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7/31/24 Capitalist Times Live Chat
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AvatarRoger Conrad
1:52
Welcome everyone, and thank you for participating in our mid-summer Capitalist Times live webchat. As always, there is no audio. Just type in your questions and we’ll get to them as soon as we can comprehensively and concisely. And tomorrow morning, we will be sending you a link to a transcript of the complete Q&A.
 
Per usual, we’ll start by posting answers to questions we received via email prior to the chat.
Q. Hi Roger. What is your opinion on APAJF? Haven’t heard much and it looks very cheap today. Thanks.--John
 
A. Hi John. I think APA Group (ASX: APA, OTC; APAJF) is still a solid value. And the yield of 7% plus is likely to be increased again later this year. Next earnings are August 28--which will be after the August issue posts. But I will have a full recap in the September issue of the results. 
 
The stock recently hit a 52-week low following the recognition of an asset impairment at an ethane pipeline. And there appears to be some concern about how quickly a recent asset acquisition in renewable energy will start adding to earnings. But the underlying thesis here is intact.
Australia is shutting down coal to replace it with renewable energy and that means it's going to need a lot more natural gas. APA dominates this business in Australia and there's a lot more upside from expanding regulated infrastructure. The currency has been weak this year (AUD at 67 cents). But that will eventually reverse as well. 
 
 
Q. Hi Roger: I am sure you saw RBC’s comments on Monday about NEP. The headline was “NextEra Energy May Cut Dividend on Equity Financing, Wind Repowering Hurdles, RBC Says”.
 
It continued “NextEra Energy Partners (NEP) may face a dividend cut amid $3.7 billion in convertible equity portfolio financing liabilities after 2026 and "insufficient growth from wind repowerings,
1:53
RBC Capital Markets said Monday in a report. "We do not have full confidence in the suite of solutions being sufficient to maintain a healthy" cash available for distribution run rate to meet the dividend payout, the report said. UBS lowered its rating on the stock to sector perform from outperform and cut its price target to $30 from $38.
"While there is still time until management faces the situation, we are uncomfortable with the risk relative to the return profile," the report said. RBC revised its dividend forecasts for 2024 to 2027 to $3.65, $3.86, $2.00 and $2.06 from $3.62, $3.80, $3.99, and $4.19.” I am new at reading these reports and headlines. You must be used to having analysts opine on stocks/companies all the time.
Question:
1.   How does RCB know and understand NEP better than the company itself which makes quarterly announcements? 
How do we as investors reconcile what NEP states and what an analyst may state? I am dumbfounded by RBC’
1.   RBC’s apparently disputing NEP’s assessment of its own future growth.
Thanks--Barry
 
A. Hi Barry. Thanks for writing. I addressed the NextEra Energy Partners situation at length in the July CUI issue. And the company along with parent NextEra Enegy (NYSE: NEE) has since announced earnings and updated guidance.
 
The bottom line is the issues cited by analysts are very real. Where I part company with them is their chief assumption is that capital market conditions will stay rough for the next 2.5 years AND NextEra Energy (NYSE: NEE) the parent has to basically kick NEP to the curb, something it did not do in 2015-16 when NEP was also in a period where it was not an effective financing vehicle. 
 
As I've written, I do think there's risk here. But the yield of 13% plus is certainly pricing in a pretty big dividend cut that I think odds still favor the company avoiding--especially given NextEra Energy's need to raise capital the next few years to fund all that renewable energy. 
 
 
I don't claim the ability to read minds. But it seems to me these opinions are basically people trying to wash their hands of a position that's recently been a loser. And I would also point out that while these analysts got the publicity for being bearish, the vast majority of those tracked by Bloomberg rate NEP either hold (10) or buy (5). 
 
 
Q. Roger. I read the transcript of the earnings call for NEE. I found it hard to decipher regarding the future prospects of NEP. Hope you can help us subscribers understand. I’ve got a very healthy position in NEP and it’s leaking so far. Finally, when you next put pen to paper for us (pardon the anachronistic reference) the impact of the election with new participants on NEP and all your universe.—Gary S.
 
A. Hi Gary. I didn't see a lot new from either the call or the Q2 numbers for NextEra Energy Partners. Earnings seemed to pretty much be tracking what management had previously forecast, other than getting slightly more benefit from the higher wind resource
1:54
and repowering effort that's progressively offsetting the sale of the pipeline assets on EBITDA and distributable cash flow. Management also affirmed in its comments the dividend growth plan through 2026.
 
