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5/30/24 Capitalist Times Live Chat

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Roger Conrad

2:38

Good questions! I think until Dominion brings the Coastal Virginia Offshore Wind facility on line, management is unlikely to start another massive, multi-year project. CVOW is at this point both on schedule and below VA regulators' cost cap, demonstrating this is a company that can get big projects done. And there is expertise and appetite for new nuclear in both VA and SC, though not for any project that cost as much and took as long as Vogtle.

I do think a successfully merged Dominion/Duke would be far better able to build new nuclear than either company alone. And while I haven't been to the Summer site, there would be a number of advantages to building there.

The X factor is would regulators allow Dominion/Duke/Southern the kind of deal and then continuing support Georgia regulators did to see the Vogtle project through. And none of these utilities are likely to spend dollar one until an ironclad and legally enforceable deal is in place.

Jack A.

2:38

Hi Elliott:

What effect do you think a Trump presidency would have on energy companies in the United States? My assumption is that the price of oil would fall, as he believes in increasing production, but I'm not sure about the price of natural gas, as he no doubt would try to increase its export. My thoughts are that with all the variables affecting oil and natural gas prices, the safest investment may be the pipelines involved in natural gas export... Could you mention perhaps 3 pipeline companies that would benefit the most from the increased export of natural gas?
Thanks

Elliott Gue

2:38

I don't see a Trump Presidency having any substantive impact on US oil production. US producers are focused on a steady-as-she-goes production policy aimed at preserving a long runway of top-tier acreage and maintaining or growing production at modest rates (say 1-3% per year) ex-acquisitions.

My view is that US oil production growth right now is mainly a chimera and we'll see US output plateau regardless of who's in the White House.

I do think a Trump Administration would be viewed as more favorable to M&A -- so I can definitely see an acceleration/continuation of the recent (much-needed) consolidation trend.

There's a more obvious impact for gas as a Trump Administration would almost certainly lift the permitting pause on new LNG export infrastructure. However, that really only would impact terminals that will go into service after 2029/30, so I see no substantive impact on US natgas prices in the next few years.

As with oil, I do think you'd see the consolidation trend underway continue/accelerate

Elliott Gue

2:38

In my opinion, the industry needs more M&A. The pipeline companies will benefit from greater gas use/exports though, as always, midstream has less upside leverage than upstream to the price story. Also note that many of the midstream assets that will benefit most directly from growing US exports are already, or soon will be consolidated into the producers -- ie EQT buying ETRN and CHK's investment in infrastructure to serve its Haynesville production business. Among the pure midstream plays, portfolio favorites like EPD, ET, PAGP would all be beneficiaries of rising US gas and or oil production and exports.

Jeff B

2:44

Roger, I bought CQP in the low $50's. The dividend is good, but it has done nothing but go down. What's your opinion?

Roger Conrad

2:44

Hi Jeff. As we wrote in EIA earlier this year, Cheniere Energy Partners elected to reduce its dividend in order to fund a greater percentage of ongoing LNG expansion projects with operating cash flow. I think that decision makes a lot of sense--given the fact borrowing costs are high and the company's opportunity to complete and lock in contracts for its already permitted projects. Remember the Biden Administration has declared a moratorium on granting new LNG export facility permits. So Cheniere has a clear incentive to accelerate development now. I think investors have overreacted to the lower dividend and possibly weaker natural gas prices. But management affirmed 2024 guidance and the value proposition of adding cash flow by building is still very much in place. We've had a buy below 55 recommendation on CQP for some time and that's still the advice.

Sohel

2:44

Hi Elliot, Thanks for holding these chats, very useful. Get to learn a lot. What's your current outlook on the markets? Do you think we still have the overhang of a deep recession? Would you expect this year?

Elliott Gue

2:44

Thanks for attending and the question.

I continue to think the US economy faces greater risks to growth than the consensus believes.

However, I don't see recession as imminent -- in recent cycles the yield curve has regained a positive slope just ahead of , or coincident with, the start of a US recession and that hasn't happened yet. It's something I'm watching closely.

I'm also watching bank reserves closely -- markets have strong correlation to the trend in bank reserves over the intermediate term because reserves underline credit creation.

As for the depth of any recession -- it's a bit too early to know. History suggests deep inversions are followed by more severe recessions, but I think we'll get a better sense as the data turns more meaningfully negative ahead of the start of the recession.

John S

2:51

Roger, I want to thank you for great advice over the years that has helped me to build a retirement fund that has made retirement comfortable for my wife and I. I have been a follower of your for many years, having followed you from your previous employment. In my eyes, that move has been very beneficial for your followers.
What are your comments on the Chesapeake / Southwestern merger? Many thanks

Roger Conrad

2:51

Thank you for those comments. I'm very happy to have been of help. And thank you so much for making the jump with us to Capitalist Times.

