JotCast | 4/27/22 Capitalist Times Live Chat

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4/27/22 Capitalist Times Live Chat

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Elliott Gue

3:53

I think those price targets might be possible over the longer-term (2 to 3 years), but they're above the targets we've published for the next 12 to 18 months. Generally, our strategy has been and remains to take partial profits on names like EOG/PXD/ OXY when they see dramatic upside; we may then look to buy on the inevitable dips. It's going not going to be a smooth trip to the moon even in names we like.

Bonnie Beth

3:56

I had asked the question about selling shares. I’m sorry I came in as Guest but was not signed in. My interpretation of your reply on selling a small number of shares is that if we have only 10 shares of a specific stock, it sounds like I should hold all the shares, or sell the entire position. So if I have say 10 or 20 shares, it does not pay to keep only 5 shares and sell 5 shares. I hope understood you correctly. I have held these companies for many years and do appreciate the dividend income I have been receiving from these stocks.

Roger Conrad

3:56

I think that's right. Again, the main reason to harvest gains on stocks trading at what historically have been unsustainably high prices is to protect the value of your portfolio--if/when they come back to earth. the bigger the position, the more important it can be to take action. But in the case of very small holdings held for a long time, it may not be worth the taxes and commissions.

Jeff B

3:57

Hi Roger and Elliott, thank you for hosting another Live Chat.

Roger Conrad

3:57

You're very welcome.

Jeff B

4:02

I was interested in your opinion on EQT and ETRN

Roger Conrad

4:02

The big worry for Equitrans Midstream is the ultimate fate of the long-delayed Mountain Valley Pipeline. The company's largest financial partner NextEra Energy (NYSE: NEE) basically wrote off its entire investment against Q1 results, following yet another setback in the courts that will likely lead to another delay of at least a year with accompanying higher costs. But doing the same could financially ruin the pipeline company as lead developer--at the very least forcing it to suspend dividends. Quarterly earnings are due out May 3, at which time we'll get another progress update. But for now this is a stock to avoid. EQT as a producer primarily in Appalachia is obviously benefitting from higher natural gas prices and should see solid results this year--even if MVP fails. But we prefer the producers in the Model Portfolio.

Dan

4:34

Hi Roger and Elliott, I'm not sure if the "new Diamond Offshore" drilling company is on your coverage screen. Recently I had some DODRW dropped into my brokerage account. Is that something I should hold onto? Is the offshore drilling industry making a comeback? Thanks for your insights. Dan

Elliott Gue

4:34

DODRW are warrants on the underlying stock Diamond Offshore Drilling (NYSE: DO) . Offshore drilling is one of our least favorite areas within energy right now. There's still a lot of excess capacity in the industry (too many rigs) and deepwater spending usually picks up late in the cycle. We prefer exposure to other areas within energy services like Schlumberger (SLB) and Baker Hughes (BKR)

FRED

5:02

I hear periodically that the Biden Administration is still working hard behind the scenes to cave in to Iran regarding lifting sanctions on their oil.

If, in fact this misguided madness plays out, what short to near term impact on oil prices do you see it having and, for how long would the pricing situation last?

Your opinion on what the impact on near term oil prices may be due to the Biden Administrations rumored attempts behind the scenes to give Iran what they want in return for the U.S. to remove sanctions on Iranian oil.

Elliott Gue

5:02

The market expects Iranian barrels to return eventually and there have been rumors of an Iranian deal in the words since last summer. Over time -- likely at least 6 months -- a US-Iran deal could add on the order of 1.2 million bbl/day to global supply. However, right now, the world is undersupplied by well over that amount. So, given that Iranian barrels are expected at some point and the world oil market is probably more like 2 million + bbl/day undersupplied, I'd expect such a deal to have a minor and temporary impact on prices. Even with Iran, OPEC is dangerously low on spare capacity and obviously the Russian situation isn't improving the matter.

Jeff

5:10

Roger, what is your opinion of KREF? Do you think the dividend is safe?

Roger Conrad

5:10

I think so. They've paid the same 43 cents per share since July 2018. Financial REITs in general face a challenge from higher borrowing costs. But it looks like results were pretty steady in Q1 despite that. Distributable earnings were 47 cents, which is adequate dividend coverage. The company's funded loan portfolio is 100% performing and 100% floating rate, meaning income should be keeping pace with costs. Book value rose and the company appears to have a solid backlog of new transactions. Obviously, any REIT yielding almost 9% should be handled with care. But this company's payout does appear sustainable--especially after the big cut in the leverage ratio to 3.2 times from 3.7 times EBITDA.

James

5:13

Hi Elliott, can you give a brief update on your bear market checklist?

