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4/30/24 Capitalist Times Live Chat

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Sohel

2:15

Hi Elliot, Are the prospects for the refiners particularly VLO dimming for the intermediate term say looking out 1-2 years?

Elliott Gue

2:15

Actually, I see the opposite. I mean earnings were very high in 2022 due to short-term market dislocations following Russia-Ukraine and they've normalized a bit since then. However, I don't think the market even remotely has priced in the likelihood that average margins are likely not coming back down to where they were previously -- it's a higher for longer refining margin market now. Global refining capacity is just too low relative to demand and many markets (i.e. California/PADD V and EU) are becoming dangerously reliant on long-distance tanker supplies of refined products.

Rick P.

2:17

Roger, what did the market like so much about the Monday ARLP earnings release?

Roger Conrad

2:17

Hi Rick. I think people liked the fact they reaffirmed guidance for 2021--which is supportive of the quarterly dividend of 70 cents per share. In my view, it's obvious at a yield north of 12% investors acknowledge the considerable risk to the dividend, given its royalty income is heavily impacted by global coal prices--and to a lesser extent natural gas. As we've said, if you buy ARLP--or our natural gas royalty company Black Stone Minerals (NYSE: BSM) for that matter--you've got to be prepared for the dividend to fluctuate. But ARLP showed its quality in a somewhat difficult quarter.

Ric M

2:19

What was the reason for the Live Oak Bancshares LOB drop?

Elliott Gue

2:19

The main driver was an earnings miss relative to consensus. A few moving parts in there but it looks like the main driver of that was a increase in provisions in Q1 '24 due to "macroeconomic" changes. Credit quality and loan growth remain solid, but this market is very sensitive to any hint of credit issues at banks. My view is the post earnings reaction is overdone and the stock will at least bounce into the high $30s.

Mike C.

2:22

Hi Roger and Elliott (and Sherry!) –

I think these are questions for each of you….

Roger, do you have recommendations to replace the upcoming version of AQNU?

Elliott, I know you had a yen trade a while back. Do you think it’s time to re-enter a long-yen trade (as in, way overdone selloff/etc.?).

Also – as it seems like we’re solidly in the commodities-outperform-during-inflation part of the cycle, do you see critical updates your CT Metals perspectives?

Finally, I want to thank you both for an EIA you wrote several years ago, at the bottom of the energy cycle, that had a headline along the lines of “table pounding opportunity” to buy MLPs. The result (along with Roger’s income portfolio) is the bedrock of my retirement portfolio. I very much appreciate your work!
Thanks

Roger Conrad

2:22

Hi Mike. I'm very happy the MLP advice has worked out so well for you. That's what we're doing this for.

Regarding the Algonquin preferred, my advice is to hold though the conversion on June 15, which will include one more payment of the regular dividend of 96.875 cents. At that point, the portfolio will again hold Algonquin common stock, which at its current price yields about 7%. I had thought by this time the company would be well along on executing its strategic plan--instead it looks like we're going to have to wait perhaps another 12 months. But with activist investor Starboard holding 9%, moves are coming and I continue to believe this should be at least a $10 stock in the next year or so.

I do intend to devote the next issue of CUI to high yield opportunities, which are likely to include some high yielding convertible preferreds like AQNU.

Sohel

2:27

Hi Elliot, What's your outlook on interest rates? Looks like we will hold on the higher rates for longer, but do you expect rates to rise. Some are predicting much higher rates. That could/would really tank the market.

Elliott Gue

2:27

I don't think the Fed will hike rates again. In my view, what's not full appreciated is that the central bank's hands are a little bit tied because Treasury's borrowing needs are so (ridiculously) elevated. The higher rates go, the higher the interest rate tab and that implies more Treasury issuance. Market is already having trouble absorbing bonds with maturities of 1+ years and the RRP facility at the Fed is nearly exhausted, meaning that even T-Bills are going to be harder to sell. 10-Year is well off last autumn highs and I suspect it remains that way. In terms of fixed income ETFs from an investment standpoint, I've avoided direct Treasury exposure in the portfolio (we do have exposure via a covered call bond ETF). I have seen/still see some opportunities in the Fallen Angels corner of the bond market and Variable/Floating rate preferreds.