Management did address the post-2026 funding issue briefly in the Q&A--and seemed to indicate it was pursuing a private capital solution for NEP with the implication that the recent agreement selling a partial ownership interest in a portfolio of wind and solar assets is a possible template. But they mainly emphasized that the pipeline sale has bought them a lot of time to find the optimal solution to keep NEP viable and eventually to resume its role as a funding vehicle.
 
As for the election, my view is it's a very bad idea right now to make investment decisions based on campaign rhetoric and possible election results. And in any case, NextEra's most important state by far is Florida--source of almost 70% of its earnings--which is run by a climate skeptic, Republican governor.
That's about as much proof as you can get that this company knows how to navigate politics.
 
Q. Guys. Should we now be taking partial profits on KMI, PBA and PAGP not that the ALL are overbought, then buy back on the upcoming dip? Thanks--Gary S.
 
A. Hi Gary. That would not be our advice at this time. All have had a nice run this year. But they're well below their high points of the previous energy price cycle. Valuations aren't particularly extreme, with yields still very healthy. And all are in good health on track for solid growth in cash flow the next few years.
 
In the event of an overall stock market rout, it's hard to see a scenario where midstream stocks don't back off as well. And Pembina is above our highest recommended entry point just now at 38.
But we view these stocks mainly as buy and hold at this point in the cycle--the big gains have historically come at the end and we don't believe we're near that point yet.
 
 
Q. Hi Roger. Hope all is well. Thoughts on NEP after the earnings call today. Seems like they were watering down their prior statements concerning dividend growth through 2026. Best—Ron K.
 
A. Hi Ron. As I indicated in my answers to the earlier questions, I think NextEra Energy’s strategy is to stay patient with NextEra Energy Partners, until it can improve its access to capital. NEP is basically a funding vehicle for NEE. And NEE has immense capital needs over the next 3 to 5 years at least that a functioning NEP can greatly help.
 
I did not see anything in the earnings report or guidance call to indicate they’re having second thoughts about target 5-7% (mid-point 6%) annual dividend growth through 2026. The question is what happens after that, which will depend on whether NEP can regain access to capital markets on decent terms.
1:55
If it can, the refinancing of the CEPFs will not be a problem and resumption of drop downs will fuel dividend growth beyond 2026. If they can’t regain access, then a dividend cut become a possibility—though the current yield of nearly 14% is pricing in one of roughly 50%.
 
Q. Hello. I am a subscriber to Energy and Income Advisor service (it’s great by the way!). I did buy some TC Energy (TSX: TRP, NYSE: TRP) recently. But I just noticed on their website that for non-resident investors (I’m in the US) that the dividend will be subject to a withholding tax of 15% and also the IRS requires withholding of another 24%. The stock currently yields approx 7%, am I correct in understanding that 39% of that dividend will be withheld as taxes? Greatly appreciate any insight you can provide.—Doug B.
 
A. Canadian withholding tax for US investors is 15% of dividends. This can be recovered on your US taxes as a credit, provided you don’t hold TRP in a tax deferred account (IRA). If you do hold it in an IRA, then there
should be no taxes withheld.
 
This is a point of confusion that seems to continue to bedevil US brokerages, as it has since I used to run a dedicated advisory on Canadian stocks in the ‘00s and early teens. That’s despite the fact these are NYSE-listed stocks. But I can tell you there is no IRS withholding of “another 24%.” Any broker doing that needs to cease and desist.
 
Q. Hi Roger. I really appreciate your selection and thoughts on real estate investment trusts (REITS). I bought shares of SPG for around $100 between March and October. They are now 48% above the buy price and two thirds are long term. You have suggested that the share price could reach $200 apiece. I'm in a quandary about whether I should take some profit or let it ride.
 
Also being part of a small family farm, I am unhappy about promoting Farmland Partners.
1:56
It seems to me that making money from buying and selling farm businesses is increasing the cost of growing food. –Sandy
 
Hi Sandy. We were able to add Simon Properties to the REIT Sheet recommended list at a very good price. Now it’s become clear that the indoor mall business has adapted fully to the rise of e-commerce and is in fat seeing strong growth.
 
My highest recommended entry point for Simon is 140—shares are currently near $155. My view they’ll eventually make a new high above the Sept 2016 level of around $230. And I may raise that entry point after they announce earnings August 5 and very likely boost the dividend again. But at this point the shares are below the point where I’d take a profit or buy more and I think we just need to be patient.
 