Elliott Gue

5:13

Sure. Most of the indicators have "tripped" except for those related to the Conference Board's Leading Economic Index (LEI), which is still not signaling recession in the next 12 months. The main driver of that remains that the yield curve as measured by LEI -- 10 year less 3 month -- is still very steep because 3-month bill yields are very low. I suspect that will change as the Fed hikes and we're also seeing other key components of LEI that have been strong like ISM manufacturing New Orders are now weakening. So, we're not there yet but if trends continue as they are, I think the Bear Market Checklist will signal overall later this year. Beyond that, I've been putting together a list of shorter term and intermediate term indicators to supplement the Bear Market Checklist --- I'll be rolling out some research on those in coming months. Suffice it to say, the situation there looks a lot less promising -- in particular, liquidity indicators (basically monetary policy) have turned very bearish. For example, US

Elliott Gue

5:13

money supply continues to grow at a rate of 9.9% year-over-year; however, the nominal change in GDP (GDP without inflation adjustment) is growing even faster. Simply put, that means that Fed policy has generally turned more restrictive. This is being felt most intensely in growth-oriented groups first because they benefited most from the Fed's largesse, but it's spreading. On a very short-term basis, my indicators suggest that we still haven't seen the level of "washout" and extreme bearishness that tends to accompany durable market lows. Not exactly a promising picture for the broader market.

jim

5:19

although the sector has recovered, I am still down 45% on PAA which I purchased. Of course I have buyers remorse, because I thought it was not in the league of MPLX, EPD, ET, and WMB that you were recommending at the time. My portfolio is over-concentrated on midstream, which happens to be back in favor. I bought it for the dividend stream, with the intent being to ride out any storms, and collect great payout till things recover. After several years under water I am tempted to go to cash - but am still addicted to the returns. I just itch to do something about re-balancing. Would it be better to dump PAA at a 45% loss rather than wait for it to rebound. If so would putting the procees back into one of my others be a safe parking place for the money. I still expect dividends of nominal 6% overall which they all give - and they are backed by producing assets.

Roger Conrad

5:19

Hi Jim. Midstream energy stocks have had a good couple years. But as we've pointed out before, the better operating and financial results we've seen--including better distribution coverage ratios, reduced leverage ratios, dividend increases and stock buybacks--are largely the result of companies becoming better adjusted to an environment where midstream volumes are still lagging well below pre-pandemic levels, and even further below what we've seen at a similar stage in previous cycles. We've yet to see that real pickup in volumes that was behind the much higher prices for midstream stocks we saw, for example, back in 2014 at the beginning of the energy downcycle. Plains is highly volumes sensitive, so it's not surprising it would lag the recovery. My view is we're going to have to be patient a while longer with PAA. But I can tell you that this month's dividend increase will be followed by others this cycle. And midstream dividends across the board are safe and rising again, and should be for some time.

Neil V.

5:27

Hello Roger, Elliott:

I have had a long position in this company from years ago, and expect to keep it.
I see from its 2021 10-K (pg. 11 of 335) that it utilizes a purchased gas adjustment to respond to commodity price increases, and that it utilizes other techniques as well (commodity hedging; storage in summer, distribution in winter; etc. - pg. 63 of 335).

Do you have any further comment about the ability of this company to withstand further pressure from natural gas commodity price increases ($4 to nearly $8 already)? I am reminded of the stock price behavior for Centerpoint and Vistra last year, and the ability of the market to imagine a lot, notwithstanding the eventual strong recovery for those companies, and the hope for reason and balance in the interim.

I have in mind selling puts for WTRG if its present stock price drop continues. I did well with CNP and VST last year.

Roger Conrad

5:27

Hi Neil. I'm not seeing a symbol or name in your question. I can tell you that Centerpoint as a utility by law passes through changes in fuel costs directly to customers in rates. Regulators want it to manage that cost to avoid rate shock and storage and hedging are ways to do that. And when there is an extraordinary event like Winter Storm Uri that drives up those costs, regulators will typically pass them through with securitization--companies issue bonds that cover the extraordinary expense and make them whole, and ratepayers pay them off over time in a special surcharge. But pretty much every natural gas distribution company in the country is allowed to pass through its fuel costs, just as electric utilities are. It is possible that fuel costs will rise so far and fast that regulators will push for rate changes to lessen the impact. But that's not happening at this point. Note that Vistra was a different animal--not a regulated utility so it had no ability to automatically pass on extraordinary costs.

Roger Conrad

5:29

Regarding Essential Utilities, I don't think the decline has anything really to do with natural gas costs at its distribution utility. Again, these are automatically passed on to customers per Pennsylvania regulation. It's possible if prices rise enough that it will have a harder time growing rate base with infrastructure replacement. But I don't expect to see much pressure when they release Q1 results on May 9.

5:33

On a larger point, it's important to distinguish real business weakness--the kind that can blow a whole in portfolios--from selling pressure in a particular stock. Much of what we're seeing now is money sloshing out of the market, with ETF-heavy stocks the most affected. And unless it is accompanied by real business weakness, we're going to want to ride it out in high quality, dividend paying stocks for the most part.

cagill

5:36

I bought ENLC back in 2018 and what might be your thoughts are on it now.

