JotCast | 4/28/21 Energy & Income Advisor Live Chat

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4/28/21 Energy & Income Advisor Live Chat

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Roger Conrad

3:23

Hi Bill. Thanks for this interesting question. Pretty much every extraction business where workers operate at close quarters has had a Covid challenge over the past year. Some have handled it exceptionally like BHP Group and some not as well.

Regarding the Canadian midstream producers, Pembina has the greatest exposure. But so long as the likes of Canadian Natural Resources and Suncor don't go bankrupt, they will get paid on their contracts, which are 100% take-or-pay (capacity based). We'll see a lot more on how they're faring when the company announces Q1 results on May 6. But the time when those revenues would have been at risk was last year when oil and gas prices were a lot lower and CNQ and other Canadian producers were challenged by very low energy prices. Even if Covid pressures really do impact output at these producers, Pembina will get paid. And as for TC Energy, only 20% of revenue is from liquids pipelines overall, so there's minimal exposure to oil sands.

Roger Conrad

3:23

Bottom line: Not to minimize the situation but this should not have a major impact on Pembina and TC.

Guest

3:37

Hi Roger, Could you explain why ET is still considered an aggressive position in the portfolio's? I understand from past chats that its dividend coverage and debt ratio's don't seem too bad. Also, if you had to pick between PAGP and ET which one to put new money in at current prices?

Roger Conrad

3:37

There are three main reasons ET is more aggressive than for example Enterprise. First is overall levels of debt, which at last count is roughly $51 bil. Debt to EBITDA was calculated by Fitch at 5.5 times as of the end of 2020, and it projects 2021 at 5 to 5.4 times. Obviously, that debt becomes less important the more the company pays it down, and robust levels of EBITDA this year would help greatly in that regard. But at this point, the company's outlook is rated negative by Moody's and S&P and is one notch above junk. That contrasts to EPD's BBB+.

Second, ET is in process of closing a merger with Enable Midstream, which means uncertainty about closing the deal and successfully integrating the assets. And third, there are issues surrounding the Dakota Access Pipeline, which is only about 5% of company EBITDA at last count but would nonetheless be a blow to the business if the judge in the case does order it shut, if it fails to garner a new US Army Corps of Engineers permit or fails a final appeal

Roger Conrad

3:40

To finish my answer on Energy Transfer, if DAPL is ordered shut, it will be a blow to cash flow and almost certainly the share price as well. I believe management will succeed in holding the dividend this year. And I continue to expect a mid-teens price for ET in the next 12 to 18 months. But there is risk here that you don't have with Enterprise. As for choosing between PAGP--which is also aggressive as Plains is highly dependent on volumes--we continue to rate both stocks buys.

Guest

3:46

Safety of BPMP at this level? The dividend is inviting at 10%. I imagine that since it did well last year, it must be fine this year?

Roger Conrad

3:46

The issue with BP Midstream Partners--which we do rate a buy up to 12 in our MLPs and Midstream coverage universe--is a potential take under by parent BP, as well as the fact that priced to yield 10% plus it's no longer an effective drop down vehicle for its parent. Earnings are due out May 6 and it's possible we'll hear some clarification on where management and the GP plan to take this MLP. If there were to be a takeover, I would expect at least some premium to the current price. And there's no reason to doubt the assets won't be resilient again in 2020, as the company is operating under a three-year minimum volume commitment contract with BP that won't expire until Q3 2023. But dividend coverage is thin at 1.1 to 1.2 times, and without drop downs potential to grow is limited. That's why we would not pay more than 12.

Guest

3:52

TOT has had a good run, is this a good time to take partial profits? What is your ultimate price target on TOT?

Roger Conrad

3:52

Total SA was resilient last year as an overall business, with the gas/power/utilities division generating growing cash flow to offset weakness in the oil and gas and refining businesses. The company releases earnings tomorrow for Q1 and I expect the see a big benefit from higher oil prices as well, perhaps somewhat offset by soft downstream results.

Shares are of course well off the lows as are many energy stocks. But the ADRs are also about $10 per share below their pre-pandemic level. The yield is still very attractive at around 6% for US investors who don't try to recover French withholding tax. And at 11.1 times expected next 12 months earnings, the stock is a value below our highest recommended entry point of 50. As an ultimate price target, I think at least 60 is reasonable, as that's where Total traded in late 2018--the last time oil was in the 60s.

