JotCast | 5/26/21 Energy & Income Advisor Live Chat

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5/26/21 Energy & Income Advisor Live Chat

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Roger Conrad

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Greetings everyone and welcome to the May Energy and Income Advisor members only live chat. As always, there is no audio. Just type in your questions and Elliott and I will get to them as soon as we can concisely and completely. We will send you a link to the complete Q&A after the conclusion of the chat.

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Per usual, we're going to start the chat by posting answers to questions we received beforehand.

Q. Hi Roger and Elliot.
Thanks for your research, etc that helps us make intelligent investment decisions. I subscribe to your EIA, CUI & most recently to Roger’s REIT Sheet newsletter. The bulk of my Portfolio is centered around your suggestions. I have a few questions for this upcoming EIA Chat session. Hoping I don’t have too many questions:

1-With the ExxonMobil (NYSE: XOM) contested election for Board of Directors rapidly approaching, what is your near term outlook for XOM should the Green crowd win some seats, which to me seems highly likely?
I have lightened up on my XOM positions the past week or so just in case they tack too hard to the left, no pun intended. XOM has been a nice money maker for me (Capital Gains and Dividends) and I would hate to see the new Directors take XOM in an entirely new, less profitable direction.

2-After reviewing my $155k portfolio, which, thankfully has been heavily weighted towards oil, I recently took some nice gains on XOM and Valero Energy (NYSE: VLO) and I have decided to Broaden out to Utilities, REIT’s and Energy as I believe that, for the long run, investing in stocks that also pay decent dividends is the best way to proceed, especially considering the current and future Economic scenario. For Energy I include pipelines Kinder Morgan Inc (NYSE: KMI), Enterprise Products Partners (NYSE: EPD) and MPLX (NYSE: MPLX) and Pembina Pipeline (NYSE: PBA) and Producers XOM, Total (NYSE: TOT) and Refiners VLO. For Utilities I include AES Corp (NYSE: AES), Algonquin Power & Utilities (NYSE: AQN), Atlantica Sustainable (NSDQ: AY), Vistra Energy (NYSE: VST), NextEra Energy (NYSE: NEE) and NextEra Energy Partners (NYSE: NEP). All are recent purchases since I decided to diversify a bit from mostly oil. For REIT’s, I include Artis REIT (OTC: ARESF) as a recent purchase) and I may be adding one or two more

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when your next REIT issue comes out. I also have small positions in a few Tech stocks as well as Gold, Silver, Copper and precious metals miners.

I know you can’t give specific individual Investment advice. But with my Portfolio's diversity, do you think I am diversified enough (or, perhaps too much) to weather the next few years and Biden’s eventually crashing the dollar. I am 85 years old so the future can’t be too far away. But, I would like to maximize my returns without losing much if the worst case scenario's unfold downstream).

3-What impact on oil (XOM & VLO) do you see as it looks like Biden will cave and cancel the existing sanctions on Iran and they produce more non-sanctioned oil?

4-Discuss your near to mid term outlook for VLO. Some news media say sell, with a projected price in the $60’s, others say Buy with a target of $120.

5-Due to the extreme political push towards Green Energy etc, how many years do you think it will be before adversely impacting stock prices and dividends, on pipelines, i.e., KMI, EPD and MPLX?

6-Am I correct in assuming that well managed Utilities profits are mostly guaranteed, thus their dividends are pretty safe? How about if/when interest start climbing?

Thanks again for the great advice, research and services you both provide.--Fred W.

A. Hi Fred. First thank you for all of these questions. What a great way to start off this month’s chat. And speaking for Elliott and well as myself, thank you so much for your confidence in us. Please feel free to follow up during the chat on any of these if you have additional comments or concerns.

Starting off with your first question regarding ExxonMobil, environment related shareholder resolutions are certainly nothing new in the big oil world. What’s different is they obviously enjoy a higher level of support right now with the trillions of dollars going into ESG (environment, social, governance) investment strategies. Blackrock, for example, is endorsing three “rebel” nominees who want to push the company into a strategy more akin to what we’re seeing at BP Plc, Royal Dutch Shell and Total SA—that is more investment in renewable energy and less in conventional oil and gas going forward.

