JotCast | 7/27/22 Capitalist Times Live Chat

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7/27/22 Capitalist Times Live Chat

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Elliott Gue

3:03

Yes, releasing oil from the SPR adds to supply in the short-term, which tends to slow the rallies. But when you stop releasing oil and (eventually) have to buy oil to refill SPR, the effect is reversed. In my view the main reason SPR releases don't impact prices very much is that the market can see through the impact and discounts the eventual re-tightening of supply.

Elliott Gue

3:03

In my opinion (for whatever that's worth) we should use the SPR solely to offset short-term disruptions to supply (ie hurricanes/earthquakes) and as an emergency military supply. Everything else is just a sideshow. However, of course, Presidents from both sides of the aisle have released oil from SPR for what I think are dubious reasons.

Barry J

3:12

Roger:

Can you tell us what are the ongoing issues with ENLAY?
Also, would it be smarter not to invest in foreign “green” renewables like DNNGY, IBDRY and ENLAY and just stay close to home with NEP and BEP?

Can you talk to us about HASI and the firm who is making their criticisms and going short on HASI?

I tried to research the firm’s background. They have very few employees and seem to promote adversity with their prior criticism of other companies. Do they make money by causing companies’ stock prices to fall and then they go short on them? What is the deal with these people?

Thanks

Roger Conrad

3:12

Hi Barry. I answered questions on Enel SpA and Hannon Armstrong earlier in the chat fairly extensively. I will definitely have more on earnings and guidance updates in the August CUI, before if needed to take action. But I can add a little color now on Muddy Waters. The firm and its founder Carson Block have a long history of going after stocks of companies they believe are vulnerable--which includes publishing extremely negative research at the same time they go short the stock. That apparently includes using at least borderline legal methods as the company is reportedly currently under federal investigation for "spoofing" and "scalping." The first is illegally using fake orders to pump or crash a stock price, the second is when activist investors close out positions without disclosing the move. This doesn't mean we shouldn't take a look at what they say--though the "report" on HASI did resemble investment newsletter marketing. But It does mean acting blindly on their "advice" is hazardous to our wealth.

Guest

3:13

Hi Elliot, can you give an analysis of the price action of SLB and where you see it going in the near term? What were your thoughts on Schlumberger's earnings?

Elliott Gue

3:13

I thought SLB's earnings were rock-solid -- they beat and the stock jumped. There's growing evidence that oilfield services pricing outside North America is improving and the supply/demand balance is tightening even more than I expected. SLB remains a top pick in services for us. There are some "macro" caveats -- another leg lower in the bear market would hit SLB along with most other stocks -- but the intermediate to long-term picture is very bullish. Specifically, I wouldn't be surprised to see SLB dip to the high $20's in a broader market sell-off, but I still see SLB back over $60 in the next 12 to 24 months.

Jeff

3:19

Hi Roger, thanks for any web chat. I would like you opinion of how the strong dollar will affect the prices of Canadian stocks and their dividends. I own BCE, BEP, SU, ENB and some Brookfield preferred's. Thanks

Roger Conrad

3:19

Hi Jeff. I think the prices of these Canadian stocks as well as the Canadian dollar have actually held up very well so far to the Federal Reserve's dramatic interest rate increases. As you note, several of these companies pay dividends in Canadian dollars, which are converted to US dollars for US investors--BCE, Enbridge and Suncor, as well as some Brookfield preferreds (BEP and BEPC actually pay in US dollars). So the US dollar value of BCE's dividends, for example, would decline if the CAD dropped against the USD. But as I've said, that really hasn't happened this year to any appreciable extent, as the CAD opened the year at about 77 US cents and currently sits at about 76 cents. I think that bodes well going forward--particularly as the CAD tends to do well as energy upcycles unfold. And despite the potential for lower oil and gas near term with a recession, we're still early innings in the big cycle. Bottom line: CAD is a good reason to own Canadian stocks long term.

Christopher

3:20

Hello
What future supply do you see for Europe and how will Europe replace lost Russian Natural Gas supply. As shown below the problem is very large to solve ?
Plus on flip side what will happen to Natural Gas prices when Russia finds new customers, seems like maybe a huge supply compared to demand ?

(Quote)
For context, the EU received 158 billion cubic meters of natural gas from Russia last year, per Germany’s deputy finance minister Joerg Kukies. Of this, 30 billion cubic meters could potentially be replaced with liquefied natural gas from the United States and Qatar. (end of Quote)

source: https://oilprice.com/Latest-Energy-News/World-News/Energy-Security-Tru...

