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4/27/23 Capitalist Times Live Chat
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AvatarRoger Conrad
1:52
Welcome to the Capitalist Times live webchat for April. We’re looking forward to a lively discussion today. As always, there is no audio. Just type in your questions and we’ll get to them as soon as we can concisely and comprehensively.
 
We will be sending you a link to the transcript of the complete Q&A. That will probably be tomorrow morning, depending on when we wind up here. We will keep going so long as there are questions left in the queue, or answers left to post from emailed queries received prior to the chat.
Thanks again for participating today. We do very much appreciate your business. Now let’s get started with answers to some of the emailed questions.
 
 
Q. Roger. Well the Street is pounding NextEra Energy Partners (NYSE: NEP) post earnings report. With guidance basically maintained, are investors skeptical management can pull off this overall growth plan and the 12-15% distribution growth for several years? Is this a golden buying opportunity (dream price) to add to my 3600 shares or a time to pause and let the market sort this out? Best Regards,--Gary J.
 
A. Hi Gary. NextEra Energy Partners did pretty much affirm all of its guidance this week. In fact, the company announced a drop down of renewable energy generation on highly favorable terms from parent NextEra Energy (NYSE: NEE),
which as management said firms up the asset acquisition piece of what’s needed to meet guidance. And it raised its quarterly dividend by 3 cents a share, keeping the year-over-year growth rate north of 15 percent.
 
Based on statements from several of the major brokerages—notably KeyBanc today—there does appear to be skepticism about NEP’s ability to fund these acquisitions on terms supporting deal economics. The Keybanc analyst, for example, specifically cited “impending equity dilution in an unfavorable financial landscape” for moving the stock from “overweight” to “sector weight.” Other analysts have speculated about a higher cost for convertible security financing employed by management to fund purchases.
 
In my view, some of this reaction is analysts looking for reasons to back away from the company following the stock’s disappointing year-to-date performance. Certainly, as I’ve pointed out, being able to finance on terms that preserve deal economics is essential to Partners continuing to meet the 12-15
1:53
% dividend growth target. And equity finance through the company’s ATM, “at the market” stock sales plan gets more expensive the further NEP shares retreat.
 
But that said, NEP does always have an ace in the hole—which is the unwavering support of parent NextEra Energy since the IPO in June 2014. Mainly, NEP is a basically a funding vehicle for NextEra Energy’s unregulated renewable energy asset growth—which as Q1 earnings show continues to accelerate. So long as NEE remains financially strong and supports, NEP will reach its dividend growth objective. It’s proven that support again and again over NEP’s nearly 9-year existence. And the terms of the latest drop down transaction I believe confirm that support continues.
 
I generally don’t advise investors to really load up on a single stock, no matter how attractive it looks. And in the dividend paying renewable energy space, there are numerous other attractive stocks. But NEP yielding nearly 6% is priced at best for low-to-mid single digit percentage
1:54
growth—nothing close to 12-15%. That should limit downside from here even if management reduces dividend growth pretty dramatically. And if it’s still maintaining guidance when the Fed stops raising interest rates, we should see a price in the 70s fairly quickly.
 
 
Q. Roger, I am long some Southwest Gas (NYSE: SWX). Why is it under so much pressure? The only position I own making new lows! Thanks for all your insight and advice.—Willy F.
 
A. The game with Southwest is the spinoff of the construction unit Centuri, which management now says is likely to close in early 2024. In a recession, construction businesses contract, and I think that’s more or less what investors are pricing in now to SWX. There’s also the matter of Carl Icahn’s activism—and the fact he’s continued to increase holdings that are now 14.8% of the company. That on its face is bullish, as it implies pressure is on management to boost shareholder value.
But so far at least, Icahn’s moves haven’t done much to help shareholder value. In fact, the sale of the MountainWest pipeline system barely a year after its purchase and for a huge loss—which Icahn more or less demanded—was as very disappointing and contributed considerably to the downside in my view.
 
