JotCast | 5/14/20 Conrad's Utility Investor Live Chat

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5/14/20 Conrad's Utility Investor Live Chat

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Lawman

2:49

What is your take upon the prospects for WTI in the near and short term? Is it advisable to maintain hedges such as SCO and DUG at this time?

Roger Conrad

2:49

We think oil prices remain vulnerable here to another down leg--though probably not a repeat of what happened when the April futures expired. There's still a supply glut and demand destruction is likely to continue, and speculators have a way of getting too excited too quickly about recovery prospects during bear markets.

That said, the main reason to hold a hedge position in the commodity at this time is if you're following our strategy in Energy and Income Advisor--which is to accumulate positions in the best in class from the wellhead to the burner tip--up and down the energy value chain. The hedge will increase in value on a price drop and essentially give you more money to buy good stocks at low prices.

Lawman

2:53

You previously recommended AAL. What is your current take?

Roger Conrad

2:53

We think it will survive, very likely as a smaller company. And it could come out ahead in some ways when COVID-19 fallout passes, as weaker rivals go down for the count. But at this point it's hard to get excited about any airline stock, even with jet fuel prices taking big hits.

There have been some favorable signs in China, where the industry appears to be getting back into the air again to some extent. And there's still going to be a need to travel--with air the best option--as the economy opens up. But it looks like the industry is going to have to get used to an environment of lower for longer traffic.

Lawman

3:02

Why has AES taken such a beating lately?

Roger Conrad

3:02

I think in part, it's a question of mistaken identity. Mainly, investors are treating AES as if it were the company that nearly went bankrupt in 2002 and stumbled again in 2008-09. Shares have also taken a hit on general weakness in utility sector performance--despite resilient earnings so far, the group is at the bottom for S&P 500 performance. And to some extent the stock is suffering because investors are dumping companies with any emerging market exposure.

Whatever the case, the stock's slide this year is sharply at odds with company performance, which is extremely steady given the pressure of COVID-19 fallout. I discussed this at length in the May issue Feature article. But the key points are AES is still on track to meet free cash flow and deleveraging guidance this year, and that its contract generation and regulated utility model is holding up well. Even foreign currency exposure is not triggering meaningful losses and renewable energy construction is on track also.

Roger Conrad

3:03

Bottom line is at just 8.3 times expected 2020 earnings---which appear based on conservative guidance--this stock looks very cheap right now. And the yield at this price is 5%, growing at a mid-single digit rate. Very attractive in my view and still a buy up to 22.

ma

3:13

What does the picture look like for mid-term Duke Energy? Seems not to exactly follow the XLU.

Roger Conrad

3:13

In the short-term, ETFs buying does drive the prices of their primary holdings--unless there's substantial action from other buyers and sellers. Duke Energy is nearly 8% of the XLU, the Utilities Select Sector SPDR. And as one of the last major electric companies to report Q1 results and guidance, there haven't been a lot of catalysts specifically for its shares. That changed earlier this week, when Duke reported numbers that were, I think, substantially stronger than what a lot of people expected despite mild winter weather. Most important, management affirmed its previous earnings guidance range--and therefore the safety of tis dividend and likelihood of an increase this summer.

I think it's reasonable to expect Duke will continue to track the XLU and vice versa this year to a large extent. But what's important so far for Duke as holding is like other electric utilities in the Southeast US it's balancing COVID-19 related declines in power usage by industry and commercial customers with cost cuts,

Roger Conrad

3:14

rate support and by adding new assets--rate based and contracted renewables. And that business model is supporting earnings, the dividend and ultimately the share price. I continue to rate Duke a buy up to 90 for those who don't already own it.

Lawman

3:18

Is the current dividend for AETUF safe? Is AETUF a good buy at this level?

Roger Conrad

3:18

ARC Resources has certainly set a conservative level for dividends in terms of what it expects cash flow to be--that's after the 60% reduction in the payout announced in March along with a 40% cut in CAPEX. And my opinion of many years that it's a well managed company hasn't changed.

But while I would rate the odds of another dividend cut in the next few months as low, it must be said that ARC is dealing with conditions well beyond its control. That's especially selling prices for oil and gas in Canada, which because of a lack of pipeline capacity out trade at a discount to depressed US benchmark prices. So yes, I think ARC's lower payout will hold but I would not call it "safe" as I would say a water utility's dividend at this time.

Len

3:26

Question for the live chat: I see where on analyst has dropped there expected price for SPH down to $11 because of over supply of propane and expected reduced expected reduced income and over leveraged. This differs from your advice on SPH. What is your take on SPh’s expected
results this year.

Roger Conrad

3:26

According to Bloomberg Research, there are now 4 major brokerage/analysis firms that track Suburban Propane Partners. Two recommend buy, one hold and one sell, which is Argus Research. Target prices for the other three are 16 (Raymond James), 16 (Wells Fargo) and 14 (Morningstar).