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If the dissident shareholders do win this round and elect their nominees—and it appears they have now--management will be under pressure to move faster in that direction. The important question for investors is if that would undermine the value proposition for the stock—and I think that’s far from clear at this point. One could actually argue that XOM shares will get a lift from an influx of ESG money on a strategy shift.

Despite green strategies, BP, Royal Dutch and Total will fundamentally be oil and gas producers for at least the rest of this energy price cycle. So will ExxonMobil and Chevron is they move in that direction. Meanwhile, every dollar they spend on, for example, offshore wind and not on oil and gas production will ultimately restrict supply at a time when demand is starting to pick up globally. That will arguably extend the cycle and produce an even bigger boost in big oil profits, including ExxonMobil’s. And in any case, this stock is still trading $12 a share below its pre-pandemic level—

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it’s not even pricing in $50 oil, let alone mid-60s, which is why we’re sticking with it.

Moving onto question two about portfolio diversification, you’re correct that we can’t offer focused, detailed individual investment advice at Capitalist Times. I believe I can legally say we are in the process of building an income-oriented offering at our regulated business Halcyon Capital that we will bring to your attention when it’s ready to go. But at this point, what I can do is offer a couple of observations.

I think this is a very good mix of high quality companies with solid dividend coverage, strong balance sheets and sound business strategies that should ensure above average dividend growth for many years to come. All of them have in fact raised dividends since the pandemic began. That doesn’t mean they can’t go up and down in price as you know. But you can count on the income and over time, those rising dividends will push up their prices. I you wanted to add to them, I do focus on companies in other sectors with similar strengths in the CUI Plus service. And if you’re interested, you can contact Sherry Roberts at 877-302-0749 from Monday through Friday, 9-5 ET for more information. But I think this is a great foundation.

The other observation is if there is a dollar crash, your holdings that pay dividends and are priced in foreign currencies will benefit commensurately—i.e. Pembina Pipeline, Total. Algonquin and Artis should do so as well. They do have operations in the US but also a long history of

managing currency exposure successfully. Mining companies and oil producers have historically benefitted from a weak dollar environment due to their connection to commodity prices. So all in all, it looks like your holdings should net benefit from US dollar weakness—though a real crash that’s disruptive for the global economy could bring unexpected consequences. It’s something to watch but all in all I believe it’s a good practice for income investors to hold a mix of foreign stocks with their other holdings.

On question three, Elliott has some comments on the Iran situation in the current issue of Energy and Income Advisor, which we posted yesterday. I would strongly urge everyone to check those out in the feature section of the issue, which is part three of our Q&A roundtable relating to what we learned from Q1 earnings and guidance updates.

The short answer is this is old news that’s unlikely to have a major impact on oil prices or the value proposition for oil stocks. Iran is already producing 2.4 to 2.5 million bbl/day, so we’re only talking about 1.3 mil bbl/day if it produced full out—which will take months even if sanctions ended today. And by that time, we’ll have seen a huge surge in global demand.

On Question four, as you’ll see in the Model Portfolio table in the current EIA issue, we continue to advise buying Valero up to 85. That’s a higher maximum recommended entry point than we had a few months ago. And the reason is this company not only weathered the pandemic easily but is now seeing business momentum. Of the analysts tracking the stock, there are 16 buys and one sell—a pretty good endorsement from those following the company and industry most closely.

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On Question five, I think pipeline companies actually benefit from the green push in two ways. For every project that doesn’t get built or operating asset that’s shut down, transportation capacity tightens and the value of everything else rises. Winter Storm Uri proved once again how vital pipelines are when weather turns nasty, and Kinder for one made a huge windfall just for keeping its systems on line. The other way is that these companies all have huge opportunities from new uses of their systems, for example carbon capture and hydrogen blending. Kinder is in fact moving aggressively in both.

As I’ve pointed out in Energy Commentary on pipeline politics, there are certainly pipeline and midstream companies that could lose big on certain political outcomes. But if you stick to the large diversified companies, a setback in one place will likely lead to a benefit elsewhere. Bottom line, these are still assets that are vital to a functioning economy and will be for many years. The key is picking the right

companies who can adapt to change and turn it to their advantage.

