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6/30/21 Energy & Income Advisor Live Chat
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AvatarRoger Conrad
1:55
Good afternoon everyone and welcome to our June live chat for Energy and Income Advisor members. Elliott and I are looking forward to your comments and questions today.
1:57
As always, there is no audio. Just type in your questions and we'll get to them as soon as we can in a complete and concise way. We will be sending you a link to the complete transcript of the Q&A shortly after the conclusion of the chat, which will be when we run out of questions in the queue as well as what's been sent us via email.
As always, I'm going to start by posting answers to questions received prior to the chat. Please type in your questions as you join. Thanks!
Q. Dear folks. Thanks again for this opportunity. My question is about the wood-pellet producer Enviva Partners (NYSE: EVA). You called the stock to our attention in mid 2017 after you attended an MLP conference. Since then, EVA's stock price has just about doubled and its dividend has increased substantially. 
 
Unlike many other "energy" MLPs, which are funding CAPEX out of cash flow, EVA is aggressively issuing debt and equity for dropdowns. How do you currently feel about EVA and its prospects? I have always regretted selling out of NEP when I thought its stock price was getting "too high." Do you think EVA will continue its success story? Many thanks—Jeffrey H
1:58
A.Hi Jeffrey. Thanks for joining us again this month. One of the great things for us about attending the MLPA conferences of the past was occasionally uncovering a company like Enviva, occupying and even dominating an overlooked niche with huge potential and under generally conservative financial management. And as you point out, this one really worked out well—in fact it’s up nearly 50% in the last 12 months alone.
 
I have two basic points to make regards Enviva’s recent capital raises. First, they appear to be funding investments that will immediately add to sustainable cash flow, and therefore ability to fund a higher rate of distributions.
Specifically, management will spend $345 million to buy a wood pellet production facility and a deep-water marine terminal in Mississippi, output from which is sold under three long-term capacity-based contracts (not volume sensitive) with investment grade Japanese counterparties. It’s guiding toward $18.9 to $20.9 mil in new EBITDA from these assets, which with other income will fund a $3.30 per unit dividend this year. That’s clearly an accretive transaction benefitting Enviva unitholders.
 
Second, Enviva is selling shares at very close to an all-time high price. And it was able to upsize this deal by 10% due to robust demand. Wall Street dogma is to always worry about dilution when a company sells more common shares. But in this case, management is using a valuable currency (its shares) to fund growth that will lift per share earnings and dividends.
1:59
That’s not something most MLPs or energy companies can do right now with so many investors either pessimistic on the sector or avoiding it on ESG grounds. But so long as Enviva can build value—and arguably more security—by adding scale on an accretive basis, it’s undeniably a reason to be more positive on its prospects. So is the insider buying we’re seeing.
 
Again, this is not an oil and gas stock. And the business of selling wood pellets for fossil fuel power generators to reduce CO2 emissions is very much a niche that could theoretically disappear in a world burning no coal or gas. That’s something to maybe think about 5 to 10 years down the road, depending on how the global fuel mix evolves. But for the next few years at least, this company appears set to find all the contracts it can handle. And there’s certainly no shortage of wood waste in the US Southeast to fuel its efforts. We still rate it a buy on dips to 50 or lower in our MLPs and Midstream coverage universe on the EIA website.
Q. Gentlemen. As a practical matter, could the boards of directors of Chevron (NYSE: CVX) and ExxonMobil (NYSE: XOM) become so populated with tree-huggers and environmental wackos that the companies could be destroyed? How can board members be allowed to stand with such conflicts of interest? Dump CVX and XOM for the likes of Gazprom and Saudi Aramco where more rational leadership hopefully prevails?—David O.
 
A. Hi David. ExxonMobil’s Board has 14 members. So while losing three seats is a clear rebuke from shareholders, it does not mean management has lost control. Also, from what we hear, the real motivation of Engine No. 1 is they want the company to share what appears to be an incoming windfall from higher oil prices with a dividend increase. And our view is management will likely do so, at least once stated deleveraging goals are met—which at $70 plus oil may happen a lot faster than even the company expects.
A concerted shareholder vote can force changes at Chevron, ExxonMobil and other publicly traded company. But at the end of the day, it would cost hundreds of billions of dollars to win that kind of control. And as you’ve implied by suggesting a switch to Aramco or Gazprom, the mutually assured wealth destruction in tearing down Chevron or ExxonMobil will do basically nothing to affect global oil production, CO2 emissions or climate policy.
 
