JotCast | 5/25/22 Capitalist Times Live Chat

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5/25/22 Capitalist Times Live Chat

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Roger Conrad

4:16

I definitely prefer other utility stocks at this point. Consolidated Edison is a stock a lot of funds tend to buy when they want something "safe." I do think the replacement of Governor Cuomo has greatly improved utility/regulator relations in New York. But with natural gas prices soaring, New York ratepayers are feeling the heat with high electricity rates. And that can't help this company's ability to spend on its grid going forward. Any of the utilities in the Conservative Portfolio of CUI would be good alternatives.

Guest

4:21

Greetings Gentlemen, I'm a recent subscriber to CUI+ and I've have a couple of items from a past portfolio. I was hoping to get your quick opinion on if I should keep these or not. One is Alliance Bernstein Holding (AB) and the other is Compass Diversified Holdings (CODI).

Roger Conrad

4:21

These are probably stocks we should be revisiting. The yields certainly look enticing, though Alliance Bernstein's is variable and Compass cut its payout earlier this year to 25 cents per quarter, from the 36 cents paid every quarter since April 2011. Compass did raise its 2022 guidance following a solid Q1 and Alliance beat estimates in its Q1. But I still see both as vulnerable to a combination of rising interest rates and slowing economic growth in the US. Bottom line is I think there are better alternatives with less risk for income.

BobP

4:22

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

4:22

Hi Bob. I believe I answered your question earlier in the chat. Both OXY and the warrants are effectively holds at these prices.

Victor

4:23

The Biden administration has been hostile to the oil industry since day one. They recently canceled leases in Alaska and the Gulf. Biden said a day or two ago that a "transition" is taking place and that once it's over we''ll be stronger. Is he knowingly or unknowingly "fueling" high gas prices with his words and actions? Can extreme high gas and diesel prices trigger a serious recession? Your thoughts.

Elliott Gue

4:23

There's no doubt that the market is worried about supply and any news that would seem to limit oil production/supply growth adds to that worry and helps keep oil aloft. Canceling leases, tying up vital energy infrastructure approvals and anti-oil rhetoric certainly doesn't help. However, I think that what's happening right now actually goes back a lot further than the Biden Administration and it's not a simple political fix. The real problem is a lack of investment in new oil and gas production projects globally in recent years. Some of that is due to unfavorable government policies and naiive energy transition timetables. And, some of that is due to the fact that ultra-low interest rates pumped up valuations for alternative energy plays and robbed traditional fossil fuel companies of capital. Rising energy prices can certainly help to trigger an economic downturn; for example, we've recently heard from companies like Ross Stores and Wal-Mart that suggest a slowdown in spending from low and middle-income co

Elliott Gue

4:23

it's even worse than that because there's inflation in food, housing/rents, air fares, used cars, new cars...the prices of almost everything is soaring. In my view the idea that buying a $50,000 electric vehicle is a viable near-term solution for higher oil prices is pretty ridiculous, especially if you're talking about households with annual income of $50,000. This problem will take time to solve and I think it will be tough for inflation to come down without the US tipping into recession.

Hans

4:23

Elliott, What was the reason to take ENB with a 6 % div. off the EIA portfolio.

Roger Conrad

4:23

Hi Hans. We had Enbridge Inc in the High Yield Energy List. And after some strong price appreciation, it now yields less than 6%--so we replaced it with higher yielding fare. Still a great company, it just no longer has the yield to be on a high yield list. We took Williams Companies off earlier for the same reason--though we like that one too.

Dan

4:26

Hi Roger- thoughts on Allete (ALE)?

Roger Conrad

4:26

Rate it a buy at 70 or less--as noted in the Utility Report Card with the May issue, Q1 results were solid and guidance is on track. The yield over 4% is also attractive and should grow at a mid to upper single digit percentage rate for the next few years. Also a possible takeover target when M&A heats up again.

Victor

4:27

Last year DVN had a nice break up and it's now on a solid uptrend. CLR has not performed the same way. Please comment on these two names.