Management statements also haven’t helped. I expect to hear more on the post-spinoff plans next month with Q1 results. But the cryptic statements following Q4 results about “evaluating” the dividend at the utility were in my view likely floating the idea of a payout cut, which was a contrast with earlier comments about being able to pay out a higher percentage of earnings from a 100% regulated business.
 
That said, I believe Southwest still should be worth somewhere around $80 on a sum of the parts basis.
That’s the reason for keeping it in the Aggressive Holdings, though as a hold.
 
 
Q. Alliance Resource Partners (NYSE: ARLP) does not seem to be covered in either EIA or UI newsletters or utility report card. Any thoughts on it? Attractive yield, almost too attractive but coal unloved yet needed? Thanks in advance regarding whether this is buy, max buy price, or hold or sell—Cliff W.
 
A. Hi Cliff. We do cover Alliance in our “MLPs and Midstream” coverage universe on the Energy and Income Advisor website. You can access that under the “Portfolios” tab from the home page. Our current advice is hold.
 
1:55
 
I think the best way to view Alliance’s dividend is that it’s essentially at a variable rate. The big recent increase is primarily due to being able to lock in a higher price of coal sales. But keeping it there will depend on being able to lock in similar prices going forward.
 
In years past, Alliance’s coal output was heavily contracted to US electric utilities on a long-term basis. That made for exceptionally steady cash flows for many years but those contracts have been expiring/bought out at an accelerating rate in recent years, as utilities have switched to natural gas. And that has forced the company to rely on exports, which are considerably more volatile.
 
The pricing and demand picture over the next year or so does appear favorable for the company. And coal will still be needed globally for several decades, no matter how fast it’s phased out here and in Europe.
That should mean ARLP pays a solid dividend for a good many years to come—and we may re-rate it to a buy at some point on that basis.
 
 
Q. Dear Roger. How is NextEra Energy Partners (NYSE: NEP) promising such strong growth prospects for almost the next 4 years, with 12-15% dividend growth predicted through 2026? Where is that growth coming from? It seems fantastically out-of-step with peers in the renewable power yieldco field, and that gives me a 'no free lunch' skepticism.
 
The previous Conservative Income spotlight highlighted that the bear case on NEP is that it won't have financing or sufficient acquisition opportunities, and that NEP's souped-up future growth anticipates lots of acquisitions. 
 
What is the special advantage for NEP? How can it promise to grow cash flow and dividends at a rate essentially twice its competitors with similar business models?...and particularly in the case of Brookfield Renewable Partners (TSX: BEP-U, NYSE: BEP), better access to capital?
1:56
Does this all come down to favorable treatment from parent NextEra Energy (NYSE: NEE)? Has NEE been offering dropdowns on ridiculously favorable terms in order to build NEP into a strong standalone franchise? (At the expense of NEE shareholders?) Or are the dropdowns essentially typical in their margins for the yieldco, and it's just a matter of the sheer volume of anticipated dropdown transactions? And how vulnerable is this model to interest rates? 
Second question: Is there any significance to the recent DOE announcement of changing policy regarding LNG export terminal permitting extensions? I see that DOE rejected Energy Transfer LP’s (NYSE: ET) application for a second extension on the Lake Charles project. Is that likely to torpedo the Lake Charles LNG terminal project? Or should this be viewed as a way of telling ET to quit stalling, and it might spur a quicker commitment? Thanks—Dan N.
 
A.Hi Dan. As I said answering the first emailed question posted in this chat, NextEra Energy Partners should
basically be considered a piece of NextEra Energy. I would take issue with the assertion Partners has been offered drop downs “on ridiculously favorable terms.” And I don’t agree Brookfield Renewable—a stock I do like as you know—necessarily has better access to capital than NEP. But NEP does sink or swim with NEE—and the parent has consistently demonstrated support over NEP’s nearly 9-year history, including much more challenging times for the company than now.
 