Far more likely is anyone trying to affect emissions at Chevron, ExxonMobil et al will use their influence to push these companies toward investment in carbon capture, hydrogen production and blending, efficiency and other new technologies—which ultimately will increase these companies’ long-term resiliency in part by making earnings less cyclical. And that in fact appears to be what Engine No. 1 is doing so far.
Bottom line: These stocks are still trading below pre-pandemic prices, when oil was barely above $50 a barrel. That’s at the same time $70 plus oil is rapidly strengthening balance sheets and positioning companies for stronger earnings as the cycle turns higher. Don’t let this kind of noise scare you out of super major oil stocks.
 
 
Q. Dear Roger & Elliott. Apologies for a question that relates more to the Utility Forecaster universe, but I am feeling increasingly anxious about Edison International (NYSE: EIX) as the California wildfire season gets underway
2:00
You have previously noted that the low P/E multiple of EIX relates primarily to wildfire risk, and that management has delayed providing full year 2021 guidance until it hears whether it will be able to securitize previous wildfire costs through its current California rate case. The impact of last winter's storms on Vistra's (NYSE: VST) share price would seem to highlight a similar risk for EIX.
 
Should I be telling myself that EIX's dividend is ample reward while I wait, perhaps over the long term, for its share price to more accurately reflect the underlying strength of this A-rated company? Or should I be moving my money to another company that pays a similar dividend but is less at risk from what might be quite a long-term wildfire risk? Many thanks once again for all your good advice over the years!—Phil B.
A. Hi Phil. Wildfires burned more acreage in California last year than ever before. Indications so far are 2021 could well set another record. And despite the state’s wildfire insurance fund, utilities are still subject to inverse condemnation—if their wires are connected to damage from wildfires they’re potentially liable.
 
Edison managed to avoid significant new liability in 2020, largely thanks to successfully utilizing a combination of targeted system blackouts when wind conditions reached dangerous levels in its service territory. But it also made record investments in system hardening, strengthening poles and insulating wires as well as improving intelligence.
Over the next several years, these investments have the potential to greatly reduce risk Edison’s system will play a part in future wildfires, even as the climate becomes more unpredictable. Until then, the key will be controlling the danger with less palatable methods, including system shutoffs.
 
Whatever its reputation in other areas, California has maintained a generally positive regulatory environment for utilities since the Schwarzeneggar administration. And regulators’ decision this month to severely alter net metering for rooftop solar in the state is the latest evidence of a high degree of cooperation. Mainly, only utilities like Edison are large enough entities to manage the investment to control both wildfire risk and the state’s push toward an energy transition. Regulators know it and company management is on the same page with their policies, since high levels of CAPEX on utility rate base ultimately push up earnings.
2:01
Bottom line is I’m not worried California will make Edison and other utilities whole on investment. The question is if companies can manage their way through another wildfire season without significant financial damage, as they did in 2020 and to a large extent 2019 as well.
 
The risk they won’t be able to is reflected in the very low valuations we see for Edison as well as PG&E (NYSE: PCG), and to a lesser extent Sempra Energy (NYSE: SRE). The rationale for owning them is if management succeeds, these stocks are headed a lot higher in the next 2 to 3 years. Consider Edison at a price of $100 would have a valuation similar to that of a typical T&D focused US utility. So while there are lower risk utilities yielding in the 4-5% range, there aren’t many with that kind of upside.
Q. I've been disappointed at the performance of Enterprise Products Partners (NYSE: EPD). You have it listed as a buy under 33, which it hasn't achieved in the last 5 years. As I recall, EPD once sold in the 40's prior to OPEC flooding the market in 2014. Prior to its fall, you presciently recommended taking some money off the table. That shows you how long I have been a subscriber.
 
My concerns are the headwinds for an increased price for EPD that include decreased oil production due to political pressure, most likely an inability to build new pipelines to add to earnings, and a decreased price multiple placed on it by "woke" investing firms. In light of all that, what is the realistic maximum price you expect EPD to achieve, and over what time frame? Thanks.—Jack A.
 
