JotCast | 4/27/23 Capitalist Times Live Chat

Return to

4/27/23 Capitalist Times Live Chat

Prev Page View Full Chat Next Page

Elliott Gue

2:59

Their margins were a little light for the quarter but it appeared to be some one-off issues with a production disruption in Ecuador that's since been resolved. Generally Q1 can be a little light for SLB for seasonal reasons. But, the big picture remains healthy here -- strong growth in their core international operations and, in particular, OPEC is spending big to increase spare capacity despite the fact their cutting production to support prices right now. It's still our favorite big services name. Also, SLB is on track to return 2/3rds of free cash flow to shareholders this year via dividends and buybacks.

Lorraine

3:00

Are you concerned about a possible dividend cut from T?

Roger Conrad

3:00

Hi Lorraine. People focused a lot on AT&T's free cash flow from Q1. And I think the shortfall was a big reason why they did not raise the quarterly dividend. That said, the basic business actually looked pretty positive during the quarter, including revenue trends for both wireless and fiber broadband growth. And the reasons for the free cash flow shortfall appear to be one-offs--which is why management maintained its full year forecast of $16 bil. The company is also on track to reach a $6 bil cost savings target this year, which makes achieving the free cash flow target not so dependent on market conditions. And it should be said Q1 free cash flow was in line with management guidance if not Wall Street's. I will be more concerned if the company starts missing its own guidance. But I think there's still plenty of cushion for the dividend, which in fact was set conservatively following the WBD spinoff.

Lee

3:09

What do you think of Scott Sheffield’s retirement announcement. How does this change the Street’s view of PXD?

Elliott Gue

3:09

He was expected to retire. In fact, this is actually the second time he's retired from PXD. He stepped down as CEO in 2016 and the company -- like most shale producers at the time -- grew production too quickly, which hurt the stock. So, he came back on as CEO in 2019 to guide the company's transition from a growth stock to a free cash flow generation machine. So, he's wanted to retire for some time now and I suspect he now feels the company is on solid footing for his hand-picked successor to take over. I expect no change in strategy.

BobD

3:12

Today one of the Motley Fool services recommended selling NEE based upon its increased debt load and rising interest rates. They stated that as a concern for the financial health of NEE. Since NEP is dependent upon NEE's financial health, do you agree with the concerns about NEE?

Roger Conrad

3:12

Hi Bob. When the stock market is under pressure it's easy to come up with reasons to sell stocks--particularly a bellwether like NextEra, which is a member of 171 stock indexes and all their related ETFs. It's also fair to say NEE has a relatively high valuation--25 times expected 12 months earnings versus 19X for the DJUA. But when it comes to earnings and dividend exposure to balance sheet and interest rate issues, the NextEras really aren't that exposed. Added debt in Q!, for example, was less than half asset growth in dollar terms for NEE. Also, the company affirmed its financial targets through 2026 for earnings and 2024 for dividend growth (10% a year) and basically doubled its solar deployment plans in Florida--all signs of strength. Perhaps the Motley Fool report came out before Q1 results???

guest

3:18

At what price for natural gas do you think producers will stop drilling for this product or is there such a surplus from oil production that the producers just have to take what the market offers?

Elliott Gue

3:18

It depends on the play. In Appalachia, many producers can generate free cash flow with gas in the low $2's. In the Haynesville Shale -- a crucial play to watch -- it's closer to $3/MMBtu. However regardless virtually all of the gas-heavy producers are cutting CAPEX already to preserve cash flow generation. I suspect that most will want to keep production flattish through 2023 and then be in a position to grow production into 2024 to benefit from the start up of additional export capacity next year. Associated gas production isn't the overhang it once was because oil drillers are also cutting CAPEX and or keeping production near flat right now. The days of unrestrained growth in production at any cost ended (finally) in 2019-2020.

Alex M

3:25

Hi Roger. I'm sure someone else may ask about this too, but what are your thoughts on AT&T's most recent quarter and their lower-than-expected free cash flow number? Thanks.

Roger Conrad

3:25

Hey Alex. As I noted answering an earlier question, I'm not particularly concerned about the Q1 free cash flow number--which was in line with management's guidance. Also, the "shortfall" apparently reflected one-off factors and notably management has affirmed its full year projection. At least one Wall Street analyst called the investor reaction unmoored from fundamentals. I don't think we can fully dismiss competitive risks in the telecom sector--with bonds of companies like DISH, Lumen, Altice and Uniti priced for bankruptcy. But also clear that a lot of people were looking for reasons to doubt AT&T going into Q1 results--and the free cash flow number provided that opportunity even from a price of 7 times expected next 12 months earnings. I never recommend really loading up on any one stock. But AT&T is worth holding at this price--or adding to for those without positions.