As I also noted in that previous question, there is concern about funding drop down acquisitions at such a challenging time for financial markets. We’ve seen much the same drag on BEP shares this year in fact, following its proposed acquisitions of Westinghouse and Origin Energy in Australia. But as I also said, NEP shares yielding nearly 6% are not priced for 12-15% annual growth. In fact, with BEP yielding around 4.4% and recently raising its payout 5.5%, I would say NEP is more priced for 3-4% growth.
 
As for Energy Transfer, I think
with the Lotus Midstream acquisition in late March they’ve shown they have plenty of places to invest. Management still says it’s optimistic on Lake Charles LNG—but the challenge has been lining up supply commitments. They’re still sitting at about 8 million metric tons/year versus a target of 12 mil before making a final investment decision. But again, ET is hardly bereft of options to fuel growth. And its balance sheet is probably the strongest it’s ever been. They’re sticking with the quarterly dividend bumps. May 2 is earnings.
Matt S.
2:02
How safe do you feel that BSM is as a long term investment? Are there better/safer royalty plays for someone in their early 30s who will likely be able to retire from dividend income in the next 10 years or so?
AvatarRoger Conrad
2:02
Hi Matt. I think Black Stone Mineral LP (NYSE: BSM) is a little high priced right now and doesn't appear to reflect the likelihood of a lower payout in second half 2023--due to much lower selling prices for natural gas harvested from its lands. The dividend history of BSM is quite volatile. And the last time gas was around its current level, the quarterly payout was in the 15 to 20 cents per share range. That's why we have the highest recommended entry point at 14. That said, BSM is conservatively run and will provide plenty of leverage to the energy upcycle we see the next several years--maybe not enough alone to retire on but probably eventually a quarterly dividend near $1.
Bill G.
2:09
Hello Elliott: What has happened to VET? I bought some after hearing favorable comments from you earlier in the year. I would ask Roger the same about VST?

Thank you for taking the time to do these get togethers every month.
AvatarRoger Conrad
2:09
Hi Bill. Thank you for joining us today. We do track Vermilion in our Canada and Australia coverage universe on the EIA website. The bottom line with the stock is it's tracking natural gas prices, which have been declining sharply globally since the start of the year, Vermilion is in a position of strength, which it demonstrated by closing the Corrib acquisition March 31to reach a 56.5% project interest. And the 25% dividend increase that month is also bullish. I would expect a recovery with gas prices, though you may have to be patient.

Vistra, which we track in Conrad's Utility Investor--reports Q1 results May 9 and appears to be meeting free cash flow targets. The big events this year are closing on nuclear power company Energy Harbor and Texas' plan to build natural gas plants. But I think VST is undervalued and a buy up to 28.
DougB
2:16
Hi Roger and Elliot,  What in your opinion has caused the recent severe swoon in Valero?  I haven't been able to find anything to account for the recent weakness and just wonder of there is something that would contradict the rosy outlook of the last couple of years growth?  And thanks very much for holding these chats.
AvatarElliott Gue
2:16
Thanks for the question. The refiners have all been hit by a decline in  crack spreads, basically a measure of refining profit margins. Refiners like VLO are in the business of buying crude oil as a raw material for their facilities and then converting that oil into gasoline, diesel, jet fuel, etc. OPEC threw a floor under the price of oil in early April by cutting output; that's good for producers but bad for refiners because it increases their feedstock costs. At the same time, the value of the products they sell is driven primarily by demand -- concerns about an imminent recession have weighed on gasoline, diesel, etc. So, you have a near-term profit squeeze where the cost of raw materials is flat to higher and the value of refined products is weaker. I don't expect that to persist long term as the world is fundamentally short of refining capacity and I'd expect demand from China to continue to ramp as the economy there opens up.
Andy Z.
2:18
Hi Roger and Elliott,

I've held PBA for a number of years. It seems after it was outbid by Brookfield for Inter Pipeline, they've stalled. They've given us consistent dividend increases over time, but they don't seem to have a stated range for increases like HESM or TRP. I've 'read' that their slow growth prospects will equate to minimal dividend increases. Can you comment on their growth prospects and what if any effect does switching from a monthly payer to quarterly have on their dividend growth prospects.