A. Hi Jack. Thanks for joining us again on the chat this month, and especially for being a long-time Energy and Income Advisor member.
Our caution on Enterprise way back when basically came from two places. One was Elliott’s analysis of global supply and demand at the time that forecast a decline in benchmark oil prices to the mid-$20s a barrel. Oil was well over $100 at the time and we believed most energy stocks would likely come down as well from what were then cycle (as well as record) highs.
 
Second, we believed there was a fundamental misunderstanding of North American midstream as a business—mainly companies were exposed to volumes as well as producers’ health, which would worsen with lower energy prices. We also believed there were a large number of midstream companies that either lacked sustainable business plans or were over-extended and headed for a fall, which would also bring down sector valuations.
As it turned out, all of those things have happened. But after the accelerated downside we saw last year in the wake of the pandemic, they’ve run their course. Energy prices we believe have bottomed for the cycle and are now in a multi-year uptrend. Midstream companies including Enterprise have fully adapted operating and financial policies to this stage of the cycle.
 
We’re also seeing a lot of evidence that past few years’ exodus from oil and gas from ESG strategies has largely run its course. The reason is simply that investment pools shunning oil and gas are underperforming big time this year. And the larger a percentage of the S&P 500 energy stocks become, the greater the pressure will grow to adapt ESG systems to accommodate ownership. One example would be giving greater weight to, for example, companies’ carbon capture investment, rather than to the quantity of their emissions.
2:02
As for government policy, after forcing abandonment of Keystone XL, the Biden administration has actually been supportive of high profile pipeline projects—including the Justice Department’s opposition to a last ditch lawsuit to halt construction of Enbridge Inc’s (TSX: ENB, NYSE: ENB) Line 3 pipeline, which is now on track for completion in Q4. Justice and the US Army Corps of Engineers have similarly refused to support closure of the Dakota Access Pipeline, despite the easy cover they would have had from a judge’s ruling. And while they’re supporting a more intensive review of Enbridge’s Line 5 tunnel project, they show no sign of saying no.
 
Meanwhile, courts are also coming down on the side of pipeline companies in a growing number of cases. That includes Penn East, which the US Supreme Court can go ahead on a FERC permit despite New Jersey state government opposition. And another court has required the Biden Administration to resume permitting for drilling on public lands.
So what does this mean for Enterprise? First, it will find investment opportunities even in an environment of more intense climate regulation, which arguably will make its existing assets more valuable. Second, it has weathered the worst environment for North American midstream in memory and is proof against most anything. And paying a dividend that’s 25% higher than at the stock’s peak price in 2014, it arguably deserves a price well north of the old high in the low 40s.
Ken in Phx
2:17
Biden has proposed changing the tax laws to essentially eliminate MLP’s tax advantage. How do you see that affecting the future of MLP’s like EPD, MMP, and MPLX? KMI and PBA are doing ok as C-Corps.
It seems he wants to destroy everything that helps energy or real estate (e.g. 1031 exchanges for REITS). Are we condemned to a world of 3% dividends with 4%+ inflation?
AvatarRoger Conrad
2:17
Hi Ken. Thanks for your question. I have two basic points. First, what presidents propose in terms of taxes, spending etc is not what they historically get. The math this year is none of these tax proposals are going to be supported by the 50 Republicans in the Senate and to get a reconciliation bill through will require all 50 Democrats--which if past is prologue is going to require a lot of horse trading. Items so small as requiring corporate taxation of MLPs by 2025--a proposal I have seen--are often shelved in order to secure a key vote. The only proposal I've seen for REITs is to eliminate 1031 exchanges, which in practice they seldom use.