Our view is the CHK/SWN merger will go though per management's continuing guidance for a "close in the second half of this year." The combined market cap of the two companies is only about $20 bil and together they won't come close to dominating gas production in any region. The FTC requested more information on the deal in early April and may do so again. But after clearing ExxonMobil/Pioneer, it's hard to imagine the commission would risk challenging this much smaller deal in court. There may be some conditions. But we expect a successful close and for management to beat guidance for synergies after.

Sohel

2:56

Hi Elliot, What is your outlook on interest rates in the near term like 3 months? Will the Fed hold steady? When do you expect them to do an initial couple of drops and will these being the most anticipated drops ever actually be "buy the rumor - sell the news" type of event for the market?

Elliott Gue

2:56

The Fed is dramatically reducing the pace of quantitative tightening (QT) starting June 1st.

That gets less attention in the mainstream media than the prospect of rate cuts though it's arguably more impactful for markets. What's interesting is that the Fed needed to taper QT because Treasury was struggling to sell longer-term debt (outside T-Bills). We saw a number of note and bond auctions "tail" in the past year meaning that rates spiked as the government sold debt and/or much of the auction as bought out by dealers (big banks that make a market in bonds).

By tapering QT, the Fed reduces the quantity of Treasuries private markets must absorb, which eases the government's funding problems somewhat.

My view is that the Fed's ultimate decision to cut could be based more on the need to alleviate some of the pressure on Treasury (need to fund the massive deficit) rather than the economic/inflation data as the central bank would have us believe.

I don't think the Fed will do anything over the next 3

Elliott Gue

2:56

months in terms of rates. I suspect they'd prefer to wait until after the Election in November to make any major moves. That said, I do think the next moves will be cuts. Right now, the market is discounting a soft landing narrative, so they're looking for a series of minor downside rate adjustments like we saw back in 1996. I have my doubts about that, but that's more of an intermediate/long-term topic. As far as the stock market is concerned, it's currently discounting 1-2 cuts by early 2025 and I think it would respond positively if it looks like the Fed could cut more. However, if the market starts to discount a more significant cutting cycle I think you'd need to look out below on the S&P 500 -- typically that kind of pivot only happens in recession.

Jerry J

2:57

With COP acquiring Marathon… what are your thoughts on MLPX?
I have the sense that COP will spin them out.

Roger Conrad

2:57

Hi Jerry. Actually, ConocoPhillips is buying Marathon Oil (NYSE: MRO), rather than Marathon Petroleum (NYSE: MPC)--which is the general partner of MPLX LP (NYSE: MPLX). I would not rule out MPC eventually merging in the 36.29% of MPLX it doesn't currently own. And in fact, that possibility is a major reason why MPLX still trades at a discounted valuation (yield nearly 8.5%). The original IPO price was $22 per share back in October 2012, so the tax implications of merging in an MLP to a C-Corp are no doubt still a very big disincentive to do that. But that's one reason we haven't lifted MPLX' highest recommended entry point above the current 40.

Hans

3:01

Elliott, RRC, Insiders sold lots of shares, anything we should keep an eye on. Thanks

Elliott Gue

3:01

I don't really see anything unusual there.-- recent sales follow much larger buy transactions from more senior insiders from February through early May. Their last earnings release was solid and the stock jumped over 3% on the news. RRC is also near its 2022-23 peak -- a break higher from here would be significant.

Sohel

3:03

Hi Roger, Thanks for holding these chats. What's the outlook for pipeline companies for the next 3 months or so? In particular, EPD, ET, KMI, PAGP etc?

Roger Conrad

3:03

Hi Sohel. Even that very strong midstream company quartet has definitely taken a breather the past couple months. I think one big reason is the concern that natural gas producers in many regions are restraining output in the face of what are still quite soft prices. Some of that is being driven by associated gas production accompanying oil output. And some of the weakness is weather. We've laid out a number of reasons why we think natural gas prices have probably seen their lows--a big one being the discipline of shale producers. But lower gas output does mean reduced throughput for midstream companies.

That said, we think investors are overlooking the fact that midstream companies have also adopted capital discipline. And as a result, re-contracting is strong, tariffs are holding and midstream results are adhering to guidance. M&A is the preferred road to growth as noted in the most recent EIA issue. But all four of these MLPs are still very solid on the inside. And we expect them to return to the upside.

3:06

Elliott, anything worrisome about the downturn in PBF since April? It is now below the 200 DMA and the downside just intensified during the last 2 trading days.