John A

3:58

PXD news stated they have a derivatives loss of $691M for the 1st Q. Is this significant or normal hedging activity? (Sorry if you already answered this as I just logged in)

Elliott Gue

3:58

Companie shave to mark-to-market their hedge book each quarter, which means that they'll generally see a derivatives loss when commodity prices are rising. So, yes, it's normal hedging and it's not significant.

Roger Conrad

3:58

Hi John. Texas February Freeze not surprisingly dealt out a number of dramatic one-time impacts. But in Pioneer's case, the hedging losses are almost certainly offset by higher realized selling prices for oil and gas--since producers hedge to lock in prices, not speculate. The company says it paid $321 mil to settle contracts and has a non-cash unrealized loss of $370 mil on other contracts. Offsetting that partly will be a non-cash gain of $54 mil on the sale of an asset.

Bottom line is we don't see this as significant to Pioneer's operations or to our eventual returns with the stock, which have already been substantial in the Model Portfolio. It's also notable that the stock is up since announcing the hedging loss, including a sizable boost today.

Guest

4:00

comment on vlo thanks

Elliott Gue

4:00

It's our favorite refiner and a beneficiary of rising oil demand. We expect refiners' crack spreads to rise though the summer as demand rises and inventories of refined products remain tight.

Arnold S

4:15

Hi there... I heard an "expert" on the radio the other day, saying that he's less interested in oil, since natural gas players have a clearer path to advancement. What are your thoughts on that?

Elliott Gue

4:15

I am more bullish on natgas than I have been in many years due to more restrained associated gas production. However, I think the outlook for oil is at least as bullish and I actually prefer the oil producers as long term investments. I have been eyeing some gas names but more on the trading side as shorter term plays.

John A

4:17

In general what % upside do you normally expect above your buy up to prices?

Elliott Gue

4:17

It varies widely. We set the buy up to prices at levels that help ensure that readers don't buy a stock on a "spike" higher or when its too stretched or overbought. Our view is that if you buy under the buy price, we believe the stock will generally outperform the sector over a reasonable holding period (6 to 12+ months)

Michael L

4:23

Given your "clock" example for the energy cycle, and that we are somewhere around 7 (?), what is a rough time frame for the energy market to move to 12 or 1?

Elliott Gue

4:23

Yes, I'd say we're somewhere in the 7 or 8 range on the cycle clock. The time it takes to move through the cycle varies over time. Roughly speaking, I'm looking for us to be in the "mid-cycle" around 9 o'clock by H1 next year. I think beyond that a lot depends on the economic picture. 2021 GDP looks strong amid reopening and stimulus and I think 2022 looks generally solid as well. However, I have some concerns about late 2022-23 and the potential for inflation to accelerate to the point that the Fed starts raising rates. Could that, coupled with fading stimulus, result in a major slowdown or soft-patch for the US economy? Or, indeed, could we see a very short, sharp expansion this cycle followed by some sort of hangover? I think it's too early to assess, but I'll be watching the indicators for signs that economic cycle is maturing and the potential for that to push the energy cycle to that 11 to 12 o'clock level.

Dragomir

4:24

Hi Elliott & Roger. I've been patiently (maybe despondently-lol) sitting on PSXP for a few years. It's been creeping up since last September's lows. Though I'm reluctant to sell it I may consider doing so and buy MPLX. If the DAPL situation is resolved I would think there would be a healthy pop in PSPX's price. Any suggestions? Thanks.

Roger Conrad

4:24

You're right that DAPL's fate is the critical issue for Phillips 66 Partners, which draws about 20% of EBITDA from its ownership stake. I believe DAPL will stay open for many years. But if the judge orders it shut immediately, or if the pipeline ultimately fails to get a new US Army Corps of Engineers permit and fails appeal at the US Supreme Court, the distribution may be cut. And in any case, it appears increasingly likely that parent Phillips is going to buy in the 25.65% of the partnership it doesn't already own--since PSXP priced to yield nearly 10% has long since lost its attraction as a financing vehicle. We've had a buy on PSXP up to 35 in our MLPs and Midstream coverage universe for some time and that has paid off. But now that it's moved above that price, it rates a hold. As for MPLX, they report Q1 results on May 4--currently trades just below our buy target of 28.

