JotCast | 7/29/21 Energy & Income Advisor Live Chat

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7/29/21 Energy & Income Advisor Live Chat

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Roger Conrad

2:39

Hi Jack. It's certainly possible some money is sloshing around on that basis. As we've said, our read on producers at this time--especially in North America--is they're going to stay conservative regards CAPEX, which means lower output of oil and gas and reduced midstream system throughput. On the other hand, the value creating ability of midstream companies is not from volumes but from cash flow, which funds distributions, buybacks, growth CAPEX, debt reduction etc. And though results at EPD, KMI, MMP and other diversified midstreams did indicate some impact of volume constraints at certain assets, they were able to offset the impact on cash flow and then some with growth in stronger areas (Mexico for KMI, NGLs for EPD), cost cutting and other actions taken to adjust to the current environment. As EPD CEO Fowler noted during the earnings call, investors aren't valuing his company on a reliable cash flow basis, and the same is true of KMI and other high quality midstreams. We think that's actually normal

Elliott Gue

2:39

Also, regarding the cycle chart question, I see us around 8 o'clock at this time. That's because we're clearly past the low of the cycle but we're not yet seeing late cycle signs. By that I mean 1. Signs of demand destruction from rising oil prices or 2. A significant up-tick in global E&P spending as producers seek to bring more supply online. That's a very brief summary of where I see us in the cycle; of course, this is something we'll be writing a lot more about over the next few months.

Roger Conrad

2:40

continuing my answer on EPD and KMI, we think that's actually normal for this stage of the energy price cycle. But we believe these stocks will come to be valued on a cash flow basis as the cycle moves higher--meaning they're going to move quite a bit higher. Again volumes are important but only so far as they affect cash flows. And the number one takeaway from EPD and KMI earnings is cash flows are healthy and growing again, even with producers keeping a lid on output.

Mr. G

2:45

Why has Enterprise Products (EPD) been such a laggard, especially now paying 7.75%? Isn't this the largest, highest quality, most diversified pipeline?

Roger Conrad

2:45

As I've noted in answering several questions on Enterprise during this chat, the important thing is this midstream leader is still generating very healthy and growing cash flow--and it proved this again in Q2 numbers released earlier this week. That means the dividend of nearly 8% is quite safe, well covered by both free cash flow and distributable cash flow with enough left over to fund pretty substantial stock buybacks. As this energy price cycle unfolds, that's going to be worth a lot to investors.

Michael L

2:46

OPEC+
Does the resolution of their internal dispute (for now) change your outlook for oil prices in any substantive manner?
Thanks,

Elliott Gue

2:46

We expected them to resolve that dispute for the simple reason that it was in the best interests of UAE, Saudi and the rest of the cartel to do so. They simply can't risk another major rift as it would really wreck their credibility. I think the most important point is that this deal underlines the fact that OPEC+ is willing to adjust production frequently to keep the oil market tight but not too tight. On the demand side of the equation, there's considerable uncertainty around the pace of demand recovery into 2022, so OPEC+ just can't map out production increases 6 or 12 months into the future, they need to be flexible and adjust accordingly on a month-to-month basis. Also, Saudi doesn't want to price of oil to fall too far (for obvious reasons) nor do they want to see $100/bbl because 1. Eventually it will encourage shale to come back into the market and 2. the US (and other countries) begin to blame them for inflation if oil prices get too high. Some my sense is that we're entering a more stable period for

Elliott Gue

2:46

oil prices as OPEC+ dials up its management of this market.

Guest

2:52

Thanks for holding these chats. Very informative, I learn useful things each time. In your view is Valero an aggressive purchase and what is your buy up to price for Valero.

Elliott Gue

2:52

Thanks for kind words about the chats, Roger and I also enjoy hosting them. I believe we had Valero listed as aggressive the last time we classified the stock. However, I would say that the energy markets today are very different than they were one year ago and risks have declined as commodity markets have healed. A year ago, for example, there were valid questions around VLO's ability to hold its dividend while today I think that risk has receded. So, I think risks in VLO are falling. We have it as a buy under $85.

Arnie S

2:57

Both Capital Product Partners LP CPLP, and Crestwood Equity Partners LP CEQP -- had all-time highs over $200 and now are a fraction of that. Fortunately I'm not losing money on my positions, but is there a reason to continue holding them?

Roger Conrad

2:57

It's worth pointing out that those are reverse-split adjusted highs. But the larger question to ask isn't what prices energy related stocks like these have reached in the past but where industrial logic points them to in the future. Energy is a highly cyclical business. And because it's also extremely capital and time intensive, these cycles tend to play out over many years if not decades. The high past prices you see for tanker CPLP and gathering/processing focused Crestwood were reached at a time when oil and gas prices were peaking and capital was flooding into everything to do with oil and gas. We're now at the opposite end of the cycle, where capital is scarce and few still believe the recent rebound in oil and gas prices has legs. The important thing, however, is how these companies' underlying businesses are faring. CPLP reports tomorrow and we're less sanguine on the tanker business in general. But CEQP did report very solid numbers and we believe there's a lot more upside to come.

