JotCast | 6/30/21 Energy & Income Advisor Live Chat

Return to

6/30/21 Energy & Income Advisor Live Chat

powered by

Prev Page View Full Chat Next Page

Michael L.

2:59

First, congrats on calling, over a year ago, the factors that would move WTI/Brent and their direction and general price level. I have noticed many pundits are now describing the energy market in terms you suggested in spring, 2020!

On ENB, Morning Star has raised a concern that the heavy, sour crude extracted from the oil sands, which creates a more negative environmental impact than shale, will serve as a long term headwind for the company. Do you guys buy this argument, and how negatively will the impact be?

Roger Conrad

2:59

Thanks Michael.

Regarding Enbridge, the answer is no. First off, this company is extremely diversified in terms of geography and operations, which include renewable power generation, gas distribution utilities and storage, a massive natural gas pipeline network acquired with the former Spectra Energy. Yes they transport output of oil sands and are on the verge of bringing more to the US through the Line 3 pipeline--which appears to have at least tacit Biden Administration support. And yes they transport heavy crude, which with all respect to Morningstar's reporters is something else entirely from oil sands output--and it's also greatly needed by US refiners, who otherwise have to rely on places like Venezuela for heavy oil. But the bottom line is Enbridge has the size and financial power to weather setbacks to any of its assets and operations. In fact, it arguably is able to make up the difference elsewhere.

Roger Conrad

3:01

As for the broader argument against oil sands in general, the industry in Alberta is working hard to reduce the impact of emissions and on water supplies from the process and has become very concerned about its global image. And there's definitely a market for it globally--which it will serve when the Trans Mountain pipeline expansion is completed early in this decade.

DG

3:02

There have been recent coverages in EIA regarding M&A activities in the MLP space. Sensed some excitements in your comments in those communications. Unfortunately, for those of us long term MLP investors who are deep in the reds in our investments, the acquisition activities or the prospect of those do little to alleviate our miseries since the acquisitions have very little premium despite improving fundamentals in the oil industry. Am i wrong ? Like to know your thoughts.

Elliott Gue

3:02

There are other benefits from M&A other than the immediate premium received. For example, in the producer space, PXD announced the acquisition of Parsley on October 10, 2020 in an all-stock deal and both PE and PXD fell; yet, PE shareholders who accepted 0.1252 shares of PXD for every share of PE owned would have been very happy, watching their shares rise in value by just under 60% by the time the deal closed in January 2021 and then watching shares of PXD run up an additional 21.5% from that time. The reason is that the PXD/PE deal resulted in lower breakeven costs and significant synergies. Some f the deals we're seeing in midstream offer similar advantages -- significant synergies and scale/cost advantages.

Steven

3:03

Any new news on AGLXY? It took a tumble today.

Roger Conrad

3:03

Hi Steven. I stand on my answers to two previous questions regarding AGL. I don't think the announcement of the coal spinoff should have surprised anyone, given management told us several months ago. I think the market reaction to the release of details probably marks a bottom in the stock. But I want to see progress on the plan before raising it from hold.

Jim

3:14

Share prices of WMB and OKE are up substantially from optimum buys. In this environment, are they still a buy? What about their potentials as take-over targets.

Roger Conrad

3:14

Hi Jim. At this point, I think the only North American midstream companies that probably aren't takeover targets are Enbridge Inc at $80 plus billion in market cap, and Enterprise and TC Energy at around $50 bil. You could also possibly add Kinder Morgan to that list. But for the most part, even companies as large as Williams, Energy Transfer and ONEOK could benefit from additional scale, which makes them more likely to be acquirers but could also land them in a larger deal.

The key is these companies have adapted to the current phase of the cycle, which is basically dealing with producers focused on free cash flow rather than maximizing output. We think that will last a while and that midstream companies will benefit from the kind of cost cutting that only happens with big mergers. And both WMB and OKE are on track to report solid Q2 numbers and guidance, making them worthy holdings even without a deal.