Finally, with question six, the value proposition for utilities right now is the enormous capital spending opportunity they have on regulated rate base, which feeds earnings and dividend growth. So long as regulators are supportive of that CAPEX—which does vary from state to state by the way—there are few if any insurmountable hurdles to steady growth.

Obviously, capital-intensive industries borrow a lot of money. And if and when interest rates do move to higher levels, borrowing costs will rise and so will the expense of financing utility CAPEX. On the other hand, regulated utilities earnings are typically set by an allowed return on equity, a percentage that will rise with interest rates. In fact, in Illinois ROEs are directly tied to Treasury bond rates—which benefitted several companies in Q1 at the bottom line.

There is still a persistent narrative in some places that utilities are bond proxies and must lose ground if rates rise—and it’s equally obvious some investors still move money around on that premise. But as I’ve pointed out, there is no relationship whatsoever between calendar year returns for utility stock averages and changes in benchmark interest rates. In fact, the worst years for utility stocks—as with the stock market—have been years when benchmark rates fell furthest. That’s because they corresponded with economic weakness, which is bad for all stocks. And utilities though they pay dividends are stocks. Also worth pointing out is the fact that utility stocks have performed best when the Fed is raising interest rates, since the central bank only does so when the economy is strong.

Thanks again for your questions Fred. And again, please feel free to follow these up during the chat.

Q. Dear Folks, Do you have any advice about doing some tax loss selling now with Occidental (NYSE: OXY)? I would get back into the stock after the 30-day period but I would hate to get caught buying after a big spike. What does your crystal ball say about price trends during the next month or so? Many thanks.—Jeffrey H.

A. Hi Jeffrey. Thanks for joining us again. We view Occidental as an excellent leveraged bet on the next leg up for oil and gas stocks. Q1 results demonstrated the deleveraging strategy is on track and the longer benchmark oil stays in the mid-60s, the faster management will be able to execute it. The stock also traded at $40 pre pandemic, versus about $25 now—so it’s not pricing in $50 oil by a long shot, let alone $60 plus. We think that will resolve to the upside, very likely over the summer.

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The question of tax loss selling is a good one. Obviously, Occidental has come down a long way since announcing the acquisition of Anadarko on the eve of oil’s biggest swoon in this cycle. On the other hand, however, we believe doing so now and staying out 30 days really will run a pretty big risk of missing out on the next leg up. Again, our view is the cycle has entered a new phase. And with energy stocks digesting previous gains now for roughly two months, we think another big move up is likely to be imminent.

Q. Gentlemen. Nice to see some daylight since the storm broke in 2014! Can’t thank you enough for your shepherding through that mess!!!

Retired, need income. While a little “off topic” I sense the need to hedge our portfolios with “unstoppable trends.” “Going green” is one, have picked up some NEE, AQN, and Brookfield Renewable Partners (NYSE: BEP) on the pullback. Looks like the need for copper, lithium, cobalt, nickel, etc. will be insatiable. Any ideas how to get reliable income from that trend? This retiree has zero appetite for the boom / bust cycle of stock prices of the miners. Their dividends can be all over the place as well. Are you advocates of selling covered calls? This still leaves you at risk for declining stock prices.

Do you have any thoughts on making reliable income from miners / metals? Maybe best to stick with the high quality “green” names and dividends in our portfolios and call it a day?--David O.

A. Hi David, thanks for your question. I like the three green stocks you’ve picked out. The main reason is unlike the vast majority of companies claiming to be “energy transition” investments, they actually make money on a consistent basis and share those earnings as generous dividends. And while they haven’t been hit as hard as the earnings-free companies most people associate with going green, they have come down substantially to levels that make sense.

As far as betting on actual commodities, the best idea for income investors is to stick with the best of the biggest mining companies. Our Deep Dive Investing service has recommended several of these to great effect over the past couple years. One that should be on everyone’s buy list is actually also a CUI Plus portfolio name as well—BHP Group, which has American Depositary Receipts trading on the NYSE as “BHP.” It pays semi-annual dividends that it has consistently increased the past couple years and the yield is currently 5.6% net of any Australian with

withholding tax.