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5/25/22 Capitalist Times Live Chat

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Elliott Gue

2:16

There are a number of factors at work. One is that while oil prices are the single most important raw material for making gasoline, there are several other raw material inputs. One example is natural gas prices (gas is used to generate heat needed in the refinery distillation process). The last time oil prices were around $100 in 2014, natgas prices were far lower than is the case today (around $4/MMBtu vs. $8+ at the moment). There is also the matter of refining capacity vs. demand -- refined product demand was running at record seasonal levels earlier this year and above average in most weeks over the past 6 to 12 months. Yet, the total amount of refining capacity in the US is shrinking -- total operable refining capacity was at just under 19 million bbl/day at the peak in 2020, now down to less than 18 million bbl/day. The situation is worse overseas (refining capacity in the EU, for example, has plummeted) and US refiners do serve these overseas markets via exports. So, basically, you have growing

Elliott Gue

2:16

gasoline demand meeting diminished gasoline production capacity. Finally, there are regional issues. In California, for example, gasoline has to be blended to a different standard, which makes it tough for refiners in some parts of the country to serve the CA market. Also, there aren't as many pipelines serving some markets, which increases transport costs. This is why gasoline is usually more expensive in some States than others. In my home state (Florida) for example, gasoline is cheaper in the northern part of the State, close to pipeline capacity while the need to transport via truck to the southern reaches of the State results in higher prices closer to Miami (this situation is, in turn, exacerbated by the rising cost of diesel used in tanker trucks).

Lawman

2:28

Are you contemplating a recession and, if so, what impact to you expect this to have on the equity markets?

Elliott Gue

2:28

Right now, the data doesn't yet suggest an imminent US recession. However, I am starting to see datapoints that suggest the US could enter recession as soon as early 2023. Oner major issue is that what causes inflation is too much demand relative to supply -- i.e. to much demand for labor, insufficient supply drives up wages, too much demand for cars relative to supply drives up used car prices. Supply takes time to adjust and the only real way for the Fed to bring down inflation is to induce a major economic slowdown (reduces demand for goods/services). I just don't see how the Fed will be able to bring down inflation without causing the US economy to enter recession. Most bear markets are associated with recessions, so an economic downturn is usually associated with weak returns in equity markets. My view is that there's risk of a more severe-than-average equity bear market this cycle because stocks (especially growth stocks) are still very expensive relative to most historic periods (except 1999/2000).

Elliott Gue

2:28

I also see rising risk of a 70's style (or 2000-2009 style) equity market trading range where stocks in general go nowhere and produce negative real returns (adjusted for inflation) for a prolonged period. I know that's not a cheerful forecast though the good news is that some assets and sectors can still work and produce solid returns even if the S&P 500 is in for a prolonged period of weak returns.

Jack A

2:29

Hi
Unlike other exploration and production companies and midstream companies, Crestwood Equity Partners' price has not increased very much year to date. Do you attribute this to the marketplace thinking they accumulated too much debt in their merger with Oasis Midstream Partners? What do you think is holding back the price appreciation?
Thanks.

Roger Conrad

2:29

Hi Jack. Crestwood has returned roughly 10% year to date, which is about half the Alerian MLP Index. But it's also up about 75% since the beginning of 2021, better than the AMZ. And it's up about 10-fold from the low point in early 2020 versus a 3-fold gain in the AMZ. Shares are basically flat since the announcement of the Oasis Midstream acquisition. But they hardly have a debt problem: At the end of Q1 debt to EBITDA was only 3.5 times and there's no maturing debt until September 2024. They also generated $28.3 mil of free cash flow in the quarter after all CAPEX and distributions, with DCF coverage of 2 times. And S&P raised the credit rating to BB following the close. As for Q1 results, Oasis acquisition synergies appear to be running ahead of expectations--EBITDA and DCF were higher on a pro forma basis. And drilling activity at multiple basins appears to be picking up. I think all of those things eventually drive CEQP higher--meantime it pays 9%.

David O

2:34

Gentlemen,

Retired, need income. I have been your faithful disciple…well positioned in XOM, EPD, DUK, VZ, and the like. Have positions in private equity in commercial and residential real estate. I will be embarking upon the accumulation of BHP as a major position over the next year. I realize it does not have the reliable revenue streams like the above, but I am willing to take that risk. The world’s thirst for metals is an unstoppable trend green new deal or no green new deal. Honestly…tell me…is BHP to your minds a “heavy weight” worthy of a position on my “front line” in retirement.