2:59

What ,in your opinion, is the best managed energy company?

Elliott Gue

3:00

Hard to pin it down to just one. I would say that among the E&Ps Pioneer is a standout led by founder and CEO Scott Sheffield. He was one of the first to really commit to a cash flow over growth-centric shale model. Among the services names, they have a new CEO but I have always been impressed with Schlumberger and I think that they've managed well through a very tough year since the beginning of 2020. CEO Olivier le Peuch took the helm in the summer of 2019, just in time to "enjoy" the worst commodity price downturn in history less a few months later. I'm sure he's aged about 15 years in the past 2 years but he's done a great job in my view. Among the majors (and this one will be controversial) but I really like Exxon. I guess I am contrarian by nature but I respect their decision to stick with investments through the downturn, a move which has now been vindicated (in my view) and will allow them to grow production over the next few years. Among the MLPs, management at EPD has always been top notch -- for as

Elliott Gue

3:00

long as I've followed EPD, they've been considered best of breed.

Michael L

3:09

A number of the E&I companies have reported now. Have any surprised to the up/downside? Do you see specific opportunities to buy, or sell and purchase something different ( and what?) based on the reported numbers/guidance?

Roger Conrad

3:09

Hi Michael. As we've indicated in this chat and as you'll see in the soon-to-post new issue of EIA, we're not seeing much in the way of surprises so far this earnings reporting season. Producers as expected are using free cash flow afforded by higher oil and gas prices to pay down debt and are not ramping up CAPEX plans. The best in class midstream companies are offsetting the negative impact on volumes and from contract expirations with incremental asset additions, cost and debt reduction (including greatly scaled back CAPEX) and share buybacks, as are services companies. And downstream companies are seeing a big rebound in demand for gasoline as well as jet fuel. Bottom line is the best companies have adapted to the current environment. And unlike in 2016-18, they're using free cash flow to improve balance sheets rather than to expand.

We would use the pullback we've seen since mid-June to buy Model Portfolio and High Yield Energy List companies below highest recommended entry points. The best targets

Roger Conrad

3:12

continuing my answer on earnings season, the best targets will be companies you don't already own. But pretty much everything is at a good point now. Look for more individual company analysis in the EIA issue about to post, as well as the one we'll be publishing next month. But from what we're seeing now, Q2 results confirm we're in a far more positive place in the energy cycle than we were in 2019-2020. That means prices are going to stay strong and scarcity is going to build as CAPEX remains restrained. And that's very good news indeed for the selected energy companies we've been bringing to your attention.

Guest

3:17

Would you prefer RDS.B or BP at current prices for income oriented investor looking to preserve capital?

Roger Conrad

3:17

They're both buy rated at these prices. But in the super major category, we would prefer Chevron, ExxonMobil or TotalEnergies. I've written extensively on TotalEnergies in this chat, and it looks better than ever after reporting very solid Q2 numbers. Chevron and ExxonMobil report tomorrow but should also a big free cash flow benefit from higher oil prices.

One thing that separates these three companies from BP and RDS is a much lower level of debt. BP is still laboring from the cost of the Gulf of Mexico oil spill a decade ago and Royal Dutch in retrospect paid far too much for BG. CVX, XOM and TTE are also under a good bit less regulatory pressure.

All will benefit from stronger oil and gas prices in coming years. But CVX, XOM and TTE are at this time safer and therefore more suitable for conservative investors.

Arnie S

3:19

I have these two entries in my brokerage holdings; can you briefly tell me what they are and if I can/should sell them just to simply my life?
OASPW:OTC Pink OXY/WS ------ OASIS PETROLEUM I 24 WTS WARRANTS EXP 11/19/24, and
OCCIDENTAL PETROL 27 WTS WARRANTS EXP 08/03/27

It would be great if you could offer a "dream sell" list... a list that would help me set a limit price to sell. I don't need to sell at the absolute top, but I wouldn't mind making a reasonable profit and reduce my holdings in general as I am nearing retirement.

Elliott Gue

3:19

Those are warrants. Basically, they're a bit like a call option. In the case of OXY, the strike price of the warrants is $22 per share, which means that they confer the right to buy OXY stock at $22. Since OXY trades at roughly $27, these warrants are in the money by about $5. the Warrants currently sell for about $11.32, so they trade at a premium to intrinsic value, which is normal and reflects the time value if the option though expiration in August 2027 (about 6 years away). We like OXY, however, we'd prefer exposure to the stock by owning the stock itself rather than through the warrants.

Elliott Gue

3:19

The second one appears to be an Oasis petroleum warrant that's due to expire in November 2024 and has a strike price of $94.57. Oasis trades at around $91. OAS went through a bankruptcy restructuring last November. We haven't recommended OAS in a few years now, and we continue to strongly favor other producers at this time.