Thanks so much for your time today.
AvatarRoger Conrad
2:18
Hi Andy. I actually think Pembina managed to get a piece of a much bigger deal after being outbid for Inter Pipeline--that's the venture with private capital firm KKR to expand northwest Canada gas infrastructure in anticipation of LNG exports ramping up the next few years. Q1 earnings and guidance updates are May 4, which should include an update of this venture. NYSE-listed PBA shares are down about -4% this year, which compares to a gain of around 5% for the Alerian MLP Index. And as you point out, they have a more conservative dividend policy than HESM--though very similar to TC Energy's. On the other hand, PBA has also been a somewhat steadier performer on a long-term basis--despite the downdraft from a softer Canadian dollar. And that should remain the case longer-term as these investments pan out--including the Cedar LNG project near Kitimat in BC, in which it's partnered with the Haisla Nation and has a supply agreement with ARC Resources.
Tom L.
2:25
Hello Roger & Elliott. Your thoughts on PXD's earnings report please?
AvatarElliott Gue
2:25
Operationally it was a strong quarter mainly because their operating expenses were a little bit below guidance and CAPEX for Q1 was right in the midpoint of guidance. Their distribution was a total of $3.34 which annualizes to around 6%, also in-line with our expectations. Like all producers they face a near-term headwind from flattish oil prices and weak natgas realizations, but they're one of the highest quality, lowest cost producers in the US with 20+ years of inventory, so we think they're a core holding longer term.
Andy Z.
2:25
Hi Roger and Elliott,

Can I get your opinion in WPC? I've held it since before the pandemic and it's pretty much flat since then. WPC has raised their dividend barley 4% over a 5 year period. That's a total of 4% not 4% a year - which amount to token increases given to keep their streak alive. Their share price has followed that anemic dividend growth. They've shut down their private REIT management business which streamlined their operation. It is supposed to be a positive long term, but they took a short term hit from the loss of fees. But now, higher interest rates are making accretive deals harder to come by because CAP rates aren't rising as much as interest rates. What - if anything - will rev up WPC's FFO/AFFO such that they can give us a decent yearly dividend increase? .8% a year doesn't even match the Fed's target 2% rater, so it's really not keeping even close with a real rate of increase in this inflation environment.

Thanks again for your time.
AvatarRoger Conrad
2:25
I'll take this one as well. WP Carey (NYSE: WPC) really hasn't growing its dividend at significantly for several years. Q1 earnings are due out tomorrow and I would not expect to see that policy changed during the guidance call. But I think shares are attractive for a couple reasons. First is the high and very safe yield near 6%, which is close to three times what's paid by the popular iShares US Real Estate ETF (NYSE: IYR). Second, Carey has literally transformed its business the past few years into a major beneficiary of reshoring of industrial and logistics facilities to the US, UK and EU. As you note, like all REITs Carey's expansion faces headwinds from higher interest rates. But from the current low valuation and stronger financial and operating position, the REIT does have the wherewithal to raise dividends and for the shares to take out the old high ($94) with relatively low risk.
David O.
2:34
Gentlemen,