Roger Conrad

2:34

David, we're pretty high on the long-term outlook for BHP Group (ASX: BHP, NYSE: BHP), which we've actually held very profitably in the CUI Plus Income Portfolio for several years. You should expect volatility in the share price to continue--a lot of people seem to trade the stock based on their current feeling about China, which consumes a great deal of the company's iron ore output. And the dividend is going to be variable too, since profits do vary with commodity prices. But that said, BHP is a mining company that's consistently been successful growing output of key metals--and these days what's needed to produce all those batteries needed to electrify transportation. And the current price is quite low relative to my long-term target of $100 plus for the NYSE traded American Depositary Receipts.

Ben F.

2:42

Good morning.

Thoughts on STAG?
STAG Industrial Inc STAG

Roger Conrad

2:42

We cover STAG Industrial in our REIT Sheet advisory as a buy with a highest recommended entry point of 45. Shares are down by roughly one-third since the start of the year, despite a pretty solid Q1 including 8.2% higher FFO and acquisition volume of $166.4 mil. Cash available for distribution was up 13.8% and debt to EBITDA of 5.1 times is "at the low end" of management guidance. The company has also been successful cutting costs. Shares appeared to take a hit from Amazon's management comments that the online retailer has too much space. But only 3.2% of the portfolio is leased to Amazon--one a build-to-suit under a lease with 12 years left on it and the two up for renewal next year renting 25% below market. The yield of 4.5% is safe as well.

James

2:43

Hi Elliott, can you give an updated on your level of conviction that we can get a powerful bear market rally (to S&P 4600 maybe?) that follows the pattern that you outlined in the newsletters? That is, within the first 200 days of a new bear market, there will be chances to reduce your stock exposure and that it just doesn't go straight down. I'm getting worried as a number of experts I follow who were bearish, then turned bullish recently, and now are full blown bearish again after seeing that the market cannot rally and is so weak. We may already be in the phase of the bear market (past the first 200 days) where we will not get any more chances to sell. In other words, it goes straight down.

Elliott Gue

2:43

My view is that this is a bear market (not a correction like 2018) and I am increasingly of the view that it could persist for longer, and result in a larger-than-average bear market decline for the S&P 500. The main reasons for that are that my view remains the inflation problem won't be easy to solve and the starting level for the stock market was high (valuations were high at the peak of the bull market). There really aren't any modern examples of major bear markets that don't have multiple bear market rallies. The two closest analogs in my view are probably 2000-02 and 1973-74 -- the former example had multiple large bear market rallies (some 20%+) while the latter had 2 in the 10% range. So, I would be surprised if we didn't see at least one more rally in that 10%+ range for the S&P between now and July/August. Any such rally would be a selling opportunity in my view and it's difficult to predict how high it would go, though I'd say 4,600 would be toward the high end of what I'd expect.

Elliott Gue

2:43

One issue that continues to trouble me near term is that even on days where we've had major declines in the stock market, a lot of indicators I follow aren't showing the level of capitulation that typically marks an important low. To turn more bullish (short-term) I would like to see more of these indicators line up.

Chris E

2:45

What are your long term thoughts on Hercules Capital (HTGC) and Sixth Street Specialty Lending (TSLX)?
Thanks

Roger Conrad

2:45

Hi Chris. I answered a question on Hercules at length in one of the prechat questions. Generally speaking, shares look cheap but the company is definitely swimming upstream right now in terms of rising finance costs and credit risk, should what we're seeing now develop into a real recession. I think Sixth Street is facing the same headwinds. I think the "regular" dividends these companies pay should probably hold this cycle. But no one should count on the "special cash" payouts to continue at current rates--which are a big part of why the posted yields look so high.

Willy

2:48

Roger/Elliott:
Could you provide some guidance as which of these might be preferable? I already have KMI, EPD, MMP and MPLX. You seem to like both for possible future appreciation, but is one a safer bet than the other?

Thanks so much for your continued guidance.

Roger Conrad

2:48

Hi Willy. For some reason the names of the stocks you wanted to ask about didn't seem to show up in your question. Please ask it again.

I can say we very much like the four midstream companies you did name--as indicated in the current issue of Energy and Income Advisor, all of them had a great Q1 and solid guidance updates. And it's hard to find anything in the current stock market of such high quality with such high yields.

Bob P

2:56

Hi Roger, Elliott hope all is well.
In regards to OXY warrants received in 2020, and have held the warrants, I am trying to determine if now would be a good time to purchase the warrants and then sell the warrant shares, for partial profit taking?
Thanks and look forward to the webinar later.