3:32

What is your current advise for KREF? And what is your opinion on Iron Mountain?

Roger Conrad

3:32

Hi JT. I actually recommended selling KKR Real Estate Finance (NYSE: KREF) in the most recent REIT Sheet--ahead of Q1 results. I'm encouraged by recent insider buying on the stock's recent plunge. But the business headwinds I cited with the sell recommendation appear to still be worsening--including volatile interest rates and rising credit pressure with recession risk increasing. The net loss in Q1 doesn't particularly worry me--the -4.7% drop in book value does as it means asset values are dropping and management is increasing loss reserves rather than investing. The floating rate portfolio is benefitting from higher interest rates as management said it would, which helped distributable earnings cover the dividend in Q1. But so long as the Fed is squeezing the economy, KREF is going to be on the defensive. Rating Iron Mountain a buy under 55 ahead of earnings May 4. Data center growth should continue even in a recession, and IRM is also a potential takeover target.

Jimmy C.

3:38

Roger/Elliott: Good afternoon, I wanted to ask about FCX and SCCO in light of the expectation for the need for a much greater supply of copper to accommodate the increase in electric vehicles between now and 2030. Is this a good time to begin to play the mining sector or do you think it will be more timely as the growth in EV actually begins to come
to fruition?

Roger Conrad

3:38

Hi Jimmy. We're also very bullish on copper supply in the long term, an Freeport McMoRan has been one of our top recommendations in mining for some time. We will be updating our mining strategy and favored stocks in CT later this spring. That said, Freeport's already announced Q1 results pretty much affirm our trepidation about really loading up right now in the sector. The company did report solid progress ramping up its Grasberg mine. But it also showed the negative impact of inflation on costs, including a labor shortage in the US and unrest in South America. And management appears concerned about a recession the impact on copper prices, announcing lower expected volumes and CAPEX. Bottom line--we believe it's a time to be patient with new mining sector positions, though our long-term bullishness is strong as ever.

Roger Conrad

3:40

As for electric vehicles, we suspect sales will expand in coming years. But keep in mind copper is critical for a lot of other things at a time when industries are going full digital--so demand is pretty well supported even if EVs aren't as big a deal in future as many believe now.

Jim

3:48

Dear Roger & Elliott:

Over the past several months commentary in both EIA and CUI have seemed to indicate it might be best to build a cash reserve to invest in the future. I can get around 4.5% in money market funds whereas many stocks yield 3% or less. I figure when the debt ceiling is reached the media will whip everyone into a frenzy resulting in a sell everything moment thereby putting stocks on sale providing a good entry point for new money. My question is concur the upcoming debt ceiling crisis might be a good time to wait to invest new money?

Roger Conrad

3:48

Hi Jim. We continue to believe holding a larger than usual stockpile of cash (and equivalents like money market funds) is a good idea this year. And in fact, the managed income and growth portfolios we run as Creating Wealth and CUI Plus/CT Income are also pretty heavy on cash these days. So far, it's been more difficult to keep up with the S&P 500--which has been pushed up by the big tech stocks that now make up more than one-third of the index and related ETFs. But we believe it will be key to taking advantage of opportunities following another leg down for the overall stock market--and the S&P and big tech in particular.

I think it's a reasonable assumption that stocks will sell off on a US debt ceiling default. But the real risk to stocks is the growing likelihood of a recession from whatever catalyst--more bank failures from Fed squeezing being one.

Sohel

3:49

Hello Elliot, 1) What's your outlook on the possible/potential recession and when? 2) When would be a good time to start adding to energy names after having taken profits earlier in the year?

Elliott Gue

3:49

I still see recession as likely. This cycle has been "slow" relative to most historic market/recession cycles in that the market usually peaks before the economy enters recession but not 12+ months earlier. Also, while leading indicators have steadily deteriorated over the past 12 to 14 months, the hard numbers are only just now starting to weaken. Economic trends rarely move in a straight line -- usually there are soft patches and mini-booms in every expansion and periods of stable growth even in recessions like 2007-09. However, we are getting there and signals like the very narrow breadth on recent rallies suggest we're getting very close. I continue to suspect we'll see the recession by Q3 2023. We remain very conservative about adding exposure in the model portfolio for now; for example, we added HES last week, but mostly funded that by recommending the sale of part of the XOM position. If history is any guide we could see a deeper pullback in energy stocks are the recession becomes reality and that's