Arnold S

4:29

I am guilty of over-investing in the energy area in my portfolio. I'm hoping that prices will continue to go up, but I'm always unsure of when to sell. I'll look forward to your comments in the future of when it's time to trim or sell out of positions so I can lock in some gains. An example: both Brookfields (BEP and BEPC) have doubled since I bought. What do you think about these?

Roger Conrad

4:29

I think at a price of 40 or lower both Brookfields offer a pretty decent value proposition of a low to mid-single digit yield plus what should be pretty reliable mid to upper single digit percentage dividend growth. The business model of contracted no carbon electricity generation on multiple continents is quite sound, as I think we'll see again in Q1 results announced May 4.

Both BEP and BEPC have been in the stratosphere at times over the past year. And we did at one point take advantage by cutting our position in the Model Portfolio. Brookfield is also a recommendation in Conrad's Utility Investor and we've done much the same by recommending taking partial profits there. I don't think they're buys unless they go under 40 though.

Arnold S

5:56

ENBL AM MPLX SHLX PAGP all are paying over 9% dividends at current priuces. In general, do you think that these dividends are sustainable? And specifically, why did ENBL fall so hard? Any chance it could rebound back up to its previous levels?

Roger Conrad

5:56

Hi Arnold. Enable is being taken over by Energy Transfer. The deal is all stock (0.8595 ET per ENBL unit), which I think offers upside and also is not a taxable event. Assuming ET gets to a mid-teens price, that ratio would get ENBL to a low teens value, basically where it was pre-pandemic. I think that's worth sticking around for, though the ratio does imply roughly a 20% lower dividend for the ET received as opposed to ENBL now.

Antero Midstream as we also pointed out previously in EIA has cut its dividend by roughly 28%. I believe the current guidance of the company and its general partner/major customer Antero Resources supports the reduced dividend the next several years, though the lack of likely increases is likely to prevent at return to the 20s, where AM traded in 2018.

MPLX as I noted earlier in the chat is reporting Q1 results on May 4. Until then, it's a buy up to 28 and we do consider the dividend well covered by cash flow.

Shell Midstream is a hold, mainly because the general partner has not

Roger Conrad

5:59

continuing Arnold's question, SHLX' general partner has not clarified its ultimate plans for the MLP, which will need significant new asset drop downs to resume dividend growth. The high yield reflects the possibility the parent will buy the 31.49% of the company it doesn't already own--almost certainly at the lowest price it can. In answering an earlier question, I also noted Shell Midstream's exposure to tougher offshore pipeline regulation. Those are all reasons we rate it a hold, with the only real appeal the likelihood the dividend will hold, at least until there's a takeover.

6:03

And lastly for Arnold, Plains announces earnings on May 4. We expect results to be affected by lower volumes, but the company's affirmed credit rating of BBB- with a stable outlook by Fitch is a good sign the company will meet cash flow and leverage targets thereby proving resilience. We still rate shares a buy up to much higher levels.

Michael L

6:27

Roger, just wondering what type of price appreciation WMB may have over the next 12 months. Thanks!

Roger Conrad

6:27

With a yield of nearly 7% and consistent lower single digit percentage annual dividend growth, I think Williams Companies offers a solid value proposition for conservative investors--even after shares have pushed into the mid-20s. Q1 earnings are May 3 and I expect to see more steady numbers from pipelines and gathering as well. The company also looks poised to get its hands on a major natural gas midstream asset from the bankruptcy of Southland Royalty Co. The stock has rebounded to its pre pandemic level but I think 30 is a good intermediate target, a level it held as recently as the first half of 2019. And given how strategic the assets are and the lack of competing infrastructure, I think a return to 2015 highs in the low 60s is certainly doable later in this cycle.

Roger Conrad

6:29

Well everyone. That looks like all we have for now. If for some reason, your question wasn't answered fully--or you think of another one--please send it to us at service@capitalisttimes.com. We will also be having another one of these next month and look forward to your questions then. Thanks for participating today and especially for being an EIA member!

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