Elliott Gue

4:27

Operationally, both are sound companies with good acreage and economics. However, investors have tended to favor companies returning capital via special dividend arrangements -- that's why names like PXD and DVN have generally outperformed. This is also typical when there's worry about the economy and broader market -- investors tend to favor the "bird in the hand" over long term growth stories. The other groups that have done well are names that were viewed as having financial troubles that have been solved by higher energy prices (like OXY).

Ray

4:30

I have owned Pembina and EPD for a very long time reinvesting and also adding to both during down times. I’m now more of an income investor vs long term growth. I’m somewhat overweight in both and wonder if it’s getting time to take some gains off the table and deploy elsewhere or leave them alone a while longer?

Roger Conrad

4:30

Hi Ray. I think if you're looking for conservative investments in North American midstream energy, you're not going to do much better than Enterprise and Pembina. Both are invested in the right places--particularly LNG and NGL exports, which are on track for explosive growth the next 5-10 years. The dividends are safe and growing again with little risk and the yields are high. My only caveat would be Pembina is trading above my highest recommended entry point of 38 currently. But it's still well below and profit taking point. And my expectation for Enterprise is a return to the last cycle's highs in the low 40s in the next 12 to 18 months. It's a buy up to 33.

Victor

4:30

Do you see more upside potential on MRO?

Elliott Gue

4:30

MRO is an example of a producer that was seen to be on shakier financial footing at much lower commodity prices because their breakeven cost (the oil price needed to generate positive cash and free cash flow) is higher. With prices at or near current levels, they are clearly cash generative. I'd suspect these higher cost names are more vulnerable to sizable pullbacks but can still perform well over the longer term as we see commodity prices remaining generally higher for longer.

Dan

4:35

comparing ALE to WEC and XEL, I’m curious why ALE trades at a valuation discount of ~30%. Is this just a clear market inefficiency of chasing favorites?

Roger Conrad

4:35

There may be some differentiation here on the basis of size--WEC and Xcel are much larger--or the fact that both Xcel and WEC are fully regulated utilities operating in multiple states versus Allete, which has unregulated operations. But my view is WEC this week has been trading at a price that merits taking a partial profit. And Xcel is selling well above my highest recommended entry point of 65, while ALE is a relative value. That's almost certainly the result of momentum going one way or another, particularly in heavily ETF'd and indexed companies as WEC and XEL are. Again, that's something we can take advantage of by occasionally taking money off and putting it back on.

Guest

4:35

Hi Elliot. Any thoughts on PSX? Also roughly what % of XOM's cash flow is related to refining?

Elliott Gue

4:35

In 2021, XOM generated just 9.1% of its net income from downstream (refining) but that's unusual because refining margins were depressed. In a "normal" year it could easily rise to the 20% to 30% range. Of course, the exact share also depends on how well its other businesses -- like upstream -- are doing. Right now, of course, the upstream business is doing very, very well. We continue to like PSX and the other big refiners -- VLO is our favorite because of the scale of its business and its large capacity on the US Gulf Coast, which is the most geographically advantaged place to have refining capacity.

Victor

4:36

How do you feel about SHEL. It seems that it is finally in a more significant uptrend.

Roger Conrad

4:36

We think it should do well the next few years, as all the super majors will. They dominate a vital commodity. I do think the price of SHEL, however, could be a bit ahead of itself. it's a buy on a dip to 50 or lower.

Jim T

4:39

Your outtlook for AETUF. ERF and PEYUF through Sep/Oct?

Roger Conrad

4:39

Hi Jim. I think they're going to post some pretty big numbers even if oil and gas prices fall as much as 20-25% from current levels. They've survived a seven year bear market for energy punctuated by an historic pandemic at the end and they're ready to ride the cycle higher. As far as share prices go, they could be volatile in the near term, which is why we're conservative on the buy prices listed in the Canada/Australia coverage universe. But I think all of them are definitely worth holding onto.

