JotCast | 7/27/22 Capitalist Times Live Chat

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7/27/22 Capitalist Times Live Chat

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Victor

4:25

TTE in comparison with the other majors is under-performing. Why is that?

Roger Conrad

4:25

Hi Victor. As I've commented in the past, I think TotalEnergies has underperformed for example Chevron this year for basically three reasons. One, it's priced in an pays dividends in Euros, and that currency has crashed and burned against the US dollar. Second, it primarily does business in Europe and the Continent is currently suffering through an energy crisis--which means risk of windfall taxes. And third, the company has in the past done quite a bit of business with Russia, which it has been forced by geopolitics to unwind. I don't see any of that preventing the company from reporting quite robust earnings tomorrow, which I'll have more comment on in the CUI Plus update this weekend. And I think it will push ahead with renewable energy investment that further stabilizes earnings from commodity price volatility. That's what's important to me as far as continuing to hold a long term position in the stock--though the three factors I've named could keep TTE underperforming US super majors this year.

Victor

4:31

Guys, SHEL's outlook for tomorrow's earnings and next quarter are positive but the stock is not getting any traction. What is your opinion on this one?

Roger Conrad

4:31

Basically, near-term performance of commodity producer stocks will almost always follow what's happening with commodity prices. That includes on the days when companies announce earnings and update guidance, if the commodity moves enough. Shell is actually up today in line with the gain in oil prices, as is TotalEnergies--which I discussed in the previous question. As for earnings, I don't see any reason not to expect great free cash flows tomorrow for Shell as well as TTE and every other major oil company. That starts with commodity prices and refining margins that are far above year ago levels. I also expect a good result from both companies' renewable energy assets. And I think we could see more on dividend increases and stock buybacks as well.

Confused in WA

4:34

Earlier you talked about Plains GP Holdings (PAGP) and Plains All American Pipeline (PAA). What's the difference and which one is the one to own?

Roger Conrad

4:34

Plains GP Holdings is basically a financial construct of the MLP Plains All America Pipeline LP, consisting of a 34.37% ownership interest. "Results" basically depend wholly on what the LP reports (next earnings Aug 3), as do dividends. We hold PAGP in the portfolio. But for all practical purposes, PAA would work just as well. The dividend is the same for one thing as is the yield.

Guest

4:36

do you think verizon would be a good dividend stock for 78 yr old

Roger Conrad

4:36

I think so. It's a dominant company in an essential services industry. The dividend is safe and likely to be increased again by roughly 2% next month. The stock is basically priced where it should be at a bear market bottom at 8.5X expected next 12 months earnings. And I continue to believe there's considerable upside for earnings as it rolls out 5G and fiber broadband--first with industrial/business as a potential productivity revolution and apparently later with consumers as new applications are developed using the technology.

Victor

4:39

Elliott, MRO dropped almost 30% from its highs in June. Do you see this one getting back to the previous level?

Elliott Gue

4:39

MRO isn't one of our favorites but we think it's a good company it is one of the more commodity-leveraged producers. So what that means is that it tends to see bigger swings than a name like, for example, PXD. In this case, MRO jumped 117% from its December 2021 lows to its June peak and then fell as much as 36.6%. PXD was up 65% then corrected just 27% or so. I'd expect that pattern to broadly continue -- I see higher highs for energy generally though that might not be until sometime next year. I'd expect a name like MRO to underperform amid a broader energy pullback but then hit new highs in the next phase of the rally.

Victor

4:41

WES has been moving sideways. At what point do you think that this one would get some traction?

Roger Conrad

4:41

I think the story with Western Midstream Partners is basically the same as with the North American energy midstream sector overall. That is companies have made necessary adjustments to reduce debt leverage and adapt business models to a tepid volumes environment. Now they're seeing rising free cash flow (WES reports Aug 3) to further cut debt and return cash to shareholders with dividend increases and stock buybacks. That combination hasn't seemed to excite investors to date--though it has produced some decent returns (25% year to date for WES). We think we'll see prices of solid midstreams including very likely WES revisit the highs of the last cycle (ended 2014) but only after volumes revisit levels typical of previous energy upcycles. That means we all have to be patient--which the big rising dividends makes easy in my opinion.