I did answer pretty extensively a question earlier in the chat about Suburban and I also addressed the company in the Endangered Dividends List section of the May CUI. I can tell you an "oversupply of propane" is definitely not a negative for the company, which passes the wholesale cost of the fuel directly onto customers and all else equal will sell more at the lower price. What is negative is the potential loss of sales at the commercial and industrial level because of COVID-19 fallout. And management has said specifically now that it the hit is too large, it may be forced to hold in more cash by a variety of means.

My view is shares are more than pricing in a cut right now with a yield of 18% that's not a certainty.

Roger Conrad

3:29

That to me is worthy of a hold recommendation, which is where I've had the company for some time. As for leverage, I'm maybe not as worried as the analyst you've alluded to. The company has been reducing debt the past couple years with free cash flow left over after all CAPEX and distributions paid. That cushion shrank the past 12 months due to mild winter weather but the company did still cover everything.

Fred

3:29

Hi Roger,

Roger Conrad

3:29

Hi Fred. Thanks for joining us today.

Jimmy C

3:35

Good morning, Roger:

I know its a group you do not cover (at least not in CUI) but I have a question regarding insurers. Most are really down lately and I am wondering if these names, such as MET and PRU will be required to pay off under their business interruption insurance policies and whether that is what is helping drive down their prices.

Roger Conrad

3:35

That's a really good question and I'm not sure that's really quantifiable at this time. It is a good reason to be careful about these stocks.

Most insurance is reinsured at some level to prevent mass failures of companies. But every time you have an event out of the blue like this one, there's always the chance of hidden vulnerability somewhere that only comes to light when balance sheets are strained. I think the one thing we have going for us right now as a financial system is the Federal Reserve is ready, willing and able to flood liquidity wherever and whenever its needed. I know a lot of people are worried about what happens after the crisis when we have all that debt to worry about--and rightly so. But at least at this point, the Fed is the ultimate backstop.

Ken M.

3:46

I would appreciate hearing your thoughts about CNP.PB

Thank You,

Roger Conrad

3:46

I think Centerpoint Energy has taken the hard steps this crisis to ensure its financial health--and its ability to pay dividends on its fixed income, including preferred stocks. And I think its reduced common stock dividend is well covered by utility earnings alone and therefore safe.

That said, this preferred is actually a convertible with a mandatory maturity date of September 1, 2021. The conversion is to a maximum of 1.8349 to a minimum of 1.5291 shares. The max applies if CNP trades at $27.25 or less at the conversion date, the minimum if it's above $32.70.

At this point, at the max conversion rate, the preferred's conversion value is $31.60, which is slightly below the selling price. That's not a bad price, considering you're getting a much higher yield of almost 11% and not much risk if CNP closes at conversion about where it is now. You of course lose if the stock slips. But this one is intriguing now--thanks again for your question.

Fred

3:48

I know this is probably a question more related to E&IA, but, here goes anyway.

Roger Conrad

3:48

No problem Fred. I know a lot of you get both services and we appreciate. Just so you know, the date of the next EIA chat is Thursday, May 28.

Lawman

3:53

AGLXY has not increased in value as have many other utes even with interest rates at zero. What is holding this company back, and what are its prospects in the current environment?

Roger Conrad

3:53

One thing is it's priced in Australian dollars, which are right now at just 64 US cents per. That's up from 57 cents in late March but well off from the 70 cents beginning the year. And every point drop in the AUD is one off the US dollar value of AGL Energy's shares and dividends. The Australian market and economy have also been quite weak in the face of COVID-19 fallout, in large part because it depends on resource exports to China to a great extent.

My opinion on this company's long-term prospects is unchanged from what it's been the past year. That is management faces headwinds from regulators that are trying to hold down wholesale and retail electric rates in the face of rising demand for Australian LNG exports--and federal officials who oppose the industry's ongoing transition off coal toward natural gas and renewable energy. AGL is ironically the leading producer from coal power as well as wind and sun in the country. But the previous CEO had very testy relations with the government of Scott Morrison

Roger Conrad

3:54

And that's continued to hang over the share price of AGL. That said, this company is holding its dividend and most recent guidance (May 4) demonstrates business resilience. AGL is trading below its Dream price now and I think it's a good time for patient investors to pick up shares.

Johnspm

3:59

What are the implications for Pembina's prospects if oil prices should stay in the $20s or $30s into the new year, particularly with regard to the volume of expensive to produce shale oil to be transported?

Roger Conrad

3:59

I think they addressed those concerns pretty well in their Q1 earnings call and guidance update. First off, that's pretty much what they're expecting in terms of prices, and keep in mind they've been having to deal with a lot worse in Canada where energy prices have been deeply discounted for most of this year to US benchmarks.