Hans

2:28

Elliott: Bidens exec. order to stop Russian import of uranium, does this help US uranium stocks. Thanks

Elliott Gue

2:28

My understanding is that it won't really do much to interrupt the status quo in terms of uranium trade -- I think it's more about the headline than any real change.

Kerry T

2:32

Hi Roger and Elliott:

NFE is about $26, near it's 52 week low. What happened to drive it down from $40 in December 2023? I already own some and tempted to buy more. What do you think?
regards

Roger Conrad

2:32

Hi Kerry. We do cover New Fortress Energy in our "MLPs and Midstream" coverage universe--and we've rated it a buy at 35 or lower. One reason for the decline in the stock is the general cooling of enthusiasm for LNG companies in general since the Biden Administration placed a moratorium on new permitting for export contracts. As I responded to a pre-chat question, even Cheniere Energy Partners has taken a hit--though as we've noted in EIA management has trimmed the dividend to a new rate of 81 cents from the previous $1.035 per share to hold in more cash. In NFE's case, the dividend is not such a key part of the value proposition. And it's considerably more international, starting construction of a facility in Brazil. Earnings are May 8--we expect the company to affirm guidance as it did in late March. if it does, I would look for some firming in the stock.

Kerry T

2:37

What's your latest forecast: recession/bear market coming or not? regards

Elliott Gue

2:37

Recession is not imminent. I think what's happened generally is that the normal economic impact of Fed tightening, and the disinflationary impact on prices, has been blunted by significant (extreme) fiscal stimulus.

The federal gov't appears to be acting pro-cyclically instead of counter-cyclically -- they're spending more despite high inflation, low unemployment and decent GDP growth.

The set up is similar to the 1970s and we're starting to see a lot of asset classes act as they did back then -- commodities, fixed income...even stocks.

As for the stock market/bear market, my view has been that the bigger story in 2024 will be sector rotation rather than a broader market decline.

Sohel

2:43

Hello Elliot, What's your latest outlook on the economy and inflation? We seem to be muddling along. Market seems mixed on prospects for correction ... are we still headed towards one?

Elliott Gue

2:43

I covered the economic outlook at greater length in response to a prior question from another reader. Just to summarize I don't think a recession is imminent but I do think we've entered into a higher inflation/more volatile economic environment today, much like the 1970s. In such an environment inflation tends to come in waves, periods of disinflation followed by renewed spikes in inflation. The last disinflationary period ended last summer and we're clearly seeing renewed upward pressure on prices right now. As for stocks, I continue to think the bigger story this year will be sector rotation rather than a broader market decline. We're seeing clear signs of this since the end of January -- energy, utilities and materials are the 3 leading sectors and tech is third worst-performing out of 112 sectors.

Roy W

2:44

Hi Roger,

What are you thoughts on GEV?

Roger Conrad

2:44

Hi Roy. GE's electric power systems spinoff is really the original core of the company. And the fact that shares just hit a new all-time high today I think reflects (1) the fact they affirmed the original guidance this week when they announced Q1 results and (2) expectation sales of their electrification and gas power products will continue to accelerate, even as wind power stabilizes. There's no dividend as yet, which makes it difficult to fit the stock into any of the strategies I use, though I do own the stock personally following the spinoff. I believe going forward GEV has potential to follow utility CAPEX, which is robust and is likely to remain so the next few years. The valuation looks pretty full at 35 times expected next 12 months earnings, so I would rate the stock a hold--pending what we see regarding dividends.

Susan P.

2:54

Thanks Guys. You really are unique in this day of information overload: your deep dives are appreciated explanations and add facts no one else mentions.

DEA's yield hovers around 9%...Does the fact its leases are backed by the "full facing credit of the United States government" give you any more peace of mind that it distribution will not be cut to pay off debt? On the most recent earning call, the DEA's CEO is quoted as saying "let me address our dividend. We fully acknowledge our higher than average payout ratio and we are confident in our ability to maintain and grow our dividend."

It's a unique office reit due to the Gov't being basically its only tenant. I am wondering if current pricing represents an interesting bargain if the distribution can be maintained?