Guest

4:43

Insightful webinar as alway. Thank you. I wonder what your opinion is of the potential for production by the Mediterranean natural gas reservoirs. And whether there are companies you think will benefit from their development.

Roger Conrad

4:43

Thank you! Chevron is probably the best positioned company in this area that's accessible to investors, following its purchase of Noble Energy at the bottom of the previous cycle. We'd like to see its price come back a bit more before getting too bullish again. But we look for another strong result when the company releases Q2 numbers and updates guidance later this week.

Victor

4:44

HAL has not done very well. Is that because of the lack of CAPEX? Don't they profit from existing oil wells and maintenance of exploration equipment. What is the outlook on this one?

Elliott Gue

4:44

In a commodity price cycle, producers usually lead first and then the rally broadens out into the services and equipment names like HAL, SLB and BKR. Both HAL and BKR have underperformed the S&P 500 Energy Index this year, buy they've been great performers in absolute terms, rising 27% and 22% respectively year-to-date against a 15% drop for the S&P 500. HAL generally profits from services related to both new well drilling and maintenance of existing wells as does SLB. The main difference between the two is that SLB is more leveraged outside North America and offshore in North America while HAL has more North America land exposure. We prefer SLB to HAL going forward as drilling and spending activity outside North America is picking up faster right now and we're entering a "sweet spot" of the cycle for services companies over the next 12 to 18 months.

Arnold S

4:46

Hi there, thanks for providing the dream buy prices. I wonder if you would consider also creating a list of dream sell prices? Since I'm close to retirement, if there is another big leg up on these energy stocks I would like to book some profits on some of them. In the meantime, what would you consider to be good sell points... The highest price in the last 5 years, or the highest price in the last 10 years, etc. Thanks

Roger Conrad

4:46

Hi Arnold. We do that in every issue of Conrad's Utility Investor for the stocks in the Conservative Holdings, Aggressive Holdings and Top 10 DRIPs. I could see doing that at a future date for Energy and Income Advisor holdings. So far in this up cycle, we have recommended taking some profits in some of the names earlier this year. At this point, we don't see that as a major opportunity considering where we are now in the cycle-- the best days for energy stocks in this cycle should be ahead of them. But this is a good suggestion for the future. Thank you.

James

4:48

Hi Elliott, last year you wrote an article or had a video showing that for the last 5 years, natural gas has tended to be strongest around the start of July 21 and lasting into mid-Sept. We traded it and was profitable. Do you see that trend continuing this year?

Elliott Gue

4:48

The difference this year is that prices are already elevated right now. In late July last year US gas was under $4 and popped to over $6 by October. I think you probably need gas prices above $4.50 or so to incentive new production. This year we're at $8.70. I still think that's too high because ultimately prices at that level will result in new supply coming on and if there is any break in the recent heatwave it will bring concerns about demand. I'd be wary of the normal seasonality in the gas market this year.

Jeff

4:52

Would like your opinion on Cleveland Cliffs

Roger Conrad

4:52

Steel manufacturing is a business that typically gets whacked when the economy slows, and Cleveland Cliffs' stock has certainly had its share of ups and downs over the years. The company's US/Canada focus has been a disadvantage in previous decades, due to tough global competition that's driven down the price of steel and related products. That's been less of a problem with the last two US presidential administrations being increasingly protectionist and promoting of "re-shoring" manufacturing to this country. But with no dividend, it's hard to see the appeal of this stock given the risk of recession the next 6 to 12 months. And as I noted in a previous question, cyclical stocks usually have their lowest P/Es just before the cycle drags them lower.