Elliott Gue

3:49

when we'll be looking to add. I am sorry I can't be much more specific than that, but it's really based more on how economic indicators and market conditions evolve than on any pre-set schedule. One more point -- way back in the good old days almost 30 years ago when I was in graduate school we researched monetary policy lags. The consensus back then as now was that it takes 9 to 12 months for a hike in rates to flow through and impact the economy. The Fed hiked rates 25 basis points -- its first hike in the cycle -- in March 2022, only 13 months ago. So, i suspect we're only just now starting to see the impact of all that tightening show up in the data. So, if this lag holds, we'll begin to see the big tightening from the Fed last year "hit" the economy between now and September. That also suggests Q3 for a recession start.

3:53

Money market mutual funds, such as VMFXX, takes overnight for a sell order to execute and have the funds available. My concern is that it will not allow me to execute your trade recommendations immediately on the day of announcement. Is there a close alternative that is an ETF?

I have been parking my cash in SGOV and USFR, in lieu of VMFXX. Would you consider these ETFs a reasonably close alternative? Which would you choose?

Roger Conrad

3:53

Hi JT. My view is ETFs are not good cash alternatives. For one thing, I don't like the idea of paying commissions, having tax consequences or risking losing principal with cash equivalents. Also, speaking for the kind of stocks I recommend, a few hours delay isn't going to make a lot of difference. And in any case, I'm not sure how fast sales of ETFs will show up as cash in your account for you to deploy.

Buddy

4:01

Elliott, Don't know if you received my question regarding NOV. On the surface, it seemed like a excellent quarter. Can you explain the negative reaction as the stock price is down nearly 9%. What is your long term outlook for NOV. Thanks.

Elliott Gue

4:01

Thanks for the question. Apologies for taking some time to get to it -- we've had a lot of questions today, so it make take me a while to sort through them all. I haven't yet had time to read through NOV's earnings call -- a quick perusal of some of the highlights suggests there was considerable concern surrounding a supply chain issue. Basically one of the steel companies that manufactures joint pipes had an issue, which meant they didn't have raw material and had to disrupt their production schedule. They've also been forced to procure product from alternative vendors at a higher price. It all sounds pretty temporary and their leverage to "offshore and overseas" growth remains compelling. Having only read the highlights, my sense is that their commentary around the environment was pretty solid but the supply chain issue causes a miss on EBITDA. Longer term, I'd expect them to sort out their supply chain issues and benefit from growth through the cycle.

Guest

4:02

Hi Roger: In your 4/20/23 EIA issue, you wrote that ET is engaging in "systemic deleveraging". Can you explain in greater detail their plans to the extent you know? Your issue shows that the debt/EBITDA ratio is 3.6. What has it been in the past, and how low will they be able to reduce it? Thanks.

Roger Conrad

4:02

Energy Transfer is able to "systematically" cut debt because they consistently generate free cash flow after all CAPEX, dividends and debt service--and they've generally devoted the surplus to paying off debt every quarter. We'll see how they did in Q1 when they report and update guidance on May 2. But at times in the previous decade, net debt/EBITDA was well over 5 times, which is a significant reduction. All three major credit raters have a "positive" outlook for its credit rating, which they also rate investment grade--that's in the aftermath of the company announcing the $1.45 bil acquisition of Lotus Midstream, which will immediately add distributable cash flow. And they should be able to keep cutting debt so long as they maintain a conservative payout policy, which they've returned to with modest increases now that the dividend is above its pre-pandemic level.

Buddy

4:02

Elliott, SLB, BKR and HAL all delivered strong quarters with good outlook, especially outside the USAl 'As a supplier to these oil service firms and many other drillers, why is NOV so slow to get going to the upside? Can you comment on the quarterly result, which were released this morning? Thanks for your reply

Guest

4:10

Hi Roger: Thanks again for all of your and Elliott's advice. Another question - you advocate buying "best in class" companies. In your "High Yield Energy Target List", I believe that ET, EPD, MMP. and MPLX are considered by you to be "best in class", right? What about PAGP, HESM, CAPL, CEQP and BSM? I got hammered a few years ago with PAGP during the oil crash and want to make sure that I do not give more credence to these other companies than is warranted by you.