Thanks again

Roger Conrad

2:54

Hi Susan. Thank you for those kind words. I cover Easterly Government Properties (NYSE: DEA) in the REIT Sheet--currently as a buy at 16 or lower. The dividend has not been changed since August 2021, in large part because of a need to hold in capital to limit dependence on the bond market as a source of funding. Encouragingly, management was able to affirm the very tight 2024 FFO guidance range of $1.14 to $1.16 per share. Interest expense increased by 15.2%. The REIT was able to offset with a cut in property operating expenses and extremely stable, government rental income rose. And cash available for distribution increased 5.9%. No guarantees here and the the payout ratio is high at 91.3% in Q1--so suitable for aggressive investors only. But I think there's a path to holding the current dividend that the company seems to be following well.

Guest

2:54

Hi Elliott. My question is on ARLP. It's a great company with great management! I'm curious about your current take in light of the latest developments with the Biden administration introducing new emission rules, and now the G7 officially "agreeing" to shut down all coal-fired power plants by 2035. Do you think the risks are more elevated now, and what's your medium-term outlook? Thank you

Elliott Gue

2:54

I think the Biden Admin. rules are likely to be challenged. And, generally, I don't put much stock in these agreements to "phase" out fossil fuels that come out of groups like the G7 or the UN COP conference. Fossil fuels accounted for 81.7% of global primary energy demand in 2022, down less than 4 percentage points since 2000 -- the idea that they can be eliminated in 11 years, by 2035, is frankly laughable.

Also, I look at a country like India, which has an enormous population and low but fast-growing per capital energy consumption. I see India following a path like Japan in the 50's and 60's S. Korea in the 80's, 90's or China in the 2004+ era. To be blunt some of that power is going to come from coal. Why would India choose not to grow as all these other countries have done? In my opinion they will not and should not prioritize exhortations from countries like the US to phase out coal over their own economic well-being.

Not to be "that guy" jumping up and down screaming on a soap box, but

Elliott Gue

2:54

I find it rather sad that groups like the International Energy Agency have turned from providing very useful and deep dive research into energy markets in favor of activism and politics. They've underestimated oil demand growth almost every year for a decade now and they chronically tell us the oil market is oversupplied only to reverse course 3 months later when plummeting inventories suggest the exact opposite. Frankly OPEC data is much better and more reliable.

Hans

3:03

Roger: WDS is their high div. still ok now with their new climate transition action plan.

Roger Conrad

3:03

Hi Hans. Woodside Energy's dividend is basically going to follow global natural gas prices, specifically the contracted prices of LNG from its facilities. The payment to shareholders of record March 8 is about 60% less than what the company paid a year ago. That follows lower gas prices, though the company did affirm its FY2024 (end June 30) production guidance and progress on two key expansion projects. Also notably, Moody's affirmed the credit rating at Baa1 with a stable outlook, in part reflecting the fact that dividends are held in line with earnings.

Regarding the climate strategy plan, it looks like the company is going to have to acquiesce to some shareholder demands for more CO2 controls, as its latest plan appears to have been rejected. That may raise costs in some areas. But the primary driver of earnings and the dividend is going to be gas and oil prices.

Sohel

3:15

Hi Roger, As always, thanks for holding these chats - incredibly useful. ET and EPD have both had a good run after a long time. In the short term do you expect these will hold up better than the other energy names or better to be patient to add to those names at this time?

Roger Conrad

3:15

Hi Sohel. I think by the time this energy cycle is over, Enterprise and Energy Transfer will both take out their highs from the previous cycle--for EPD that was $41.38 in Sept 2014, for ET it's $35.44 in June 2015. Both companies are larger and more dominant and pay higher dividends than they did at those points--EPD's is up 43% and ET's is up 29.6%.

Short-term, there are two main drivers. One is these companies are set to continue reporting very steady results. EPD did it again in Q1 with 1.7X DCF coverage and 5% cash flow growth from a combination of strong asset performance and low risk expansion. And ET should report the same May 8. Second, both are very prominent members of indexes and ETFs--which means they get traded a lot as sectorwide bets. We think that will also be a positive. But as a general preference we advise owning more names, rather than concentrating on one or two.

Alex M

3:27

Hi Roger. As a utility industry expert, I was hoping to get your opinion on this private market solar investment. Any thoughts or concerns? Thank you. https://www.energea.com/investment/7

Roger Conrad

3:27

Hi Alex. Thanks for sending the link. My first comment would be that this is a business with rapid growth but also paradoxically a large number of struggling companies. That includes the largest US rooftop company SunPower Corp (NSDQ: SPWR)--which last week announced it would lay off 25% of its workforce and close its direct sale unit. A small player like this one can subsist on cash flow from secure contracts. And certainly the cost of solar panels continues to plunge, which should ease development costs. But the competition for new projects is fierce--and you have to ask what exactly is this company's advantage to get that business--even the small amount needed to move the profit meter significantly. Obviously, it they can raise enough equity capital--for example from someone like you--they won't have to borrow. But how do they compete for contracts with the NextEras of the world, which can literally move on any and as many projects as they want at any time--and have 1,000,000+ the scale advantage?