Elliott Gue

3:20

The European challenge is immense. I think over a period of 12 to 36 months, Europe really doesn't have a lot of options. Starting in late 2024, new US LNG export capacity could help and I suspect you'll see new LNG export facilities approved eventually that could help even more by the end of the decade. Also, EU countries have been talking to various African suppliers, seeking additional volumes. Beyond that I think they're going to need to eventually make additional pragmatic moves, such as relying more heavily on coal and nuclear than they had previously envisioned. Re: Russia my guess is that Russian gas export volumes will be redirected to markets like China and India -- this has already happened for oil, with China and India buyers at discounted prices. Thus some US export volumes that might have previously headed to Asia can be redirected to Europe.

Jeff

3:30

Would be interested on your opinion of the safety of ET as it relates to the MLP itself and the dividend. They seem loaded with debt.

Roger Conrad

3:30

This week Energy Transfer raised its dividend for the third consecutive quarter to a level 50.8% higher than what it paid a year ago. That's the latest sign management intends to follow through on earlier guidance of restoring the full pre-pandemic rate of 30.5 cents per share in the next 12 months. As you point out, debt is still high at around $50 bil. But the important thing is the trajectory is down, as this company generates rising levels of free cash flow after dividends despite a volumes environment that remains considerably less robust than what's been normal in previous cycles. As we've said, energy prices would likely come lower in a recession. But this company is for the first time in its history being run quite conservatively. That argues for higher dividends in coming months even if the economy slows.

Sohel

3:34

Thanks for holding these chats - find them incredibly helpful. I may not be able to attend live so sending these ahead of time

Question 1
Valero (VLO) has earnings coming up ... prospects are for blow out earnings this quarter with outlook for future probably quite good but not as fantastic.

Stock price recently peaked around $145 but now seems to stall near $110.

What's your outlook? Should we hold or sell and at what price?

Question 2
Pipelines such as EPD, PAGP, ET are still way below target prices in newsletter. What's your outlook on these for rest of 2022 and into 2023?

Elliott Gue

3:34

Thanks for the question. Historically VLO doesn't see huge moves off earnings releases -- the average daily move is about 2.8% (higher or lower) on the day after earnings. I believe that's because many of the fundamentals that impact VLO are very "visible" to the market; for example, we have a pretty good idea about the path of refining margins and gasoline demand by watching futures markets and weekly EIA inventory reports. I think what's moved VLO is simply concerns about the health of the economy and, by extension, refined product demand amid a likely US recession. Also, it seems likely there was some profit-taking following the quick run-up from $120 to near $145 between mid-May and mid-June. Longer -term we believe the US is chronically short of refining capacity and, therefore, refining margins are likely to be "higher for longer" as a sort of second Golden Age for the refiners much like we saw 15 to 20 years ago. We have VLO rated as a buy under $105 and see much higher prices ahead. It remains a top

Elliott Gue

3:34

pick for us. In the very near-term I suspect the main drivers for the stock will be macro, not company-specific fundamentals.

jim

3:36

I would like to go to cash for a while, but do not know where to park the proceeds which are earning about 7% in EPD,WMB, PAA, ET, MPLX. I used to trust high yield bond funds like HYG, but I see they lose capital in tough markets as well. Is there a safer store of value that garners 4 to 7% interest to sit out the market for a while; or are my present investments equally likely to be a store of value? I have ridden a roller coaster with what I thought was a stable store of value (midstream assets with strong histories). The roller coaster dipped to a low of 35% of my investment, and is now back to almost where I started, while earning good dividends through the dip. Are there utility bundles or stocks that may be more impervious to market dips? Also please give me your current take on MPLX which I can not see on CUI. Thanks, Jim

Roger Conrad

3:36

Hi Jim. I think if anyone needs income from their investments, probably the worst thing to do is to go to cash--when there are so many stocks with big, safe and growing yields to be had--including the five midstream companies you mention. Yes, they could pull back more in a recession. And yes a package of best in class utilities may hold value better, though at a lower yield. But these midstream companies are paying those yields on revenue from midstream volumes that have not climbed to where they've been at this stage in previous cycles. And they continue to cut debt and costs. That means the dividends are shielded against recession and equally important share prices are likely to go a lot higher as this energy upcycle evolves the next few years. MPLX reports on August 2 and we'll have more in the upcoming Energy and Income Advisor. But based on what we've seen, I expect another good quarter, possibly stepped up share buybacks.