Michael G

3:20

My family owns MLPs for the income and has owned MMP for quite some time. As of late, the stocks is trading at a 30% premium to the rest of the sector so further upside is unlikely in the near term. Do you see a scenario where investors move elsewhere and the stock begins to trade down? From an income perspective, would you recommend moving elsewhere? If so, where? Thanks

Roger Conrad

3:20

Hi Michael. I'm not sure what you mean by Magellan Midstream Partners trading at a "premium." It's certainly not on a yield basis at 8.4%. Enterprise value is 12.5 times trailing 12 months EBITDA, which is basically in line with Enterprise Products Partners at 12.1 times. And both MLPs have BBB+ credit ratings, so balance sheet strength is similar. I think the big picture here is that these stocks are still very much underowned, which is typical for this stage of the energy cycle. But as we get further along the buyers will come back and blue chip Magellan will get its share of buyers--with a dividend more than 60% higher and share price -45% lower than it was in September 2014.

Roger Conrad

3:20

So no, I would stick with Magellan, which should do well as a standalone company or if as seems likely it fetches a takeover offer.

Sohel

3:25

Thanks Roger and Elliot for conducting these chats to enlighten us. I'd like to request more consistency in the way the portfolio's are presented. I see in some portfolio's you tag positions as conservative or aggressive but in others I don't see that. It would be helpful if you did that across all the portfolios. Part 2 of my question has to do with your recommendations on ET and PAGP ... in past discussions you mentioned these were aggressive positions ... do you still feel that? Also has the risk level of these two in particular has dropped some in the past few months? What is your price outlook on these in next 12 ish months. Thanks again.

Roger Conrad

3:25

Thanks for the suggestion Sohel. For reference, we do have the "conservative" and "aggressive" distinction shown for all the companies we track in their respective coverage universe tables on the Energy and Income Advisor website. These are updated with every issue of EIA.

We consider Energy Transfer and Plains GP more aggressive than say Enterprise mainly because of still high leverage, as well as their past histories of dividend cuts that demonstrate more cyclicality. The other side of that coin is that being more aggressive should mean more upside when the energy cycle turns higher, which we believe is now happening. Cash flows at Plains and Energy Transfer are, for example, more sensitive to volumes, which increase as the cycle progresses. And higher cash flows mean faster deleveraging as well. We think both PAGP and ET could double in the next 12 to 18 months.

Michael L

3:39

I would like to add to my XOM position, but would like to know if it's too late as it is now trading in the low 60s, or if I should wait for a market pullback. What are your thoughts on how high it could go in the next 12-18 months. Thanks

Roger Conrad

3:39

Our highest recommended entry point for ExxonMobil is still 65 and it's about a buck and a half below that. It's also about 10% below where XOM traded pre-pandemic with oil only around $50 a barrel, still a sizable discount that indicates it's very much underowned. We think we're going to see some nice numbers July 30 for free cash flow and deleveraging, with a real possibility of them being a catalyst for a higher share price. I think it's fair to say the stock would drop if the overall market did. But this is a pretty good entry point in our view, especially if you consider this stock will almost surely make another run at $100 later in the cycle.

Guest

4:05

There seems to be a difference in the valuations of US shale vs. Canadian producers when you look at the FCF yields that CNQ is trading at vs. Devon or other US E&Ps. What are the main differences in the Canadian vs. US energy markets and is there a reason for the difference in valuations? Is it less infrastructure? The nature of Canadian oil vs. US shale? Or investor focus?

Elliott Gue

4:05

There are likely multiple reasons for that including several that you alluded to. For example, the Permian Basin shale field (the most important in the US) is located geographically proximate to its key end-markets (US refiners on the Gulf Coast + export terminals) whereas Canadian oil has to be transported greater distances. Also, last time I looked CNQ could cover its dividend and capital spending needs with oil in the high $30s WTI. The better US E&Ps like PXD/DVN, etc probably only need $29 to $33/bbl. Doesn't mean we don't like Canadian energy plays -- Roger has been covering these names for many years -- but there are some reasons why names like CNQ may look cheaper on paper.

jerjos

4:11

Hi Elliot & Roger... In support of your thesis on Oil, just this week, both Dr. Steven Leeb of TCI and Jim Rickards of Strat.Intelligence wrote "There may be no more important issue for investors to understand than the difference between climate change and climate alarm" with supporting documentation that oil is required to be around if there continues to be a push for Renewable Energy.