My other point is the lesson from the phase out of Canadian income trusts in 2011--junky companies failed because all they had was the tax advantage. But Pembina Pipeline has returned 12% annually since the Halloween massacre. It's the underlying business not the structure that's key to returns. Bottom line, tax changes are possible but let's keep our eye on the ball.
Buddy
2:17
Elliott,  You have added only one new name to the managed portfolio this year.  Over Memorial weekend you were going to scope out some new buy candidates but I haven't seen any.  I suspect subscribers would like to see some new names.
AvatarElliott Gue
2:17
I continue to have some additional stock ideas I'm looking at and I'd honestly love to have new names to add to the portfolio. However, the question I like to ask myself about any potential new additions is if it's better than what we already recommend in the portfolio. For example, I've been going through a long list of new E&P names that look interesting here but Pioneer and EOG are pretty tough to beat and both have outperformed the S&P 500 Energy Index year-to-date with below-average volatility. Another example is the supermajors -- despite XOM being the name everyone seems to love to hate, it's up 57.5% year-to-date, which is far better than the others including BP, Shell, Total, even Chevron. Same with oil services -- our favorite, SLB, is blowing HAl and BKR our of the water this year. Just a little preview -- for the first time in a decade or so, I actually think natural gas might be a more bullish story for the next few months than crude oil. Clearly EOG is a beneficiary though I am looking at others
AvatarElliott Gue
2:18
...it's one area I'm looking at to potentially beef up exposure through earnings season.
Buddy
2:22
Is it too early to buy Baker Hughes?
AvatarElliott Gue
2:22
BKR is cheap but I really thing that SLB is the best oil services name. They are the most leveraged to an international spending recovery and I think that's the most likely growth area in H2 2021 as North American growth is likely to be restrained given producers' focus on cash flow over growth. In particular, I expect national oil companies and OPEC to help fill the supply gap caused by the lack of CAPEX on the part of most of the majors (XOM is one exception) and shale's newfound CAPEX discipline.
Buddy
2:22
Roger,  Is EIX an add at this level or should one wait for the fire season to get into full swing.  Are there any other Utes that sand out as being cheap.  Thanks.
AvatarRoger Conrad
2:22
Hi Buddy. Edison at 7 times trailing 12 months earnings is arguably pricing in a pretty horrendous fire season in my view. That's despite the fact that it navigated 2019 and 2020 without significant liability--and progress made hardening the system with stronger poles, insulated wires, better intelligence over the past few years. That's a work in progress and I wouldn't bet against this being the worst fire season ever in California. But there's also good news here few are paying attention to, including California's decision to cut rooftop solar subsidies this week, which will make it easier to pass on utility investment costs to ratepayers who are otherwise picking up the tab for rooftop. I think this will be a $100 stock in 2-3 years as they harden their system and invest in advanced grid. A high profile fire could certainly take the price lower near term. But barring that, it looks to me there's a lot more upside than downside in this stock from these levels.
Jack A.
2:32
I recently read a WSJ article on oil companies in Europe that are apparently selling at lower multiples than American companies.......... I especially noticed TOTAL, which seemed to be the most undervalued......I bought some shares at about 49 and change, and it seems to have gone down since................ What are your thoughts about TOTAL as an investment; and do you think I'd be better off switching to some other E & P company?.. And if so, which one would be your favorite at this time?

I also invested in Valero, and am wondering how high do you see its price potential, and over how long a period of time?

Thanks
AvatarElliott Gue
2:32
We generally like Total and it is cheap, though historically the European majors have tended to trade at a discount.  Also one problem I think that's shared by many of the European majors is that they have limited production growth prospects over the next few years. Indeed, many are planning to allow production to decline due to a variety of factors including plans to invest in alternative energy projects, a desire to preserve cash flow or even court decisions (Shell). Some months back a lot of pundits were arguing that was a good thing and that the world didn't need new oil production (that "seemed" true with oil prices and demand depressed in 2020). However, today, I think a three key points are tough to miss: 1. Global oil demand is recovering from last year's lockdown mess and the prospects for global oil demand to peak in the near term are not good, 2. US shale producers are not responding to the rie in oil prices as they have in prior cycles over the last 10 to 12 years. 3. The lack of investment and CA
AvatarElliott Gue
2:32
...And CAPEX from many of the majors means that non-OPEC supply is likely to fall. This essentially cedes power over the oil market back to OPEC. This is one reason we've liked XOM so much -- it's arguably the only major that's really investing in new oil and natgas megaprojects.
Ben F.
2:33
Roger -

Thanks for all the hard work.

