natural gas prices in the United States were overpriced considering it's spring, and our LNG export facilities were already producing as much as they can. Yet prices for natural gas in the United States seem to have risen a bit from where he predicted..... Does Elliot feel this is due to pure speculation, and does he still feel we'll see a pullback?
With prices overseas for natural gas continuing to rise, what is the best way for capitalizing on this as I'm assuming our domestic producers of natural gas will have limited potential to capitalize on the overseas price increases. Are there Canadian or foreign producers of natural gas that don't have the export limitations that domestic producers have?........... I guess I'm asking - in general - what is the best way to capitalize on the increase in natural gas prices in Europe?
Thanks
AvatarElliott Gue
2:35
I think the rise in gas prices of late has been due to a strong finish to the US winter heating season and, consequently, storage levels that remain below normal this time of year. However, I continue to see prices moderating as we enter a period of lower demand (heating season is ending and cooling season hasn't ramped up yet) and production continued to increase to take advantage of higher prices. However, I still don't see prices retreating even close to the lows we've witnessed over the past decade -- I still see the $4/MMBtu region as a good long-term target for US gas prices. As for playing sky-high European gas prices, US/Canadian producers benefit to an extent because high EU prices keep export terminals humming. But the incremental upside is limited due to lack of capacity. One area to look though is to industries/companies that use a lot of natural gas feedstock to produce a product -- in these industries, US producers can benefit from cheap US feedstock, giving them a dramatic advantage over their
AvatarElliott Gue
2:35
European and Asian peers. One very important example is US refiners, particularly our favorite, Valero. To turn crude into gasoline/diesel requires the use of a lot of natural gas and so VLO benefits because it's able to use cheap US natgas while its peers in Europe are being crushed by sky-high gas prices there. Of course, Valero then turns around and exports gasoline/diesel to Europe. Nitrogen fertilizer producers are a second example though those have seen a huge runup already. We also think that Europe's mess will drive more LNG trade over the intermediate term (latter half of the decade) and stocks like BKR will benefit from that because they are involved with build LNG export facilities.
Ed D
2:36
Thanks for the great research and advice. What is your opinion of Total Energy?
AvatarRoger Conrad
2:36
Hi Ed. TotalEnergies (Paris: TTE, NYSE: TTE) has been the relative laggard this year among the super majors. That's mainly because of relatively heavy exposure to Russia, which forced a $4.1 bil impairment charge against Q1 results. The country accounted for 5% of firm cash flow and 10% of earnings in 2021. That said, TotalEnergies will also report record operating results this quarter on sharply higher oil and gas selling prices and strong refining margins. The company also figures to get a huge lift from its accelerating investment in renewable energy, the latest acquisition a 4 gigawatt capacity portfolio in the US. I think this is a great entry point for this stock, which should ultimately double from the current price in addition to paying a rising 6% plus dividend--though Russia concerns will likely keep it at a discount in the near term at least.
Terry G.
2:37
What is your current view of Capital Product Partners and its pivot to LNG carriers?
AvatarElliott Gue
2:37
We don't see LNG carrier capacity as being the main bottleneck to increased LNG trade. The bigger problem is lack of liquefaction capacity. So, we don't see the LNG carrier companies as being a good way to play sky-high European gas prices or the (likely) increase in global gas trade.
Clint W.
2:42
Thanks for holding this chat. I would appreciate your current thoughts regarding Vermilion (VET), particularly in light of the fast changing situation in Europe.
AvatarRoger Conrad
2:42
I recently raised our highest recommended entry point for Vermilion Energy to USD25 for the NYSE-listed shares. The Canada-based producer of oil and gas will announce Q1 results and update guidance on May 11, and I expect to see a solid result for production, costs and realized selling prices--in line with the "Financial and Operational Update" management issued earlier this month. The developments in Europe have greatly increased the value of Vermilion's reserves and production, including the Corrib project in Ireland where the company just bought a larger stake. Bottom line: This company survived the energy sector crash and is decidedly on the upswing.
John A
2:45
Enbridge: My original 600 EBGUF from 2014 & 2016 are now 441 shares of ENB, kicking out 9.05% yield (ROI) in an IRA.

Does ENB remain a hold? I thought I read recently that it was a sell.

Thank you.
AvatarRoger Conrad
2:45
Hi John. I took Enbridge out of the High Yield Energy List earlier this month because the stock had risen enough for the current yield to drop below the point where it met High Yield Energy List criteria. But as I said then, this is a very high quality company paying a safe and growing dividend and that's a buy on a dip to 42 or lower with its NYSE listed shares. From such a good entry point, there's no reason to sell at this time.
JOHN R.
2:49
A while back you commented that inflation in 12-24 months would be greater and more prolonged than pundits (and government sources) had previously estimated. Your thoughts now ?
AvatarElliott Gue
2:49
The year-over-year increase in inflation will moderate due to base effects -- basically, we're now comparing current price levels to the levels from last spring/summer when inflation had already started to accelerate. However, inflation is still a problem and will remain elevated and well above the Fed's target of 2% for a prolonged period. The problem is that consumers/businesses are starting to raise their expectations for inflation and that's starting to result in changes to behavior such as rising wage demands. My view is that the Fed will follow through with dramatic rate increases near-term in an effort to quell inflation. As a result, US economic growth will show signs of a major slowdown by this summer and, eventually, the Fed will panic and stop hiking rates. Predictions beyond the next 12 months or so are low conviction because of the fast-evolving nature of the situation by I'll give you a few highlights: 1. I think the US will enter recession probably by the summer of 2023. 2. The Fed will likely
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