Roger Conrad

2:56

Hi Bob. The Occidental Petroleum warrants I believe you're talking about expire on August 3, 2027. They represent the right to buy OXY at a price of $22 on that date. At a current price of $43.95 per warrant, they have an intrinsic value of $43.83--which is the OXY's current price of $65.83 minus $22. As a result, investors are awarding pretty much zero value for the time remaining to expiration. Our current advice on Occidental is a buy at 55 or less--which basically means they're a hold. That essentially means the warrants are a hold too. As for the broader question of owning the warrants versus the shares, we prefer the shares mainly because they're paying us a dividend that's likely to be ratcheted up in coming years. With warrants' intrinsic value equal to their current price, I can't think of any reason why it would make sense to buy one and sell the other.

John

3:00

CDPYF has been a significant winner over the past decade. Would you add at this level?

Roger Conrad

3:00

Hi John. As I indicated in this week's REIT Sheet, I rate Canadian Apartment REIT a buy up to a highest recommended entry point of USD50. Like most REITs, it's been caught up in a sector-wide selloff over the past month. But Q1 results were quite solid. And there appears to be little real risk to guidance for FFO or dividend growth--with occupancy stable at 98% and the REIT able to increase rents again. Looks like a good entry point.

Lawman

3:00

In light of high prices for gasoline, natgas, and heating oil, that appear to be contributing to inflation, do you expect oil and nat gas producers to ramp up production?

Elliott Gue

3:00

There are really 3 "buckets" of global oil supply -- US shale, non-OPEC conventional and OPEC. US shale producers are ramping up activity, as evidenced by the surge in the active oil-directed rig count from 359 rigs a year ago to 576 right now. However, some of that is needed just to offset the dwindling inventory of drilled, uncompleted wells. US oil production is rising from 11 million bbl/day a year ago to 11.9 million bbl/day. However, you won't see shale grow at the rates that we saw back at the peak of the last boom for a number of reasons including that there's not enough equipment/labor, companies don't want to outspend their operating cash flow and some companies are likely concerned about their inventory of drilling locations. Non-OPEC excluding shale is shrinking and there are very few large projects that have been sanctioned in recent years that can move the needle there. I suspect (at least I hope) we'll see more ion vestment soon but realistically these projects take 3 to 5 years or more to

Elliott Gue

3:00

produce significant oil volumes so I think that supply is more of an intermediate to longer term consideration. Then there's OPEC, which is effectively maxed out ex-Iran -- I do suspect Saudi could produce a bit more, but they're already producing 10.34 million bbl/day, compared to a 10-year average rate of 9.8 million bbl/day. Bottom line: There's just not much scope for oil supply to rise enough to meet demand in the intermediate term. Natgas in the US, I do think you'll see supply rise and prices should come down from current elevated levels. However, outside the US it's not a pretty picture -- Russia is a huge supplier and there's just not enough gas to offset a major drop in Russian supply. New US LNG supplies will help but not before 2024 to 2026.

Victor

3:07

Hello and thank you for this service. XOM has moved up from $60 to $95 in just 4 or 5 months. Your buy price is still <$85. Are you increasing the buy price or is XOM completely overbought? Your thoughts.

Elliott Gue

3:07

Thanks for the question. XOM remains a favorite and I think longer term it's not hard to justify a price north of $120. Plus, of course, they pay a nice dividend that's likely to get bumped up again and are buying back stock. The stock has soared this year, however, and I do think that if we start hearing more talk of a recession later this year, oil demand could come in and that might well bring down oil prices and energy stocks. It's not likely to be a straight shot higher and there will be pullbacks and corrections along the way. So, our view is better to wait for a dip back into the $85 range to buy more Exxon rather than chasing the stock right here.

Dan E.

3:07

Hi Roger, many thanks for hosting the live chat.

With respect to CWEN and HASI, it appears to me that they are in the same business, yet CWEN trades at a discount to HASI. Would CWEN be a better buy to round out ones portfolio? Thanks for your thoughts.

Roger Conrad

3:07

Hi Dan. I guess you can say they operate in some of the same circles. For example, Clearway Energy took Hannon Armstrong on as a financial partner this year for a portfolio of contracted renewable energy facilities. Both are also seeing quite a bit of asset growth as more renewables get built and they have similar dividends and projected growth of 5-8%. But they actually have quite different business models. Mainly, Clearway is an operator of contracted power plants and makes money by acquiring more. I incidentally think today's announcement that TotalEnergies will be a new financial partner is very bullish for its growth. Hannon in contrast finances projects of other companies and governments--and while these include renewable energy the larger focus is energy efficiency. Bottom line is I like them both--and both look cheap now as well.

Jeff B

3:12

Roger, NEE has taken quite a pounding. What's you opinion going forward?

PXD I have a 100% gain, is it time to start trimming or taking profits?

Roger Conrad

3:12

Hi Jeff. We've been offering some advice on trimming some of our producers in Energy and Income Advisor, including the current issue. We may have more moves to make in coming weeks depending on where prices go and our outlook. But at this point, that's where to look.