Roger Conrad

4:10

In addition to buy/hold/sell advice, we also rate companies we cover in Energy and Income Advisor on a risk basis--as suitable for Conservative, Aggressive or Speculative investors. I generally reserve the term "best in class" for companies in the Conservative rating category--that's because they have the strongest balance sheets, most resilient revenue in the face of cyclical pressures, sustainable dividend policies, operating efficiency and regulatory relations. We've consistently rated Enterprise, Magellan and MPLX as Conservative, and I think Energy Transfer has cut enough debt to be considered so as well. The rest are generally more exposed to cyclical pressures, including Plains--which depends heavily on volumes. We think they're going a lot higher as well during this up cycle--remember that midstream is typically the last group to move. But they are likely to be more volatile than the other four.

Hans

4:17

Roger ABBV drop today between 8 to 10 % is this overdone?

Roger Conrad

4:17

Hi Hans. I answered a question on Abbvie earlier in the chat at some length. But the short answer is I think the stock before Q1 earnings wasn't really pricing in the likely impact of US Humira competition on sales--which is why we've held the highest recommended entry point in CUI Plus/CT Income to 130, and occasionally recommended taking money off the table in this stock in recent months. ABBV is still trading almost $20 above that level, so I would still hold rather than buy. But that said, I don't think the earnings were bad--after all management raised 2023 guidance. I may wind up raising the highest recommended entry point in the near future.

Sohel

4:20

Hi Roger, With T's dividend safe ... what are your dream buy & safe to buy under prices?

Roger Conrad

4:20

Hi Sohel. The safe to buy under point is still 20 in my view--if there's another leg down for the overall stock market we may see $16 again. But I think any price under $18 is a great entry point for anyone who doesn't own the stock.

4:24

A recent plug in my email concerning gas producers was quite favorable. However I never got the name of the company. Love the Energy and Income Advisor and would like to get more exposure to this area. Many thanks for these chats.

Elliott Gue

4:24

The pure-play US gas producer we like most right now is Chesapeake (CHK). They're a multi-basin player with operations in Appalachia (Marcellus) and Haynesville in LA/TX. I did a 2023 free cash flow breakeven analysis for them similar to what we did for names like PXD in the last issue and they need $2.95/MMBtu to generate free cash flow. However, two points to note about that -- first, while the front month gas futures (June now) is at $2.36/MMBtu, below CHK's breakeven, gas for delivery in November 2023 is at $3.14, Dec. 2023 is $3.61 and Jan 2024 is more like $3.85. Second, CHK has hedges in place to protect their near term cash flow against low gas prices -- they're 55% to 60% hedged for Q1 and Q2 2023 with a floor at $3 in Q1 and #3.44 in Q2. Then they're 55% hedged for Q3 and Q4 at $3.50 to $3.60 floor. So, a solid cash flow story in our view and one that's cheap now because of the psychological impact of low front-month gas prices.

John

4:30

Hi Elliot & Roger: Do you have an opinion on CEIX? David Einhorn has an $80 target price on it & it's currently just shy of $60. Thanks

Roger Conrad

4:30

Hi John. We don't currently track it in EIA--though perhaps that would be a good idea. The coal mining industry in this country is increasingly having to turn to exports, as utilities shutter older coal-fired power plants and phase out newer ones--and either not renewing or buying out contracts in the process. But the markets overseas have been explosive. And producers like Consol Energy, while not expanding output or investing new mines, have been able to generate consistently high free cash flow, which they've used to buy back stocks, pay off debt and boost dividends. They announce Q1 results on May 2 and updated guidance that show pretty much the same thing--though as is the case with Alliance Resource Partners, investors should consider the dividend variable owing to its tie to coal prices.

Buddy

4:31

Elliott, Your recession narrative does not seem to track with the presidential election cycle. If a recession starts in the third quarter and lasts for 2 to 4 quarters, the Democrats will be in a weak position going into the election. As manipulative as they are, I would think they would do everything they can to juice up the economy in 2024 and I expect the Federal Reserve will cooperate. .

Elliott Gue

4:31

I don't think either the government or the Fed can do much to prevent a slide into recession. If they were to apply stimulus I suppose it's possible similar to what happened in 2020, but simmering inflation would quickly reignite and that's proven to be even less popular with consumers/voters. In addition, 2000 was an election year and was also the start of a major bear market (recession began in March 2001), 2008 was also an election year and the middle of the worst recession/bear market in decades. I don't buy the election cycle market theory -- I believe the government has less influence over stocks than is commonly believed, especially now with inflation tying their hands.

Connecting…

Your current subscriptions

None

E-mail Address	Chat Owner	Status	Remove

Enter your email address to be notified when Sherry Roberts hosts a chat