Thoughts on the AGL Energy split? Market does not seem to approve, the stock is down 10%

Cheers
AvatarRoger Conrad
2:33
AGL shares have basically been slumping since the National/Liberal Party's re-election a couple years ago and in retrospect that was the time to sell. I think the market reaction is likely to the fact no one knows what the coal power plants will ultimately be worth and cutting them loose will reduce cash flow for the remaining company. That's also more or less why Moody's has put the credit rating on watch for downgrade. The de-merger is also likely to take 12-18 months to get all needed approvals. That said they don't anticipate going below investment grade for the post spin company either. Bottom line management clarified details from the demerger plan announced some months ago, the initial reaction was negative as investors focused on immediate financial uncertainty. Now it's up to the company--still the biggest retailer, renewable energy generator and rooftop company in Australia--to prove it can make it all work. I'm still rating the stock a hold on the basis it's cheap, limiting risk of being patient.
AvatarElliott Gue
2:34
As for VLO, that stock is really a play on an ongoing recovery in US oil demand and improving refining margins. I believe we've talked about a target north of $100 on VLO over the intermediate term (late 2021, early 2022).
Barry J.
2:38
Hello Gentlemen:
What do you recommend we do with the bombshell that hit today about AGLXY? Should be hold, sell or purchase more? Your wise counsel is always appreciated!
Thanks
AvatarRoger Conrad
2:38
Hi Barry. As I just indicated answering an earlier question on AGL, the company has basically provided details on a demerger it floated some months ago. The clarity of the action of spinning off coal fired power plants may have surprised some, who thought the recent management changes might be evidence the board was reconsidering. But I for one did not consider this a surprise. That said, I want to see how this plays out before I advise anyone to commit fresh money to AGL. I still see a lot to like here--it's the leading retailer, renewable energy producer and distributed energy producer in Australia and making this move definitely should improve relations with the states where it operates as well as the federal government--leadership of which could very well change in the next couple years. But I also don't see a lot of reason to jump at this price--the sentiment is very much against the company while it completes the spinoff with one buy, 6 holds and 5 sells among analysts tracked by Bloomberg Intelligence
AvatarRoger Conrad
2:38
Until that changes I think the stock will be stuck in its current range while we see how well its business plan works.
DRG
2:48
As a long-term investor in MMP, this MLP has been an utter disappointment from total return point of view despite being a company with solid financials. While the dividend yield has been decent with solid distribution coverage, the stock seems to be caught in a rut and nothing seems to move the needle despite the improving US Economy which is supposed to fuel demand for refined petroleum, not to mention the recently announced asset divestitures. Can you please educate us on the “whys” and your thoughts on whether this could be an opportunity to back up the truck in the hopes of a M&A play or may be improving prospect for dividend growth. Thanks.
AvatarRoger Conrad
2:48
Since the peak of the MLP market in September 2014, Magellan Midstream Partners units have a total return of about -13%. That compares to -31% for the Alerian MLP Index. The company has also maintained a solid investment grade credit rating of BBB+ (stable outlook S&P) and has raised its dividend by 60.5%, while the MLP Index has cut by -52%. I obviously don't know when you bought in, and it is a loss. But it's also a clear outperformance for an MLP that continues to do things extremely conservatively and still pays more than 8%.

Magellan are up about 40% from early November, so they have arguably benefitted from a stronger US economy and demand for refined products. But like other midstream companies, they are still seeing lower flows of crude oil as producers focus on free cash flow generation. And that's why MMP hasn't returned as much as the producers in our portfolio. But the company has certainly proven its resilience in a tough environment. And as the cycle moves along, midstream names will gain
AvatarRoger Conrad
2:52
Continuing on Magellan's strengths, we've talked about these at length in EIA, pretty much every time the company announces earnings. And we'll get another dose of what should be very good news on July 29 with Q2 numbers and updated guidance. But the strengths of this company are their connections, well placed assets and very strong balance sheet--which as a mid-cap with $11 billion market cap make it a prime takeover candidate in the consolidating North American midstream industry. I think that will ultimately make this a $100 stock if it's not taken over first. Magellan has proven its resiliency in the worst of times. That's a good indication it will prosper as the cycle turns higher.
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