Thinking about upstream sources of income for retirement. Have nice positions in CVX and XOM.  Thinking about PXD, DVN, COP, EOG. Would like your thoughts on reserve replacement for the four. My reading seems to indicate CVX and XOM are sub 100%…they produce more in a year than they can replace with new findings. I believe PXD is about 160%…nice! To your minds, how important are healthy reserve replacement ratios? Would seem critical to me.
AvatarElliott Gue
2:34
Thanks for the question. I don't think reserve replacements are particularly useful for shale companies. Shale is different than conventional because it's basically a manufacturing business. The reserves are widely distributed under acreage in a region and producing more oil and booking more reserves is just a function of drilling more aggressively. For shale producers I prefer to look at years of inventory -- how many years could they drill at roughly the current pace before running out of Tier 1 drilling locations. I like to see 15+ years and one of the reasons we like PXD is that they have 20+ years of locations. For the majors too, you have to be careful about looking at reserve replacement in isolation. For example, XOM has been high-grading its portfolio of projects -- selling off higher-cost more mature projects and investing in high-growth low-cost projects (Guyana and Permian being two key examples). They're the operator of the Guyana project and, at last count, they'd announced 31 major discoveries
AvatarElliott Gue
2:34
on their acreage there. They started producing in late 2019 and are starting up a series of new projects over the next 3 to 5 years (and beyond) that will ramp up their output at the fastest pace of any major oil project in many years. So, they'll be booking more reserves over time as this project proceeds. Also, remember the big oils now also have shale exposure, so reserve replacement metrics aren't as useful as they used to be. We like to value a stock like XOM based on free cash flow potential -- how much cash can they generate over and above CAPEX with oil in the $80/bbl level? On that basis names like XOM and HES, which we profiled in the last issue and has exposure to Guyana, look good.
Andy Z.
2:35
Hi Roger,

Is it possible to add a couple more REITs to your REIT Sheet? I appreciate how much work it is keep up with what you have, but if it's possible can you talk about the following trio and/or add them to your list?

EPR - I asked you about this in the fall, and I think you said you'd add it, but I don't recall. The Regal parent bankruptcy certainly hurt them, but they've said all along, they only buy the best theaters, ones that if the tenant rejected the lease in bankruptcy, they could re-lease. That seems to be proven with the Regal situation. Regal has not rejected any of their leases in coming out of Bankruptcy. What are your thoughts on this as a long term investment?

ABR - I know you've said for a long time that the only mortgage REIT you'd own was KREF and you've since rated it a sell. ABR isn't as exposed to the Commercial Market, or at least not the Office side. I think they have the lowest payout ratio of all MREITS. What are your thoughts on this and can you add it to your coverage?
AvatarRoger Conrad
2:35
Thanks for those suggestions Andy. Sorry about EPR Properties. I've just now gone in and added it to the coverage universe--so you can expect to see more on it in the next databank. The REIT announced earnings today for Q1, which included a nice again in adjusted FFO per share. The REIT also appeared to have executed on its investment plan and controlled risk to the Regal Entertainment Group bankruptcy, which is a testament to scale and diversification. There's no guidance for 2023 due to the Regal bankruptcy. And until there is, I'd rate this one a hold. But the dividend does appear well covered.

I will take a look at ABR. As you probably saw in the most recent REIT Sheet, I closed out KREF ahead of its Q1 results, which as I feared reflected the weaker operating environment. ABR reports early next month.
Andy Z.
2:37
Last, RITM (another MREIT). I've owned this for a while - mostly because they had a large book of Mortgage Servicing Rights which tend to rise in value when rates go up because people don't refinance as often so they keep the servicing rights longer. That hasn't stopped them from bleeding along with other MREITs. Can I get your thoughts on RITM and can you add this to your coverage?

Thank you again for your time. You both are truly generous to give us so much of your time EVERY month.
AvatarRoger Conrad
2:37
Thank you for joining us Andy. I will take a look at Rithm Capital as well, which reports May 4. I don't see M-REITs as a good business or stock market bet while the Fed is pushing up interest rates and recession risk is rising. But there will be a time when the survivors will be attractive.
Jack A.
2:43
Hi Elliott:

Recently Cramer on Fast Money covered and seemed to recommend New Fortress Energy. What seems interesting about the company is its apparent role in LNG overseas. What are your thoughts about New Fortress as an investment?

