JotCast | 6/29/23 Capitalist Times Live Chat

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6/29/23 Capitalist Times Live Chat

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Roger Conrad

3:44

Thank you Victor. Chevron Corp (NYSE: CVX) is down roughly -12% year to date including dividends while ExxonMobil (NYSE: XOM) is only lower by -2%. The key catalyst for both stocks going lower has been the drop in oil and gas prices. The outperformance of XOM over CVX--which does extend back the past couple years--is a bit more difficult to explain. Chevron has more bullish analyst support, for example. And both companies have been successful adding to reserves, cutting costs, generating massive free cash flow and cutting debt. CVX is maybe a little more gassy than XOM, with extensive LNG investment. And XOM caught the attention of a lot of people with its lithium investment. But at the end of the day, these companies are quite similar. And bottom line, both should go a lot higher in the energy upcycle we believe is still early stages.

Victor

3:53

On the latest issue of EIA you commented on ENB and the fact that they have 3 years to shut down one of their pipelines due to a court order. Obviously, this is not good. What is your outlook on ENB?

Roger Conrad

3:53

Hi Victor. the region of the US and Canada served by Line 5 would see chaos if it's shut down, period. Enbridge at this point believes 3 years is enough time to build an alternative route using a tunnel. And in fact the staff of the Michigan Public Service Commission this month recommended regulators approve the company's plan. There's still the need for an environmental review by the US Army Corps of Engineers that some believe will delay construction until 2026, bumping up against the judge's deadline. But if it does come to that, it's pretty easy to see the companies getting a stay at a higher court of this ruling, so work can be completed without disrupting fuel supplies for the upper Midwest US as well as Quebec and Ontario. Failing that, the government of Canada already weighed in once in this case, preventing the state from shutting Line 5 under treaty and would certainly do so again. Bottom line--this is not a long-term threat to Enbridge, though I prefer TC Energy and Pembina in Canadian midstream.

BKNC

3:57

Is there a reason why CWCO is doing very well, yet WTRG is not? They are both regulated water. I am looking at adding to WTRG, which is the reason for the question.

Roger Conrad

3:57

Simply, they're both in water but also different businesses. Essential Utilities is a pure regulated water/wastewater utility located entirely in the US. Consolidated is a desalination water utility serving the Caribbean but now also a contract infrastructure company specializing in water projects. Essential is underperforming mainly because of questions it will be able to complete a series of acquisitions of municipally owned water and wastewater systems in a timely way. Management is so far stuck to guidance, with Q2 results due in early August. Consolidated as I noted answering an earlier question, just won a big contract in Hawaii and is finally starting to get noticed. I think it's a bit expensive now.

Victor

4:05

Hello Roger. NEP has been making lower lows for almost one year. Do you see anything wrong here? Are you still holding this one for the long run?

Roger Conrad

4:05

NextEra Energy Partners' value proposition is basically a high yield--nearly 6%--that management has said it will grow 12-15% a year as it adds ownership interests in contracted renewable energy. The company has a ready source of "drop downs" of ownership interests in parent NextEra Energy (NYSE: NEE), which has repeatedly shown its commitment to the yieldco model as a way to fund its own growth. So the question has always been can NEP raise the funds to make purchases accretive to earnings and dividends. Management in early May announced a deal that should ensure minimal need to access capital markets the next couple years, including the sale of its investment in Texas natural gas pipelines and NEE suspending incentive distribution rights through 2026. We'll hear more about its plans in late July with Q2 results. But so long as its supported by NEE, NEP doesn't present a lot of risk. And I intend to hold both for the foreseeable future, recent share underperformance notwithstanding.

Victor

4:12

On your last EIA issue you highlighted concerns about a recession and the impact on stocks overall. However, you are also upbeat about the energy sector and you described how the best oil companies are prepared to weather a stock market rout. Is this a good time to add new positions while many of the actively managed portfolio stocks are still under the buy price?