Guest

4:57

Hi Elliott. In the second phase of the bear market, do you see further price destruction in oil stocks beyond their recent lows? If so, have you considered selling some of them in EIA on the recent bounce or do you believe holding on instead of jumping in and out the better approach? I am a subscriber in both EIA and Creating Wealth. One service doesn't use stops and the other service does. I see pros and cons with both and am conflicted.

Elliott Gue

4:57

The Creating Wealth portfolio is more aggressive and active, so I recommend stops there are a means of controlling risk. Also my coverage universe in CW is bigger because I make recommendations across all sectors and multiple asset classes (stocks, bonds, inverse ETFs etc) In EIA we're focused more on building long-term wealth in one sector (energy). In EIA we still seek to control risk by managing positions -- for example, we recommended taking some money off the table in some energy names earlier this year and we might recommend more if there's a rally short-term. However, our approach is generally more to take partial profits on rallies and then use dips to buy favored names at attractive prices rather than jumping in and out (trading) names.

Jim T

4:57

A month age I was looking at lng carriers DLNG, GLOP and HMLP.

Roger Conrad

4:57

This is a group that should have seen its lows for the cycle, especially with demand for LNG surging in Europe now as well as Asia. However, I have a couple of caveats for you. First, Hoegh LNG Partners has agreed to be acquired by its parent for $9.25 per share. That's a take under price compared with previous years, but it's also a big lift from where the shares were earlier this year and is the best unitholders are going to get. We rate the stock a sell as there's now little upside to the takeout price. It's likely GLOP and DLNG will also be taken out in the next 12 months--but with miniscule to non-existent dividends, that's the only reason to hold either DLNG or GLOP at this time. I think your money is better off in energy companies actually paying dividends.

Mack

5:00

With the need for increased LNG, and probably other forms of energy, to be shipped to Europe, what is your view on GLOP and tanker businesses in general. And isn't this situation also good for LNG (Chinere Energy).

Roger Conrad

5:00

Hi Mack. I think demand for LNG tankers will grow in coming years as the trade does. The problem with betting on companies like GLOP now is they don't pay much in the way of dividends, their parents will likely buy them out if business improves enough limiting upside and for now at least they're burdened by oversupply--which at least up until now has been driving down charter rates. We'll see tomorrow if Gaslog Partners has managed to stabilize this part of its business when it announces Q2 results. But as I said answering the previous LNG question, we believe your capital is better off deployed elsewhere.

Arnold S

5:05

Hello, what do you think about Cheniere and LNG stocks?

Roger Conrad

5:05

Hi Arnold. In contrast to the LNG tankers, I do see upside for owners of LNG export terminals, provided they can get them built and running. That means winning needed permits, arranging financing and executing on construction to avoid big cost increases from budget. None of those are easy tasks, which is essentially an advantage to larger companies in the business like Cheniere and Sempra Energy (NYSE: SRE), a California/Texas utility that has a development partnership with TotalEnergies in the US and Mexico. I rate SRE a buy up to 160. Cheniere Energy Partners (NYSE: CQP) is our preferred way to play that family as it pays a healthy dividend. It's tracked in Energy and Income Advisor in the MLPs and Midstream table and rates a buy at 55 or lower. Sempra is tracked in Conrad's Utility Investor as a buy at 160 or less.

Guest

5:16

Hello, I just joined Creating Wealth. There is a saying that in a true bear market, everyone loses money. I experience this during the 2000-2002 and 2007-2009 bear markets. The advisories I subscribed to at those times were right on their call in the market and the economy, but yet we lost money because we tried to go long the bounces, get stopped out, then short the drops, get stopped out, etc.