Elliott Gue

3:06

I think it's more about the refiners generally than anything specific to PBF. Market has been worried about demand and the decline in refining margins since mid-to-late March.

The products supplied data from EIA -- a common measure of demand -- has been all over the place since March. Gasoline and distillate inventories are still below the seasonal average and EIA's demand figures are notoriously volatile.

I am looking for crack spreads to turn higher this summer as demand picks up for driving season -- this would be the catalyst for the refiners and oil itself.

Hans

3:07

Roger, What is the outlook now for BHP now that the merger is of. Thanks

Roger Conrad

3:07

Hi Hans. BHP is still the largest, best financed and best positioned mining company in the world--and these days it's well focused on metals and minerals with the strongest long-term growth trajectories. A successful merger with Anglo American on reasonable terms would have been a coup for management. And what the company pays in semi-annual dividends--next in September--will depend on often volatile commodity prices, which in turn are heavily impacted by often opaque demand indicators in China. But BHP didn't need the Anglo merger for the ADRs to move back to 100 plus again--which is still my target.

Sohel

3:08

Hi Elliot, Any change in the perspective for VLO? It seems to have taken a dive over the last few days. I had sold some earlier a slightly lower price and now looking to get back in the name at this time.

Elliott Gue

3:08

Thanks for the question.

It's all about refining margins in my view -- crack spreads have come down since March generally as the market frets about demand. I covered some of the indicators I watch in response to a prior question on this chat.

My view is that with gasoline and distillate inventories below the 5-year average and summer driving season ahead, those crack spreads will recover, which will help refiners liker VLO and oil itself.

Sohel

3:13

Hi Roger, What drove the recent surge in NEP?

Roger Conrad

3:13

I think NextEra Energy Partners' shares are responding to a growing realization that NextEra Energy isn't going to abandon it as a fund raising vehicle--but rather is going to do what's necessary to restore NEP's ability to take drop downs on reasonable terms. The latest indication of that was the revelation that NextEra Energy and NextEra Energy Partners were reaching a private capital solution for refinancing convertible equity maturing starting in 2027. That followed strong Q1 results at the end of last month that affirmed assets are running well and repowering activities were on track.

I also think that renewable power stocks are again starting to join the energy bull market. The huge increase in AI-related data center demand for electricity underscores once again that America needs "all of the above" when it comes to energy. And after getting slammed in late 2023, stocks like NEP, CWEN etc are cheap.

BobD

3:17

I see that Conoco Philips is acquiring Marathon Oil. Marathon Oil owns MPLX. Any news or even speculation on what happens to MPLX in this deal?

Roger Conrad

3:17

Hi Bob. As I answered to Jerry a bit earlier in the chat, Marathon Petroleum (NYSE: MPC) is the majority owner and GP of MPLX LP (NYSE: MPLX). ConocoPhillips is buying Marathon Oil (NYSE: MRO). We see Marathon Petroleum buying the rest of MPLX as a low probability event. COP buying MRO follows the industrial logic of other oil and gas producer mergers weve seen. And we would expect that deal to close in Q4. Also COP has announced a big dividend increase starting in Q4.

Jon B

3:33

Hi, can you comments on the merits of owning NEP vs. NEE at their current levels? The market seems to be saying that this is the time to own the developers and not the contracted yieldcos. Also, what kind of catalysts might get NEP trading at a yield that perhaps better reflects the stability of its contracts (maybe 7% vs current 10.5%)? NEE has already proven a very supportive parent but seems like they are unlikely to provide a further catalyst if it is not economic for them. Obviously lower interest rates would help immensely, but what if the yield environment doesn't change, or gets worse? Is NEP essentially a levered bet on lower rates in the future?

Roger Conrad

3:33

Hi Jon. NextEra Energy Partners dropped sharply last year largely because investors came to doubt it would ever again be a viable fund raising vehicle for parent NextEra Energy. Ultimate recovery to a share price of say $50 plus depends simply on the company proving it can again take drop downs on reasonable terms.

Lower borrowing costs would certainly help. But I don't think they're absolutely necessary. Mainly, if NextEra can engineer a "private capital solution" to refinance the convertible equity coming due starting in 2027, it will greatly restore faith that NEP can sustain its dividend. And I would look for the price to rise to a point where the yield is closer to Clearway Energy's 6%. At that time, drop downs would again be viable, almost regardless of where interest rates go. And the stock would again follow dividend growth higher--logically to new all-time highs, since the dividend is 30% higher than it was at NEP's all-time high of 89 on 11/22/21. That's what I think we're playing for here.

Don C.