Elliott Gue

4:11

Right, I think one thing that's important to understand is that leaving politics aside, a lot of the ESG push and all the talk surrounding climate change is actually bullish not bearish crude oil. Understand, I'm NOT talking necessarily about it being bullish for particular energy stocks, but it is bullish for oil prices. There are two reasons for this: 1. ESG targets will, on the margin, reduce oil supply, because it discourages capital spending on new exploration and development by western oil and gas producers 2. A corollary to point 1 is that this cedes power back to OPEC +. Back in the 80s, OPEC lost control of the global oil market because of new fields like the North Sea and Alaska and, more recently, they lost control of the oil market again because of shale. To the extent that ESG targets, etc. limit non-OPEC/shale output growth, then more supply comes from OPEC.

pcburnham@aol.com

4:49

What are your current views on GLOP. We’re starting to see a bit of positive movement from its bottom but is this a false dawn?

Roger Conrad

4:49

It's still a pretty tough time to be an owner and operator of tankers. Regardless of what you're hauling, it still seems to be advantage customer, as too many older vessels are still running well past expected retirement dates and new vessels continue to come on stream, albeit at much lower rates than a few years ago. That so far has more than offset favorable developments, such as growing LNG export traffic. GasLog, however, did report a couple of favorable developments that suggest the balance of power may be shifting a bit, notably new a series of new charter agreements announced in recent weeks with super majors TotalEnergies (formerly Total SA), Royal Dutch Shell and Cheniere Energy. Some of these are one-year deals, which basically kicks the recontracting can down the road. But after cutting its dividend to a penny a share last year and crashing to a low single digit share price, even this is good news for the company's ability to survive this point of the cycle--which is of course the key for riding

Roger Conrad

4:52

(continuing on GasLog) the next phase higher. We currently rate GasLog a hold, as we do most tankers at this time. Their time will come. But at this point, the mix we have in the portfolios is where we want to be.

Michael G

4:57

There seems to be a difference in the valuations of US shale vs. Canadian producers when you look at the FCF yields that CNQ is trading at vs. Devon or other US E&Ps. What are the main differences in the Candian vs. US energy markets and is there a reason for the difference in valuations? Is it infrastructure? Difference in US oil vs. Canadian (harder to refine)? Or is it a lack of investor focus/interest?

Roger Conrad

4:57

Hi Michael. I don't think I'm reading all of your question, so you may want to submit it again. But from what I'm seeing, price differentials between different hubs is pretty much par for the course. The most noteworthy thing right now is that they've narrowed so much from where they were a couple years ago--when Western Canada Select (a heavier oil blend) sold at discounts of as much as $40 a barrel to West Texas Intermediate Crude in Cushing, Oklahoma. That was primarily due to a lack of economic transport capacity as US shale output was crowding out Canadian imports' space on pipelines. The narrowing of those differentials (WCS is still at a $14 per barrel discount while implied bitumen from oil sands is at $19) is in part because shale producers are pumping less. But the only thing that's really going to narrow those discounts further on a permanent basis is going to be bringing new pipelines from Alberta on steam--Line 3 will be first with a target date later this year. Trans Mountain maybe by 2023.

jack20

5:02

In my opinion the energy companies in the U.S.&Canada with the best export facilities will do the best. Talking here about oil,LNG,NG,LPG, and ethane. I think EPD&PBA fit the bill. For example, if PBA pulls off the proposed merger,50/50 LNG export partnership, and the 50/50 purchase of TMP, and expansion of their LPG terminal, they will be perfectly positioned to be the low cost energy exported to the Orient&India. What say you, and have I missed any big exporters?? Thank you. Jack20

Roger Conrad

5:02

Hi Jack. They will certainly have the best access to Asian markets, which are where the demand growth is really taking place at least for the foreseeable future. For Pembina, getting the Inter Pipeline deal done is a big deal, a hearing on July 9 a key date as Alberta regulators will rule on a petition from Brookfield Asset Management that will likely determine whether than company walks away from its hostile bid and allows Pembina's friendly one to go through. I think Pembina will be OK without Inter Pipeline, in which case it would still be able to pursue a purchase of TMP with First Nations, but definitely better with it.

In the US, Enterprise has positioned itself well. But there's also Sempra Energy--a utility with a lot of LNG development. And Magellan Midstream, NuStar, Energy Transfer and Kinder Morgan are also building connections.

Roger Conrad

5:02

In any case, many plays in the Portfolios to choose from

Charlie S

5:07

What is your outlook for OXY. It seems there has been good price appreciation recently...do you expect more this year? Thanks again for all your excellent advice...Charlie

Roger Conrad

5:07

Hi Charlie. We think there's a lot more upside for Occidental. First is obviously the strength in energy prices and the fact that shares are still discounted to where they were pre-pandemic when oil was only around $50 a barrel as opposed to $70 plus now. That's also true of other oil and gas companies of course and OXY did cut its dividend along the way. But we think there's a lot more upside on this basis alone, as investors get more comfortable with the fact that shale production isn't ramping up as it did earlier in the cycle to glut supply and crush prices.