Roger Conrad

5:36

Like the rest of North American midstream, EnLink is getting a lift from higher energy prices, which have stabilized production in areas its infrastructure services. We've preferred other midstream companies for some time now. But the dividend increase announced last December is a solid sign of strength. So is the upgrade to Ba1 by Moody's. Q1 earnings on May 3 will provide the next progress report. We currently rate the shares a hold.

cagill

5:37

Bought ENLC back in 2018 and it's not doing well. Do you recommend taking the loss?

Roger Conrad

5:37

As you can gather from the hold recommendation, there are definitely other midstream stocks we prefer--particularly those in the Energy and Income Advisor Model Portfolio and High Yield Energy List.

Sohel

5:41

Hi Roger, What's your outlook on price targets on ET and PAGP? They have both had good runs so far this year.

Roger Conrad

5:41

Hi Sohel. We think both of them are going a lot higher as this energy upcycle continues. We've yet to see the kind of volumes recovery that will really lift North American midstream as a sector. But both have made great progress cutting debt and streamlining operations to prosper even in a more tepid volumes environment. Energy Transfer LP this week raised its dividend for the second consecutive quarter to 20 cents a share. That's still about one-third less than what it paid pre-pandemic. But it's 31.1% higher than the payment for November 2021. And it's a good sign that earnings announced on May 4 will be robust. So is Plains' 20.8% dividend boost announced earlier this month a harbinger of good things for its Q1 results, which will also be announced May 4.

Bonnie Beth

5:53

Roger, Thank you for your advice. I may have mentioned in a previous chat that the only stock where my husband and I have a large holding is ETR, which was part of an inheritance. We hold 603 shares of ETR. If we reach the target price of $125 or more, what percentage do you recommend selling (i.e. 25%/50%). We are both retired and in our mid-sixties, and we will need some cash for a future move.

Roger Conrad

5:53

Entergy posted Q1 results and updated guidance today and did not disappoint--reaffirming 2022 earnings guidance of $6.15 to $6.45 per share. There was another solid increase in industrial sales (up 6.5%) and commercial (up 5.2% weather adjusted). The company also added 2.4% more commercial and 4.2% more industrial customers, driving long-term underlying earnings growth. And it announced Texas securitization of costs resulting from last year's devastating hurricane is complete, with Louisiana's to be completed "in the coming weeks." Storms remain an ever present risk. But the company has also made a great deal of progress hardening its system. Bottom line is this is a solid company--I still think a price north of $125 would be a good opportunity to cash out some shares--particularly for someone with immediate cash needs. But this is a position I think is worth sticking with. Note that 85% of LNG expansion projects in the US are in Entergy's service territory.

Sohel

5:56

What's your opinion of the monthly income REIT O?

Roger Conrad

5:56

We rate Realty Income Corp (NYSE: O) a buy up to 70 in the REIT Sheet coverage universe. The merger with the former VEREIT and divestiture of the office properties has accelerated FFO and dividend growth and cut risk. And the dividend looks very safe. I expect a solid Q1 result and guidance update on May 4,

Guest

5:57

Given the lull in questions, I would also like to extend the appreciation of you guys interacting with the subscribers. Needless to say, the economic winds on a micro and macro level will become more turbulent in the near term; which should be rather interesting, exciting and informative (with your presence). Take care.

Roger Conrad

5:57

Same to you. And thank you for participating today.

6:01

How will rising mortgage rates affect a stock like KREF?

Roger Conrad

6:01

Hi JT. The single biggest piece of their business is multifamily property loans--and this business is booming as renting becomes more attractive than buying a home. During the earnings call, management noted that increases in market rents were driving growth and that the REIT expected "earnings to become more positively correlated with rate increases in the second half of this year." It's always a challenge for financial REITs to manage interest rate spreads. But KKR did well in Q1 and based on guidance, it expects to the rest of the year as well.

Jim T

6:07

Roger, I became concerned with TRP and sold it for ENLAY. Yes, they are different, but was this an acceptable move?

Roger Conrad

6:07

I like both of these companies for their strong balance sheets and clear paths to earnings growth through asset expansion. TC Energy's is obviously reliant on being able to complete midstream energy infrastructure, while Enel SpA has to manage risks of investing in the developing world--especially South America. But I'm expecting solid results for Q1 on May 4 (Enel) and later this week (April 29) for TC. The biggest difference between them as investments now is that Enel is cheap--actually selling for less than my Dream Buy price--while TC is about 10% higher than my highest recommended entry point of 50, though not quite to a level where I'd be most inclined to take a partial profit. Enel in other words is the better buy now in my view, though again I like both stocks as long-term investments.

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