Aaron

3:45

Hello fellas. I subscribe to CUI plus. Newmont is a holding. Is this a good time to add to my current holdings with gold prices somewhat depressed? Do you think that the dividend is safe?

Roger Conrad

3:45

Hi Aaron. Newmont took a hit this week when it announced earnings that indicated delays and rising production costs at expansion projects in Ghana--including delayed access to land. That took capital costs for the project about 15% above the prior estimate, and along with higher costs company wide appeared to spook a number of investors. Shares have also been under pressure with gold prices coming down from nearly $2,100 per ounce in March to around $1,750 now--which is largely the result of the Federal Reserve's push to quell inflation. That said, the drop in NEM looks like a major over-reaction, especially when you consider $514 mil in free cash flow in Q2 after all CAPEX covered the dividend a comfortable 1.2 times. I think NEM will easily revisit this year's high of $86 plus per share in the next 12 months, though it may require some patience for investors to see it there. And I intend to stick with the position.

Don

3:49

Roger--first, many thanks for how you have helped me and my family over the years. For the past five decades, whenever gold shares get clobbered, I allocate a small part of my portfolio to them. When gold rebounds, I sell and wait for the next 50%+ correction. It has worked pretty well. Friends tell me that i should buy gold and silver coins instead as a hedge against disaster. I am in my 70's and am uncomfortable with owing physical metal. Do you have an opinion? Thanks.

Roger Conrad

3:49

I think that makes sense. One of the interesting things about this Federal Reserve monetary tightening campaign has actually been how well gold prices have held up--not entirely as I indicated answering that question on Newmont but certainly better than in previous cycles. That implies we could really see some wild upside when the Fed eventually reverses course, which it may do if the US economy contracts too quickly for its taste. Also, I prefer stocks to the commodity, especially when they pay dividends like Newmont does. Stocks have much more upside. And if we really do get into an investment environment where the only gold and silver investment working is coins, we've got a lot bigger problems.

RBB

3:51

Do you have a point of view / interpretation as to why the Fed wants to target a 2% inflation rate ?

Elliott Gue

3:51

The consensus view at the Fed has been that deflation is undesirable for a number of reasons including that it tends to make for a tougher credit environment. After all, if you borrow money and then have tor repay it in dollars that are worth more (deflation), then it's adding to borrowers' cost. Also, historically in periods of persistent deflation (i.e. Japan since 1990 and the US in the 1930s) economic activity had tended to be depressed/growth is poor. Obviously high inflation is also undesirable, so the Fed centered on 2% as low enough to avoid the risks of an inflationary environment and high enough to avoid deflation.

Elliott Gue

3:53

Missed this one in my earlier reply: Question 2
Pipelines such as EPD, PAGP, ET are still way below target prices in newsletter. What's your outlook on these for rest of 2022 and into 2023?

Jim T

3:53

to date they are under performing. However I stumbled accross FLNG whos numbers look very attractive.

Roger Conrad

3:53

Hi Jim. It's not one we're currently covering in Energy and Income Advisor. Shares have performed very well obviously, reflecting heavy demand for LNG carriers. And I think odds favor that continuing as the US becomes a more important exporter for LNG. That said, this is a business where there's likely to be a lot more competition going forward and despite the high yield, the stock has come up a long way over the past year--which is likely why the research house community is split between buys and holds. I would treat it with a little caution.

Elliott Gue

3:54

We like the midstream and pipeline companies into 2023. One great reason to own them right now is that they tend to hold up better than most energy stocks when commodity prices trend lower as tends to happen when there are concerns about the economy.

Jim T

3:56

Is this possbly a buy considering the very good EPS, PE and DIVIDEND.

Roger Conrad

3:56

Again following up on your question about Flex LNG, I think this is the kind of company that can have very low valuations at the top of its industry cycle--kind of the classic cyclical stock that always has its lowest P/E at the top when earnings are very high but likely to come lower. In any case, we'll get a chance to look at earnings on August 31.

Alex M

4:09

Hi Roger. Thoughts on IIPR and their recent filing that showed a major tenant defaulting on rent? Thanks.