The more important long-term catalyst for OXY is closing the valuation gap with other oil stocks, which is so wide now because of much higher leverage left over from the Anadarko acquisition. We think higher oil prices are greatly accelerating planned deleveraging, the most recent evidence being a $2.5 bil debt buyback announced earlier this week. And once OXY shows it's making real progress, we look for a big jump--near term target is $40-$45

Roger Conrad

5:08

longer term $50 plus, possibly by early this year if management executes. Another thing is asset sales are a lot easier than they were last year, which vindicates management's patience despite pressure from numerous big investors.

Ken in Phx

5:31

With so many non-energy stocks trading at valuations that have disconnected from reality, how comfortable are you with a portfolio 25% in energy?

Elliott Gue

5:31

I believe the guidance we've offered in the past still holds true-- we definitely believe in diversification and generally view 30% as a upper limit for weighting in energy stocks. Also, the energy sector itself can offer significant diversification -- stocks with exposure to natural gas, crude oil, midstream, upstream and refiners are driven by varying fundamentals and can move in different directions in "normal" markets. We also concur that the valuation gap between the growth-dominated S&P 500 and more cyclical value stocks, including energy, has reached historic levels.

RBB

5:43

Any current thumbnail thoughts you may have on AM (Antero) and ENLC (EnLink). Both midstreams provide quite decent dividends and are both trending upward YTD; AM up about 80% YTD and ENLC up about 180% YTD. . . . Enjoy the afternoon chats during a quiet hurricane season (thus far). Take care.

Roger Conrad

5:43

The Antero family has received a big lift from the drop off in production of associated natural gas in certain shale regions, which has greatly firmed prices for Antero Resources and by extension volumes for Antero Midstream --which depends on its parent for substantially all of its revenue. And after cutting dividends deeply last year, both AM and EnLink are now paying out at a far more conservative and therefore sustainable rate. We upgraded both of these several months ago to holds in appreciation of this. What holds me back from making them buys is basically the fact that there are other midstream companies and MLPs that are also still very discounted to where they were a few years ago and that don't share their risks--in other words, they're larger, more diversified, not dependent on a handful of customers with highly cyclical earnings and not burdened by leverage. I think the best end game for both Antero and EnLink is a merger and I think they're both strong possibilities. But again holds for now.

RBB

5:44

Sorry, the YTD figures for AM and ENLC are actually YoY figures, not YTD. . . . My bad.

Roger Conrad

5:44

No worries. Again, I think both of these have turned the corner--i just like what we have in the portfolios better

Jon B

6:04

Hi. I know you guys haven't been keen on battery manufacturers as a way to play growing adoption of EV vehicles. But have you explored any of the specialty suppliers to battery makers? There are quite a few companies exploring additives, nanostructures to improve battery chemistry. Do these hold any appeal? Thanks.

Roger Conrad

6:04

We're definitely seeing a lot of money go into development of more efficient, longer-lasting and cheaper batteries to make electric vehicles economic enough to mass market. And the history of capitalism is large amounts of money invested more of than not produce workable solutions. That said, this is a business burdened an awful lot of hype, which as history also shows will almost all come to naught.

My feeling is the eventual winners in this space will be the same large global competitors that now dominate manufacture of solar and wind components, batteries and the like. And they'll be the companies that can mass produce most efficiently. There may be some winners among smaller companies that get connected. A good example would be Enphase Energy--which makes microinverters that improve efficiency of solar panels. Unfortunately, it's not cheap trading at almost 100 times expected next 12 months earnings.

Jon B

6:05

Perhaps you have heard the much-interviewed Tom Lee cite the lag in oil-related stock performance compared to oil itself. In particular, he thinks the OIH could be double its current price given where oil trades. What is holding back the service stocks in this much more benign operating environment? Have they been permanently impaired? Interested in your thoughts!

Connecting…

Your current subscriptions

None

Register now to continue managing your subscriptions

E-mail Address	Chat Owner	Status	Remove

Enter your email address to be notified when Sherry Roberts hosts a chat