Boris

3:36

Hello. My question is on ARLP. It's a great company with great management! I'm curious about your current take in light of the latest developments with the Biden administration introducing new emission rules, and now the G7 officially "agreeing" to shut down all coal-fired power plants by 2035. Do you think the risks are more elevated now, and what's your medium-term outlook? Thank you

Roger Conrad

3:36

Hi Boris. Before I answer, I would like to invite you to subscribe to my weekly Substack "Dividends with Roger Conrad," which I post Sundays at 12:15 PM ET. In the latest, I highlight the new EPA rules, what they mean and who wins and loses.

These rules will be challenged and may or may not survive November elections. But even if they do, they'll only phase out coal use in the US 3-5 years ahead of when industry was already on track to. I'm not surprised other countries are going along especially in the EU. But as I noted earlier in the chat, the game for Alliance Resource Partners is exports to countries outside the G-7--and to a lesser extent to replace coal with natural gas production. Nothing that's happened on the regulatory front has changed its ability to stay with guidance, which is why the stock is up following Q1 earnings this week.

Roger Conrad

3:40

Also, to clarify, the EPA rules don't explicitly ban coal. Rather, they would require a 90% reduction in CO2 emissions from coal and gas facilities by 2039--which effectively means they'd have to install CCS (carbon capture and storage). And at this point, that's estimated to add 50% to costs. But that could also come down a lot as new tech is developed, which could actually give coal new life even in the US.

Ed

3:45

VST has risen very fast. What are your thoughts on valuation, long term future and if should buy or sell

Roger Conrad

3:45

Hi Ed. Yes, Vistra Energy has basically gone from almost wholly unloved when we picked it up in Conrad's Utility Investor to a market favorite--especially since management announced its now closed merger with Energy Harbor to become a major US nuclear energy producer.

I've commented quite a bit on Vistra in CUI as the stock has risen. Generally speaking--as with fellow momentum winner Constellation Energy (NYSE: CEG)--I've been advising investors who've been with us for this ride to consider lightening up a bit on their positions in both stocks, especially if holdings have grown to a disproportionate piece of portfolios. I think both companies are enjoying a great deal of upside business momentum and will continue to do so. But the higher they've gone, the more detached from valuations and the more vulnerable to a pullback.

Hans

3:55

Elliott: BP's ousting of CEO what is the outlook now for this company. Thanks

Elliott Gue

3:55

In my view they made a terrible error in cutting their upstream oil and gas CAPEX too deeply and then investing too much in renewable energy projects. Don't get me wrong, you can make money in alt energy, but in my mind they were pouring a bunch of capital into projects that were outside their wheelhouse and core competency.

They're starting to turn the ship but it's going to take time to reverse the lingering impacts of the bad decisions they made previously. That's the thing about oil and gas projects -- that base decline rate catches up to you sooner or later and if you're not spending to bring new low-cost projects on, you're shrinking.

Tom Lawrie

3:59

Any comments on the 6-ish% downside move in EPD since April 4?

Roger Conrad

3:59

Hi Tom. You still have about 10% total return in Enterprise year to date, which is in line with the Alerian MLP Index. Really the only significant company news since the stock spiked up April has been good--early in the month the company won US DOT approval to build a major offshore oil export terminal. There was a pretty positive analyst day. Then Q1 earnings today that were generally solid, with pipelines, NGLS, marine terminal, NGL fractionation, propylene, fee-based gas processing and NGL-equivalent production volumes all showing strong growth as new projects enter service. Gross operating margin was up 7%, 1.7X DCF dividend coverage with free cash flow after dividends to buy back stock. So no surprises, except good ones like winning the oil export license.

The drop this month in EPD from a high of less than 30 to around 28 follows an identical move in the Alerian MLP Index. No doubt concern about the economy, energy prices, interest rates and profit taking played a role. We doubt it's significant.

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