Roger Conrad

4:12

We are very bullish on this sector for the intermediate to long term and continue to see this as early innings of an energy upcycle--the primary catalyst of which is nearly a decade of underinvestment in oil and gas production and infrastructure, which has arguably worsened with Fed tightening raising cost of capital and depressing oil and gas prices. Energy stocks outperformed a lot last year but have underperformed the first half of 2023, with the S&P 500 carried up and away by a handful of Big Tech names.

The key question of adding to positions is always to get the best prices. And we continue to believe a prospective Tech Wreck 2 would at least initially take most stocks lower to better entry points, including energy. We are in process of making some incremental additions to the model portfolio, which you'll see in the promised part two of this month's EIA. And those would be our top suggestions now for fresh money.

James

4:19

In yesterday's issue of Creating Wealth, we fund the new purchase by selling from VMFXX. In practice, I have to put a sell order in to VMFXX and wait for end of day price. Then the sale is made and I receive cash. Then the next day, the cash is available, and when the market opens, I make the recommend purchase about 24 hours after the recommendation was made. How are other people doing it all on the same trading day, as is the scenario in the newsletter?

Elliott Gue

4:19

Quite a few readers I've spoken to have "cash sweep" accounts at their brokers that offer yields in the 4.5% to 5% range on idle cash balances. I use VMFXX as an example money market fund, however, if you have a cash sweep account at your broker that offers a competitive rate of interest, that's a viable alternative to VMFXX. I've also spoken to other readers who essentially have margin accounts that allow them to purchase a stock using the value of their other holdings as collateral; the sale of the VMFXX would then repay that margin loan at the end of the day. Regardless, for purposes of calculating returns in the newsletter, I assume exactly the scenario you just outlined -- the average price for the new addition on the following business day with interest accrued on VMFXX through the close the day before.

John C

4:20

What’s going on with CWEN at new 52 week low?

Roger Conrad

4:20

Hi John. Nothing if you're referring to the underlying business. Per the company's investor presentation released in late May, management is sticking to guidance for 5-8% annual dividend growth through 2026, which is fueled by steady drop downs from motivated parent Clearway Group and its 29 gigawatt development pipeline of wind, solar and storage projects. The company also has four California-based natural gas power plants that are increasingly needed to meet the state's peak demand. We'll see Q2 results in early August. But there's nothing to indicate other than steadiness at this point. As for what's going on with the share price, I could show you pretty much the same chart for hundreds of dividend paying stocks now. I think the selloff is giving us better entry points for new positions and to add to older ones. But its really part and parcel of a market where money not in cash is going to Big Tech and out of most everything else. The important thing is underlying businesses stay strong--as CWEN is now.

Victor

4:27

Elliott, OXY has been moving sideways for a long time. Your thoughts. Thanks.

Elliott Gue

4:27

Like a lot of the oil-focused producers, I think OXY is likely to need a rally in oil back towards that $80/bbl range to break out of its trading range. It's a good company, low production costs, paying down excess leverage moving to return capital to shareholders. There's just no catalyst right now. That's one reason why we think the short to intermediate term prospects remain better for gas-levered names.

James

4:29

HI Roger, can you give me your thoughts on Dominion Energy, Inc. (D)? I still hold it from years ago and didn't sell when recommended. It's down 50% from my cost basis and wonder if the business has any hopes of recovering and getting the stock up again.

Roger Conrad

4:29

Hi James. Dominion Energy is trading low 50s--down from low 80s last summer--mainly because of uncertainty about the outcome of its ongoing strategic review. Management has promised to have results this summer and it will no doubt be discussed at length in early August with Q2 results. My view is the current price reflects extremely low investor expectations, but that reaching a long-term regulation deal in Virginia and South Carolina this year has removed considerable risk from the outcome. I do think there will be asset sales, almost certainty the unregulated renewable energy business but also possibly the Millstone nuclear plant and the majority interest in the Cove Point LNG facility. The purpose will likely be cutting variable rate debt. But whatever the specifics, I think we have seen the bottom in Dominion's fortunes and that we'll see a return to 80 plus the next few years.