Second, while they do handle oil and gas produced from shale, they're not really dependent on shale volumes for revenue. Long life oil sands producers are important, but 70% plus of Pembina's business is contracted as take or pay, meaning contracts must be paid whether energy is shipped or not. And 80% plus of customers are investment grade, including the big oil sands producers.

What Pembina has done recently is cut back on CAPEX by postponing work on projects that could have an impact on EBITDA growth starting in 2022. If this environment lasts longer than that, we're not likely to see more dividend growth. On the other hand, if Line 3 and Keystone XL open up Canadian energy

Roger Conrad

3:59

to new markets, the price differentials will drop and Pembina and its customers benefit.

Lawman

4:04

You used to recommend ANCUF. What are your thoughts on Couche-Tard today?

Roger Conrad

4:04

I think they have a resilient business model with a balance sheet helped by the fact they pay very little in dividends. Convenience store traffic has been a test during this crisis--given the obvious effect on fuel volumes--but the company appears to have held up generally so far and they do continue to enjoy a solid market position. It's interesting they appear to have cancelled a proposed merger with Caltex--though that appears more related to concerns about that company. We don't track this one in Energy and Income Advisor or CUI. But I would rate it a hold at this point.

Ben

4:08

Thoughts on PEG? The dividend yield has passed 4% recently.

Roger Conrad

4:08

I'm rating it a buy up to 58. The utility side of this business continues to grow and support the dividend very well. The wholesale generating side is affected by weak bulk electricity prices as COVID-19 fallout affects demand. But the company is also protected by benefits for zero emission credits for its nuclear plants in New Jersey as well as price hedging. I think the company is handling this crisis and the stock is looking cheap at less than 14 times expected 2020 earnings. Management has also affirmed it earnings target for the year and continues to demonstrate its ability to access low cost capital. The stock's chart by the way pretty much mirrors what's happening with the utility sector in general.

Lawman

4:12

Do you like BCE at this level? How do you view canadian telecoms vs. US telecoms?

Roger Conrad

4:12

I do like BCE as a buy up to 50 US on its NYSE-listed ADR. The Canadian telecoms face a lot of the same challenges as the US communications companies. In Q1, media operations were a negative for BCE as they were for other telecoms in both countries, while wireless and broadband had strong results. The company like other telecoms did not really capture the massive uptick in network traffic in revenue and cash flow. And management withdrew its 2020 full year earnings guidance--which every US telecom did except Verizon. But it held to cash flow, CAPEX, leverage and dividend targets, including the boost in the April payout.

Henryy H

4:25

Dear Roger:
Perhaps in your next EIA chat you might comment on the Planet of the Humans documentary of Michael Moore re green energy (wind and solar farms) as non-sustainable and as a non-solution for global warming, taking down the Sierra Club, 350.org and other high profile green activist groups. If there is truth to this thesis, then there are investment consequences.
I appreciate your great work and am a long time subscriber.

Roger Conrad

4:25

Thanks Henry. I haven't seen the documentary so I can't really make an intelligent comment on it, though I'm sure it's entertaining.

What I can say is the one area of energy growth that hasn't missed a beat with COVID-19 fallout is precisely wind and solar. And the reason really doesn't have anything to do with the Sierra Club, Bill McKibben's group, Greenpeace or even government regulation. It's that costs have come down so far on a global basis--particularly for solar panels--that wind and solar are now actually cheaper to build and run than even natural gas. And Bloomberg New Energy Finance projects another 33% drop in price this year, as Chinese production ramps up and the rooftop solar business model cracks.

This doesn't mean the world is going to stop using oil, natural gas or even coal. In fact, any credible forecast I've seen is we're going to use more. But this is not the wind and solar industry of the 1970s or even the 90s.

Roger Conrad

4:26

I will check out the documentary though. Thanks.

Dave

4:38

I'll try asking this one more other way. which 10 stocks that you cover, in your opinion, have the most secure dividends?

Roger Conrad

4:38

I see what you're asking. I guess what I would say to that is at any given time, 40-50 companies will rate "A" in my Quality Grade system--that is they meet all five criteria, which as I've said before are mutually reinforcing. Since COVID-19 fallout began hitting the economy, I have drilled down a lot harder to make sure A still means A--and we now have Q1 results and guidance to inform that analysis as well. But after all of that, I really don't see a whole lot of difference between any of the companies I rate A on the basis of dividend safety alone. Where there is a real distinction is on prospects for growth and price. And my trading advice puts all of that together to make a recommendation.

Bottom line is I'm not really sure how useful it is for me to identify 10 companies as safest out of a group of 40 to 50 that are equally qualified to withstand this worst of environments. Best advice is to pick out 10 of the Conservative Holdings that sell below target prices and resolve to stick with them.

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