Can you describe your strategy for Creating Wealth going through this bear market? I would be happy to be just flat through a bear market. Maybe that means I should be in 100% cash? :)

Elliott Gue

5:16

Thanks for joining the service. Generally, my experience has been that one of the worst mistakes investors and traders alike make is "over-trading" -- trying to time every bounce and sell-off in the stock market. This leads to frustration, especially if you "bet big" on one outcome or the other and you happen to be wrong or just early. In Creating Wealth, my strategy is basically a top-down approach -- I start with the broad take on the market/economy, then move down to individual asset classes and sectors and finally individual picks. When my indicators suggest it's a bull market (as in early 2021 for example), I try to keep the model portfolio as close to fully invested as possible and my focus is on picking the best possible names/ETFs and sectors to own. When my indicators suggest signs of trouble ahead I am a big believer in measured and gradual shifts in portfolio exposure. For example, last November and December I began to see evidence of a shift underway. We started by de-risking and raising cash,

Elliott Gue

5:16

then slowly recommended small positions in inverse ETFs to profit from the market downside. We then recommended building those inverse positions in early 2022 and slowly booked gains on those inverse ETFs in the rapid sell-off back in May. As we move through the bear market, my strategy remains to continue selling down our remaining long exposure, building exposure in safe-haven assets like Treasuries and cash and, slowly and selectively, recommending inverse ETFs ahead of what I believe to be a likely second wave of the bear market later this year. My goal is to generate positive returns through the bear market, so that we'll be in a position to profit from the eventual recovery in stocks in the next bull market. I will almost certainly not catch the exact low, nor will I be able to call all the bear market bounces. I also am not a big believer in making sudden aggressive moves, such as quickly shifting to a major, large short position -- I believe in gradual shifts and risk management rather than trying to

5:17

be a hero with bold calls and trades.

Victor

5:18

Copper, Iron, Aluminum are down significantly from their highs in March. Is that an indication of a drop on inflation or like oil, just less demand due to a recession?

Roger Conrad

5:18

Depressed economic activity reduces demand for industrial commodities like copper, iron ore and aluminum--and price declines we've seen in the futures market indicate the expectation of reduced demand. Spot prices also indicate less demand, though it's harder to gauge permanency given China's dominance on the demand side and its government's consistent attempts to control prices by timing purchases and managing inventories. Similarly, oil prices also follow demand at least to an extent, though we believe supply is playing a larger role in this cycle due to a lingering investment deficit.
To the extent economic growth slows this year and it reduces demand for commodities and prices, it should reduce inflation. But barring needed investment in supply, demand, prices and inflation would return as the economy started growing again.

Willy

5:25

Roger, could you comment on BKR and ARTNA? BKR’s recent earnings call was pretty guarded, but at this price does a new position make sense? ARTNA has been a real winner for me. Any thoughts about what’s next?

Roger Conrad

5:25

Elliott I believe has commented on Baker Hughes' results. So I'll stick to Artesian Resources (NSDQ: ARTNA). The small water utility continues to perform well as a business, demonstrated by continuing twice annual dividend increases. Next earnings are early next month. And I expect to see steady underlying growth led by successful acquisitions. I believe the end game here is likely to be a profitable takeover of ARTNA. My only problem with the stock now is price--it's just hit a new all-time high and the yield to new buyers is just 2.1%. My highest recommended entry point is 45--so that's not high enough to take a partial profit. But I would be patient as far as taking new positions at this time.

Jerry

5:28

I saw that Warren Buffett just purchased a big amount of OXY. I know that you do not cover this at CUI. The dividend and yield are paltry.

Your comments on this stock would be appreciated. Thanks for your excellent work!

Roger Conrad

5:28

Thank you Jerry. We do track Occidental Petroleum (NYSE: OXY) in Energy and Income Advisor and have obviously done well with it this year. The company made some painful adjustments during the low ebb of the energy cycle and as a result has been able to slash debt dramatically and start returning cash to shareholders--and we expect to see a lot more of that. Earnings due out August 2 should be quite robust and should set the company up for another big dividend increase by early 2023. That said, our highest recommended entry point is 55, which is a bit below the current price. So we'd be patient on new purchases.

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