Dan

4:37

These talks are great. Enjoy these talks. I dipped into Newmont. Are you still bullish long term?

Roger Conrad

4:37

Thanks Dan. We do as well. I think the remarkable thing about the price of gold and Newmont shares is how well they've held up since early 2022, when the Federal Reserve started tightening money at the fastest rate since the 1980s. In recent decades, that kind of Fed action has triggered a rout in both gold and gold stocks. And I think it points to the fact that inflation is a lot more entrenched now than it's been at any time since the 1970s, in part because nearly a decade of underinvestment in key commodities. Newmont's story is complicated by the fact it's trying to close a friendly merger with Newcrest, as well as a strike in Mexico. But my intermediate term upside target is still $90 plus and I could see the variable portion of the dividend north of $1 per quarter.

James

4:39

On the fixed income side, can I get your thoughts on buying TIPS (the bond direct from US treasury at auction, not the ETF or bond funds which have always lost me money)? The real yield is approaching 2%. How does it compare to buying treasuries? I would be interested in your overall thoughts on fixed income with secured principal.

Elliott Gue

4:39

The TIPs would compensate you for inflation, so if you think inflation is likely to remain elevated, this is one way to protect your capital. Generally, I do think inflation will remain elevated for some time to come; much like the 70s, I think average inflation will remain elevated and we'll see cycles around that higher average depending on economic conditions.

Right now, however, in Creating Wealth my focus from a fixed income perspective has been on two things. First, I think the yields on short term T-Bills are very attractive right now -- for the first time in many years a viable (and lower risk) alternative to owning stocks. I recommend BIL and BOXX, two ETFs that offer T-Bill like return, but of course the alternative is to just pick up some T-Bills through Treasury Direct.

The second thing is that when it comes to longer term US government bonds, there are opposing forces right now. On the one hand, higher inflation and expectations that the Fed will need to keep rates elevated to quell

Elliott Gue

4:39

inflation will tend to put upward pressure on yields (downward pressure on prices). On the flip side, I do think that investors will regard bonds as a safe haven should the economy enter recession later on this year as I expect. So, I think that'll cap the upside in yields (downside in prices). With range-bound near-term prices and a bullish bias intermediate term, I really like the TLTW strategy -- this ETF buys longer term government bonds and sells call options on those bonds to layer in premium income. I first added TLTW to the portfolio back on March 9th -- since that time, it's up almost 5% while equivalent duration Treasury ETF (TLT) is up just 0.5%. So, I really like that covered call strategy baked into the TLTW ETF.

Gary

4:42

At these low natural gas prices what are your thoughts about loading up on UNG or even UNG CALL op

With natural gas prices so low, what are your thoughts about loading up on UNG or even a small position in UNG CALL options?

Elliott Gue

4:42

I think there are better ways to play a bullish outlook for gas than UNG. The problem with UNG is that it basically buys short-term gas futures and then rolls them according to a fixed roll schedule. Since the US gas futures curve is generally upward-sloping, this means that when you are buying UNG, you're not really getting much exposure to a potential rise in gas prices into next year. We prefer the producers as a play on rising gas -- in EIA we recommend CHK and EQT. In some of our trading services we have also recommended SWN, which is a more leveraged play on US gas prices.

Victor

4:47

MRO and DVN seem to be hitting a bottom. Do you see more downside on these two?

Elliott Gue

4:47

I think MRO is interesting -- we profiled it in an article maybe 2 months ago. But, they have a gas project in Africa that sells LNG indexed to US gas prices (which are very low). The contract that forces MRO to sell LNG at US prices expires next year, which should pr4ovide them with some cash flow uplift that we believe isn't fully factored into the stock. So, it's a name we're watching closely but aren't quite ready to add. We like DVN as well longer term, but I think the stock would be a much better buy in the low $40s than it is now. Too much exposure to oil and not enough upside catalysts in our view.