Jim T

4:41

As CT is expecting lots of turbulence starting in late summer, should we lighten up onour Utility and Energy producing stocks?

Roger Conrad

4:41

I think we stick to the program. That is systematically lightening up on stocks that exceed our "consider taking profits" prices--as WEC has this week--while looking to add companies after they drop. My table "Portfolio Holdings Trading Above Target" is in every CUI issue. And we've also given advice in Energy and Income Advisor on lightening up certain outperforming sectors. Incremental moves not dramatic ones are how to invest now.

Jimmy

4:44

Roger: With the Fed expected to make a series of rate increases, is there any realistic expectation we can see a bottom in the markets until it is clear how far the increases will go?

Roger Conrad

4:44

Hi Jimmy. Federal Reserve policy is definitely a factor that affects stock prices. But we've also seen some strong advances while the Fed was tightening--including dividend paying stocks. So I don't think tailoring your investment moves to trying to guess the Fed is a good idea. Rather, like I answered in the previous question, let's stick to the program and focus on building positions in best in class companies--occasionally taking money off the table when market momentum runs too crazily in one direction.

Barry J

4:46

Hi Roger:
Any comments on the wisdom of holding/selling SK Telecom Co Ltd? I think you may have discussed it in 1 of your various newsletters to which I subscribe.
Thanks.

Roger Conrad

4:46

Barry, I cover this company in CUI in the Utility Report Card. I think it's a solid company with a dominant market share in Korean telecom and it pays a safe dividend. I also think the new president of South Korea is likely to be more favorable to business the next few years. I rate the stock a buy at 26 or less.

Barry J

4:51

Roger:

Could you explain further the ownership issues between MPLX and MPC?
Is there a real possibility that MPLX could become a corporation the way the KMI did a few years ago and hammer us?

For those of us who buy MLP’s (like MMP, EPD. etc.) for their tax deferred income, this is an important feature.
Thanks to you and Elliott again for your ongoing sage research and advice.

Roger Conrad

4:51

Marathon Petroleum owns 63.95% of MPLX and is its primary customer. The idea that MPC would buy up the rest or convert MPLX to a corporation has been knocked around for quite a while--and in fact MPC was under pressure from Elliott Management to do so. Continuing uncertainty is one reason why MPLX yields almost 9% despite returning to dividend growth. But MPC has decided that keeping things the way they are benefits it most--a takeover would be expensive and converting MPLX to a corporation would hit it with a big tax bill. Also, the later conversions to corporations have been structured to avoid taxes. And getting a takeover done would face a high bar of getting approval from minority shareholders. Bottom line: I think things are likely to stay the way they are. But if MPC does act, it will have to pay MPLX substantially to get a deal done.

Guest

4:54

CPE declined significantly after earnings. Any thoughts on its prospects? Thanks. These chats are extremely helpful!

Roger Conrad

4:54

Callon is actually more than twice its 52-week low also. And its up about 40% the last 12 months. The recent drop off is a warning that producer stocks have come a long way in a hurry. But Q1 results were solid. We rate the stock a hold--mainly because we see better values among producers. It's tracked in our E&P and Services table on the EIA website.

4:56

Good afternoon, On the subject of HTGC, most of their borrowings are at fixed rates, so there will be little near-term impact of rising rates on liabilities. But their lending is mostly at variable rates; consequently, rising short rates will boost earnings over time.

Roger Conrad

4:56

Hi RW. Those are reasons as I pointed out earlier that Fitch rated the company BBB- with a stable outlook earlier this month. The main risk is likely to be from the economy, though the focus on technology and life science companies as customers should provide some insulation.

Jimmy

4:58

Are the recent election results in Australia what we need to move AGLXY forward?

Roger Conrad

4:58

They've certainly shaken things up--and as I recently tweeted following the results, I think it worsens the odds of the proposed demerger winning shareholder approval. I think there's a good chance Labor passes some legislation that helps coal power producers effect a faster exit while staying financially whole. In any case, my advice to buy at 6 or lower or otherwise hold still stands.

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