Unfortunately, with our present government in the United States' hostility towards developing LNG export facilities, it's hard to imagine capitalizing on natural gas as an investment unless we focus on the ability to sell overseas. What I liked about your recent recommendation of Marathon Oil is its ability to capitalize on the higher price of natural gas outside of the United States. I thought, perhaps, New Fortress Energy could fall into that same category. Your thoughts? Thanks
AvatarElliott Gue
2:43
I think New Fortress is interesting. Generally I am a little wary of companies that are not generating free cash flow -- capital consumers -- with risk of recession and amid high/rising interest rates. They have quite a bit of net debt (approx. $4 billion I believe). The key to this stock doing well will be their first "FAST" floating LNG unit in Mexico for which they expect to receive permits by this summer.  They also have filed for permits to build units in the US (Louisiana) but the US Maritime Administration is still reviewing those and I've seen read some reports from analysts who are cautious on how that process is proceeding. Of course, the most important thing will be timely execution of that LNG unit in Mexico as a sort of proof of concept for the business model. So, to sum it up, I see some promise but I think it might be a little early stage in terms of a recommendation.
Hans
2:44
Elliott  What is your outlook for the price of Oil and  Natural Gas for the remainder of this year  Thanks
AvatarElliott Gue
2:49
For natural gas, I believe the main driver of front-month and spot weakness has been warmer-than-average winter in 2023-23 and the Freeport LNG outage; both have been resolved. Also, supply should start to fall later this year, particularly in Haynesville, as the major producers are cutting CAPEX and laying off rigs in response to the commodity price issue. So, I see a gradual healing in the gas market, with prices rising into 2024; a hot summer that drives power burn could accelerate that. I'm looking for prices closer to $3.50 to $4.50 next year. Oil, the demand side of the equation will probably keep a lid on rallies, though the supply-side remains tight and Saudi/OPEC are actively managing the market, so we're looking for rangebound trading with WTI floor around $65 to $70 and a ceiling around $80 to $85/bbl.
Don
2:44
Hello Team,
Thank you for providing these monthly chats. 

1) Can you explain the negative reaction to the earnings release in NEP.  Does that change your outlook?

2) What is it going to take for KMI to break through $20?  The volatility is so low it's barely worth selling calls against it.

3) What is going on with the weakness in SWX.  This was recently in the 90's when Icahn got involved. 

Regards
AvatarRoger Conrad
2:44
Hi Don. Thank you for joining us today. Earlier in this chat, I posted answers to a couple of questions on NextEra Energy Partners with a great deal of detail. But the short answer is there seems to be skepticism it will be able to fund drop downs from parent NextEra Energy with financial markets this unsettled--and that if these conditions continue to worsen they may have to throttle back from 12-15% dividend growth. I think this is a concern. But my outlook is the same for this company--it will thrive so long as NextEra Energy supports. And shares yielding nearly 6% are already priced for much lower dividend growth.

Midstream companies like Kinder are always last to the party in an energy upcycle--and while we're in the early innings of this one, recession concerns have stalled it for the time being. That said, KMI Q1 earnings were very solid and the company will hold up well in a recession.

I also answered a question on Southwest earlier. I think sum of the parts is still worth north of $80.
Marianna
2:54
Hello Roger
I have two questions for you today
1. After last report from ABBV, is it still a buy for fresh money?
2. What would be your preferred area to invest in in the near future-renewables, oil or gas?

Thanks
AvatarRoger Conrad
2:54
Hi Marianna. As I've noted in CUI Plus/CT Income, our view for a while has been Abbvie was priced much too high given the uncertainty about US Humira sales with competition picking up. And the action the past couple days proves as much. My highest recommended entry point is still 130, or about $20 below the current price. That said, I didn't think the overall results were half bad--in fact the company raised the mid-point for 2023 earnings to $10.92 from $10.82. Understandably, people focused on the -26.1% drop in US Humira, which was not zeroed out by the 44.7% boost in Skyrizi and 47.5% higher Rinvoq sales. And overall revenue was down -8.3%. But the market reaction is much more a commentary on previous unreasonable investor expectations--this is still a solid franchise and we may raise our entry point.

I think best in class renewables and oil and gas stocks are headed a lot higher the rest of this decade--riding the energy upcycle caused by nearly a decade of underinvestment. Seek out the best of each.
James
2:59
Hi Elliott, Can I get your thoughts on SLB earnings last week and its stock price action moving forward? Reaction was very negative.
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