Alex M

4:48

Hi Roger. How do you view the proposed $42 billion federal investment in expanded internet coverage impacting the telecom space? Could this be a tailwind for a rurakn operator like TDS?

Roger Conrad

4:48

Any subsidy is obviously a plus when you're in the middle of a heavy CAPEX phase, and especially when competition is eroding revenue. The problem for TDS is its capital needs are immense for its size, with $333 million in negative free cash flow expected this year and -$300 million next even before dividends paid. That financial risk is reflected in the "negative" outlook on its credit rating from S&P--and keep in mind TDS' ratings are sub-investment grade, meaning it's tough to issue new bonds on economic terms, and 29% of debt is at floating rates with the cost still rising. It's also worth pointing out that subsidy is available to TDS' rivals as well, including cable television companies invading its space. Bottom line--you've got to be increasingly scaled up to survive in telecom. That means for TDS, the best end game is a takeover, and while it's still reasonably strong to command some premium--unlike Consolidated Communications' take under offer it can't refuse from Searchlight Capital.

Alex M

4:55

Hi Roger. How do you view the proposed $42 billion federal investment in expanded internet coverage impacting the telecom space? Could this be a tailwind for a rural operator like TDS? Could it benefit bigger players like VZ and T? Thanks.

Roger Conrad

4:55

Answering the second half of your question about Verizon and AT&T, any subsidy would also help. And both companies are ramping up fiber broadband in both urban and rural areas. That said, revenue for Verizon alone the last 12 months was $136 bil, so whatever it could add with subsidy would be far less important than how it does with wireless customer acquisition and average revenue per wireless user. But that said, trading at 8X next 12 months earnings, expectations are very low as are risks, with the still growing yield over 7%. AT&T sells for 6.6X and a yield of almost 7%. That means it shouldn't take too much good news to lift share prices in the second half of the year.

Bill

5:01

How much more downside risk do you see in AY with it hitting new lows on a weekly basis?

Roger Conrad

5:01

Hi Bill. I think it's very difficult to call a bottom for an individual stock in a top-heavy stock market like this. Today's end of the day bounce for Atlantica does show there are value hunters willing to strike in the low 20s--whatever their reservations might be about the broad stock market, companies with renewable energy assets etc. But the reason I'm comfortable sticking with this company is it's still strong on the inside--with the dividend of nearly 8% backed entirely by long-term contracted assets, debt amortized over the life of those contracts and currency risk also factored out. The big question is if Algonquin will sell its 42.15% share of the company. And the lack of detail on the strategic review at Algonquin and Atlantica is trying some investors' patience. But so long as the company is solid, I'm willing to stick and see what happens.

Alex M

5:11

Hi Roger. If Dominion proceeds with asset sales, do you think that portends a dividend adjustment? I recall that was the case when they sold natural gas pipelines a few years ago. Thank you.

Roger Conrad

5:11

Management has said a dividend cut is not on the table. I don't think we can completely rule one out. But Dominion is also in a much stronger position now than it was then, when years of delays winning permits forced cancellation of the Atlantic Coast Pipeline project. Mainly, there's a strong market right now for assets most likely to be sold: Majority ownership of the Cove Point LNG export facility, the extremely profitable Millstone nuclear plant in Connecticut and renewable natural gas production. And it's possible Dominion will find a strong buyer for a piece of its Coastal Virginia Offshore Wind project, contracted renewable energy assets and possibly one of its natural gas distribution utilities. Any of these sales--unlikely the sale of the pipelines in 2020--would have a minimal impact on earnings but also cut debt meaningfully. So I'm optimistic what we ultimately see will be positive for earnings, the balance sheet and eventually the stock.

Elliott Gue

5:32

Looks like that's all the questions this month. Hope everyone has a great evening.

Roger Conrad

5:32

Hope everyone has a great Fourth of July extended weekend.

5:33

Look for the transcript of the Q&A in the near future.

Arnold S

5:33

Thanks!

Roger Conrad