As for NextEra, this company still hasn't missed a beat. There was some heavy selling starting in late April following the company's earnings call, when management stated the US Commerce Department's threatened tariffs on solar panel imports would delay a number of its projects. But it also affirmed earnings guidance through 2025, as it has considerable flexibility to invest in growth elsewhere in the meantime. One reason NEE is volatile is because its heavily indexed and owned by ETFs--and we've been able to take advantage of momentum swings by selling the blips and buying the dips. The current opportunity is on the long side.

John

3:15

Opinion on HASI recently?

Roger Conrad

3:15

Hi John. I think it's quite cheap now yielding around 4% with a long-term growth rate of 5-8% backed by 10-13% annual earnings growth through 2024. Q1 results demonstrate the company enjoys both robust demand for financing from customers building renewable energy and especially energy efficiency projects. And it's having no problem accessing low cost capital to fund that growth, thanks in large part to the exploding green bond market. This company has the lead in a very valuable niche. Shares got very expensive in early 2021--when we sold it from the CUI Portfolio. But they're cheap again, even as the company has continued to gain value as a business consistently.

Lawman

3:18

Are you still advising going short the QQQ? If so, when do think the NASDAQ will stop declining, and what events do you think will turn the market around, and when?

Elliott Gue

3:18

In the longer-term portfolio service (the Creating wealth portfolio) I recommended selling two-thirds of the recommended position in QID (a 2x leveraged QQQ short ETF) on May 16th for a profit. In our shorter term trading service we also took profits on QID on the same day. We've also been trading the ARK Innovation ETF (NSDQ: ARKK), a speculative growth ETF, on the short side in several services since last September (September 2021). The reason we took profits/partial profits on these recommendations is that I'm beginning to see signals that suggest a short-term bear market rally is close at hand. I seriously doubt, however, that will be the bottom of the bear market and I will be looking to reenter bearish positions on any bounce. Bear markets usually last for a year or more and the market started this bear market at a high valuation -- in 2000-02, for example, the S&P 500 declined close top 50% while many of the expensive growth stocks that led the late 90's bull market were down 80% to 90%.

Elliott Gue

3:18

Generally speaking, I believe many investors/traders out there are too complacent about the current cycle, mainly because since the 2007-09 cycle, the Fed has been quick to bail out the stock market at the first sign of trouble. 2007-09 was the last real cycle we had and that's 13 to 15 years ago. This time inflation is sky-high and there's less flexibility to bail out the S&P 500. So, I think this bear market could grind on for longer, and be far more severe, than many expect. (Apologies for being so depressing on today's chat but I think it's crucial to understand what's underway right now).

Mike C.

3:20

Gentlemen – Thank you as always for such lucid and rock solid guidance, especially now. Your take what’s happening in the markets and why isn’t just instructive, it’s tangible. Thanks to your various services, my retirement portfolio is outperforming nicely and I sleep well at night. Thank you!

A couple of questions: what’s your view ahead for gold? Do you see specific catalysts?

Also, do you have dream prices for the current metals recommendations (AA, BHP)? It seems like the metals are facing the headwinds of fears of slowing growth and China-slowdown. (And Roger, thank you for identifying dream prices for REITs.)

Thanks again!

Roger Conrad

3:20

Thank you Mike. Gold is currently encountering a bit of a headwind from US Federal Reserve monetary policy to rein in inflation. But as the collapse of crypto shows us once again, it's still the best alternative to fiat currency, just as it has been for thousands of years. We have a dividend paying gold miner position in our CUI Plus Portfolio. And we look for gold to be strong in this new environment of higher inflation for some time to come--though the immediate catalysts for the price are in large part headwinds just now, which means we're prepared to be patient. We also like BHP in that same portfolio, as I noted answering a question a bit earlier in the chat. The appeal is long-term and we're willing to live with the share price volatility--every rumor from China seems to have an impact.

John

3:25

Sitting on MPLX since 2011. Can that hefty yield on cost remain?

Roger Conrad

3:25

I'm not certain what you mean by hefty yield on cost. But MPLX' dividend is very well supported by distributable cash flow (1.65 times coverage ratio versus 1.56 times) as well as free cash flow after all CAPEX. Debt is also quite manageable with debt to EBITDA of 3.7 times (3.9 times a year ago). The company generated $92 mil of free cash flow after dividends, CAPEX and debt service in Q1--money that can go for share buybacks. Management is also back increasing the payout on a regular basis. And as our earnings analysis in the most recent Energy and Income Advisor makes clear, the operating business is picking up steam in all major basins.

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