Sohel

3:24

Hi Roger, Thanks for holding these chats. Could you rate ET and PAGP specifically on two fronts a) dividend safety and b) price appreciation potential.

Roger Conrad

3:24

Thanks Sohel. It's our pleasure truly. I would be on stronger ground answering this question after Energy Transfer and Plains announce Q2 results on August 3. But based on what they released in Q1, the guidance issued then and developments thereafter, I consider both as featuring very strong distribution coverage currently. Plains is particularly volume-sensitive, and based on the underperformance of midstream companies that have reported conservative volume forecasts, I would not expect a big move in the near-term unless/until there is a throughput recovery. Energy Transfer may get more of a kick depending on its ability to close the Enable merger and get some regulatory clarity on its Pennsylvania pipeline as well as the Dakota Access Pipeline. Long-term, though, I think a double for each from current prices is fairly conservative as the cycle continues. Plains is a potential takeover target as well at a $7.2 bil market cap, with ET a possible suitor. Feel free to write after earnings come in.

Jim T

3:35

L-T holder of AETUF, ERF, PBA, and PEYUF. Is there any major development/s to be aware of. What is status of PBA and IPPLF negotiations.

Roger Conrad

3:35

ARC Energy announces earnings later today, Enerplus will on August 5 and Peyto on August 11. But it's safe to say all three are benefitting from much more favorable energy pricing this year than last, when they proved their resilience. My view is all three are likely to be the target of M&A eventually, as they're small, well-run and financially strong with good assets--and starting with Enbridge's Line 3 coming on line later this year their access to markets outside Canada is going to start improving greatly. I think the game here is simply patience but the long-term direction should be up as the cycle continues.

As for Pembina, as indicated in my answers to several questions earlier in the chat--and discussed in the soon to post EIA issue--the company will walk away with a CAD350 mil breakup fee rather than enter a bidding war with Brookfield Asset Management. I thought a PBA/IPL combination had strong industrial logic at the offer price. But I think moving on also shows financial discipline for Pembina,

Roger Conrad

3:37

continuing on Pembina, for a company that has many options to invest as Canada's number three midstream. it's also possible they will wind up getting the assets they wanted, since Brookfield is a conglomerate and therefore should be considered a financial investor that will probably shop what it can profitably.

Hans

4:00

I think at one time you had ATGFF in the portfolio what is your outlook on this one.

Roger Conrad

4:00

Altagas Ltd (TSX: ALA, OTC: ATGFF) is primarily a utility company at this point, so we cover it in Conrad's Utility Investor rather than in EIA. The August issue of CUI due out on the 10th will include analysis of Q2 earnings and guidance updates for the vast majority of that coverage universe.

Altagas reported its numbers today so I've only started going through them. But from what I've seen so far, operations are healthy and the multi-year plan launched in the previous decade to boost profitability while cutting operating risk and debt is right on track. Q2 EBITDA was 12% higher than a year ago and normalized FFO per share was up roughly 10% as both the core regulated utilities and the LPG export business posted strong results in line with management guidance laid out earlier this year. The balance sheet is solidly investment grade and dividends have returned to growth. I think a return to at least a low 30s price in the next 12 to 18 months is a conservative target and dividends are safe meantime.

Hans

4:04

Any advice on WES and ENLC good dividend, but what will the future bring.

Roger Conrad

4:04

Western Midstream's prospects are pretty much linked to Occidental Petroleum's, as its primary customer and 49.09% owner. We think that will be a positive the next few years. EnLink, meanwhile, has a large presence in central Oklahoma as well as several shale basins where midstream throughputs are likely to be stable but subdued for the foreseeable future. I think both have survived and will ultimately prosper as the cycle moves higher. But at this time, we definitely prefer the large, diversified and financially strong midstream companies in our Model Portfolio and on the High Yield Energy List.

salvatore

4:53

Evening Roger/ Elliott

Elliott Gue

4:53

Good evening. Actually, I think the guideline we've given in the past is to consider keeping your exposure to energy at or below roughly that level (30%). Of course, that's a rough guideline and it's totally dependent on individual circumstances. In addition, it's somewhat dependent on industry conditions -- we were more cautious on energy last year this time but the risks have receded significantly since that time. Finally, note that there is some diversification within more conservative picks i.e. exposure to gas vs. oil; midstream vs. upstream vs. downstream. It makes sense in our view to have some exposure to different buckets within energy as they don't all move in the same direction at the same time.

salvatore

4:53

Do you think 30 percent of ones portfolio invested in our most conservative energy stocks are too much .( mmp,epd,mplx ect) im retired looking for the income .

Roger Conrad

7:01

Well that looks like all we have in the queue for today. Thanks to everyone who participated today. We very much value your input and questions. Just as reminder, EIA readers can expect to see two items in their email boxes in the near future. One is the complete transcript of this Q&A session. The other is a new issue of Energy and Income Advisor. See you next month!

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