Roger Conrad

4:09

Hi Alex. I thought the drop in shares on this news was a bit overdone. But I think it once again highlights the fact that the legal cannabis industry is pretty new--and therefore subject to growing pains. In this case, Innovative Industrial Properties has arguably been very aggressive using a low cost of capital to expand with acquisitions of land/facilities used for growing cannabis. And since the growing sector is still extremely fragmented, that leaves it open to the risk of defaults from tenant. The question is if the company can still deliver anyway on guidance in Q2 numbers due out around August 4, as management has assured investors it would. I think until we know that, IIPR shares will still carry substantial downside risk, despite trading at roughly one-third of where they were in November 2021. I like the business plan, $350 mil of debt doesn't look like too much leverage at this time and from the numbers the dividend looks safe. But this stock was previously overhyped, may not have found a bottom.

Hans

4:12

Roger, I still have NEW and bought additional as was suggested at < $ 57.50 , with their bad results should I hold on? Thanks

Roger Conrad

4:12

I'm assuming you mean Newmont Mining (NYSE: NEM). Yes, I still intend to hold it in the portfolio. As I indicated in answering a previous chat question, I don't believe the results are as bad as has been publicized--I think the dividend is pretty secure at this time and upside is substantial when the Fed stops raising interest rates.

By the way, I expect to post a CUI Plus update this weekend that will be focused on the 8 portfolio companies posting numbers by the end of this week.

Mike

4:17

Hello folks – thanks as always for your great service, lucid explanations, and excellent guidance. A few questions:

   Do you see energy names peaking one more time before a recession sets in (that is, do you think there’s one more shot at profit-harvesting before hunkering through the likely recession)?
   Similarly, some of the names in Roger’s income portfolio are up nicely (and have held up well during the last 8+ months). Do you plan profit-harvesting there?
   Finally, I’m curious about your longer term view of gold (realizing that NEM and GLD stopped out).

Many thanks!

Elliott Gue

4:17

Thanks for the questions and comments about the service. In general, what we've seen of late is a bounce in the broader market since mid-June and a rally in energy stocks since mid July. My view has been and remains what you're seeing is a bear market rally -- a rally in the context of the longer term downtrend that kicked off at the beginning of this year. This is "normal" and happens in every bear market in history (even back in the 1930s). We think that energy will prove to be one of the winners over the intermediate to long term (anywhere from 12 months to years into the future) because the commodity supercycle remains broadly supportive. However, I would be surprised (very surprised) if energy didn't follow the broader market lower in sympathy if there's another leg lower in the bear market. I can't really say with any degree of confidence if there will be another rally to new highs in energy before the pre-recession peak or not -- if pressed I'd say that you could see some near-term upside but I doubt

Elliott Gue

4:17

we'll see new highs in the S&P 500 Energy Index this summer. I'd also say that our read of historical commodity cycles suggest the coming demand-led pullback will be short and mild and the recovery could start sooner and be more powerful that most expect. This is the 2001 model -- the entire bear market for energy lasted about one year and the index immediately took off on a record-setting run that saw gains of 240 percent from mid 2002 to mid 2008. My longer term outlook for gold is very positive -- I think you'll see $3,000+ an ounce over the next 3 years or so. Historically, you see a dip just ahead of or shortly after the start of recession, followed by a rally as the recession takes hold and the Fed starts cutting. So, while NEM and GLD have triggered my stops in the Creating Wealth/Total Return Portfolio, I will be looking for an opportunity to recommend buying back into both later this year.

Victor

4:18

Elliott, What is your opinion on FANG?

Elliott Gue

4:18

FANG is a high quality operator in the Permian. I'd put it on a par with a name like PXD, which we hold in the model portfolio.

John

4:19

What do you think of HESM results today?

Roger Conrad

4:19

I think they were quite solid and firmly back up the 1.2% sequential dividend increase announced July 25, which takes the payment due August 12 up 10.3% above the year ago level. Most important was management's reiteration of guidance growth for EBITDA, free cash flow and dividends--including 1.5X dividend coverage this year. That's based on conservatively management growth of fully contracted assets--and there's room for a substantial increase if/when midstream volumes in the US reach levels that have been commensurate with similar stages of the price cycle historically. The ability to maintain a healthy bottom line despite lower volumes due to weather events in the Bakken testifies to the conservative structure of contracts that include minimum volume commitments to creditworthy producers (95% of revenue in Q2). Bottom line: There doesn't appear to be much to worry about here including the dividend--which in fact was equally resilient in 2020 despite negative oil prices at one time.

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