3:38

Roger—could you give an update on the drama between BHP and Anglo? Should I add to my BHP position? Thanks for the guidance that you and Elliott provide.

Roger Conrad

3:38

Hi Don. Thank you for those kind words. I think BHP is compelling value in the high 50s and my eventual upside target is somewhere north of 100. Like other major mining companies, the stock price has been restrained by concerns about commodity prices generally at a time when the Federal Reserve is trying to restrain inflation--as well as worries about prospects for China's growth. Buy BHP is the world's most powerful mining company with a very strong balance sheet and an increased focus on the key commodities driving future growth. The dividend is going to vary and there's a chance the ADR will pay less in September than it did in March. But this stock is portfolio bedrock.

Elliott Gue

3:39

Question from the e-mail queue: Thank you for your advice over the years, which I have benefited from.

I find very interesting your current thesis that we are at an inflection point in oil prices, just as we were many years ago with China, but now, as it relates to India.... And I agree with you.... But I am currently retired and frankly frightened of having too much of my assets invested directly in oil and gas companies.... My fear is of "Black Swan" events, such as companies being at the whim of governments that resent "wind fall profits", or governments like Venezuela that could use their military to take over neighboring countries, like Guyana........... But to still benefit from your thesis, is there any way to capitalize on the increase in the prices of oil and natural gas without investing in oil companies? For example, if you want to invest in gold, we have the option of investing in GLD, and not investing in the gold mining companies...

Is there anything comparable to capitalize on the increase in price of oil or natural gas? If not, what comes closest to what I'm looking for?
Answer: Thanks for the question and kind words about the services. The answer is pretty complex. Yes, there are ways to profit from a rally in oil and/or gas directly – there are ETFs like the US Oil Fund (USO) and the US Natural Gas Fund (UNG) that are designed to track the price of the underlying commodities.
However, there’s a huge caveat.
With gold, you can buy ounces and store them in a vault – that’s how GLD works. With oil and gas these ETFs track futures, not the physical commodity.
So, that gives rise to all sorts of issues including, principally, the calendar roll from one month’s futures to the next. This is bad for oil/USO and pretty much insurmountable for natural gas/UNG due to the latter’s extreme volatility and seasonality.
As a result, we only recommend USO/UNG or other ETFs that track the commodities in our shorter-erm trading services – these ETFs

3:40

are best suited to those who want to jump in and out of the commodities over holding periods no longer than 6 months or so. In contrast, with producers you actually get paid (in most cases) to hold them because of the groups high and rising stream of dividends.
Black swan events are a reality of investing in most financial markets The only way I know to reduce (not eliminate) these risks are through diversification.
For example, let’s take a hypothetical example of a scenario where Venezuela invades Guyana and seizes their oil assets. I see that as a low probability event because it would effectively destroy Venezuela’s only real source of export revenue and national wealth (and, by extension, the wealth of the country’s President Maduro). I see it as even more unlikely this happens with no military response from the US.
However, let’s say it does happen – an unlikely event that has a major impact on global markets is the definition of a Black Swan.

This would be bad for XOM, potentially fatal for HES but it would also likely result in a spike in oil prices towards $125 to $150/bbl at a minimum. That would likely drive significant upside in a long list of names with exposure to more secure supply like EOG, OVV and many of the other shale names in the portfolio.
Windfall profits tax and/or other anti-energy policies are additional examples. UK did that a while back and it hurts BP, but it’s a tailwind for US exporters as lower UK gas production means higher US exports to offset that. Germany shutting down nuclear and subsidizing renewables meant the impact on their economy from the Russia-Ukraine conflict was profound and long-lasting. It was also a boon for US gas producers and French nuclear electricity generation.

Sohel

3:44

Hi Roger, Based on your buy under prices PAGP is most underpriced vs ET, EPD and KMI? Nearly 50% below vs 10-20% below. Does that makes it a better buy?

Roger Conrad

3:44

Plains trades so far below our highest recommended entry point mainly because it's the midstream of the 4 most leveraged to the energy upcycle going forward. That's because cash flow varies greatly by throughput and to some extent with commodity prices. In contrast, Energy Transfer and Enterprise have little direct commodity price exposure and throughput is generally less volatile. Kinder has some commodity price exposure through its CO2 unit, though it continues to diminish.

All four stocks are in our Actively Managed Model Portfolio in EIA--where our recommendations show both what price to pay and how much to buy for portfolio balance. We would own these four stocks based on those allocations.

Barry B

3:50

Good afternoon and thanks for all the great insight. I keep reading about more Producers signing LNG contracts. It is implied that they will get a better price for their nat gas but I never see any details. Do you have any idea how much price advantage they might get from these contracts?

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