 
Q. Roger, please give us your thoughts on Atlantica Sustainable (NSDQ: AY). Is this a good thing for investors???—Jerry J
 
A. Hi Jerry. Atlantica is expected to announce Q2 results sometime in the next week, as well as declare another quarterly
dividend of 44.5 cents per share. But the only real driver of returns at this point is the takeover offer of $22 per share in cash by a private capital consortium led by Energy Capital Partners.
 
My advice since this deal was announced has been to buy on dips to 22 or less, and collect the dividends plus any discount to takeover value. The idea is risk of deal failure is very low—and if it did fail Atlantica would eventually fetch a much higher price. I will likely advise a sell if the price rises to $22.50 or higher, since at that price further returns would be very little given the expected closing date in Q4/early Q1.
 
 
Q. Roger. I am sure you will agree with me that water is both an interesting and productive investment sector for the future. I already own American and Essential. I would like to broaden my exposure to this theme (understanding the dividends will be less than your typical recommendations) by going beyond the delivery of water into the technology side. Do you have any favorites in this a
area? Would it be a good idea to add to the Utility arena? Thank you for years of interesting and productive conversation.—Dave P.
 
A. Hi Dave. I agree that water is a great long-term investment. The question is how to play it. The utilities like Essential, AWK etc leverage the opportunity with system CAPEX on which they earn a regulated rate of return and with acquisitions--as smaller systems increasingly lack the capital base needed to fund system upgrades. Up until the past year or so, my view had been that sector stocks were generally priced too high for there to be meaningful additional upside. We've since seen a pretty severe retrenchment, with the result these stocks are again trading at good entry points despite the surge over the past week or so that appears to be continuing. There's also a new player on the utility side--Northwest Natural Holding--which is rapidly building a water utility business in addition to its natural gas distribution. Also, I track a couple UK utilities--Severn Trent and
1:57
United Utilities. I'm still waiting to see what the Labour government policies are regarding water utility regulation--there was a party plank to nationalize them up until recently.
 
Consolidated Water is a company combining regulated utilities in the Caribbean using reverse osmosis with a unit that provides services to water systems including infrastructure construction. The stock languished for years, then it became something of a moonshot in late 2023, which made it frankly too expensive. It briefly dipped to a good price this month but is rallying again. Another company in the URC coverage universe is Itron, which provides data technologies for water systems--as well as electric and gas. It's one of the few pure plays that makes money, so not surprisingly it's been off to the races this year as well and is no longer cheap. And in terms of equipment and services, there's Veolia, which merged with Suez a couple years ago to form what's now the dominant global water/waste player.
 
I've followed those names
in addition to the pure utilities over the years because they have real earnings and I believe clear strategies for sustainable growth. As you point out, there are multiple other names in the equipment and services business--many of which are listed in the Solactive Clean Water Index (SOLWATR). I haven't done a lot of work on these companies, which include names like Badger Meter (NYSE: BMI). Generally speaking, the business is very competitive and the popular names tend to trade at high valuations--BMI sells for 46.5X expected next 12 months earnings. There's an Invesco Water Resources ETF (PHO) based on the Nasdaq OMX US Water Index, which appears to include many of the same stocks--basically a mix of water utilities and services companies. It's up about 14% year to date and it's also a good place to look for individual stock names.
2:05
Q. Roger, any thoughts on the possible investment merits for CTRI, HE and JKS? The recent news on HE may be promising, but still opaque. Looks like CTRI had a tough quarter and does the political landscape determine JKS’s fate? As always thanks for your counsel.—Willy
 
A. Hi Willy. I think all three are reasonably good values at this point—companies solid on the inside but clearly unloved at this point. Centuri Holdings posted Q2 results that were basically in line with what management had indicated—but also guidance that appeared to indicate softer sales in the near term. I think there are two potential catalysts for a much better result. One is growth of offshore wind projects in the US going ahead and the other is storm activity, as restoration has been the company’s bread and butter historically. It may take some patience with the stock, given its relatively weak launch.
And Southwest Gas Holdings is likely to sell at some point—as it still holds more than 80%. But I think there’s some value, including as a potential takeover target.
 
Hawaiian Electric appears to be near a global settlement of Maui wildfire issues that will allow the company to avoid bankruptcy. We still don’t know what the ATF report contains, as the Maui fire department has not released details. But what we do know is the state is committed to a solution that keeps the utility whole and able to execute state energy goals—mainly to reduced oil dependence for generation and replace with renewable energy primarily.
 
As for JinkoSolar, it’s the most efficient solar component manufacturer in the world and I think a very cheap stock as well. That’s very likely in large part because its Chinese and there’s a well founded concern the US government could take action against it. I think what the market is missing pricing JKS at 7X expected next 12 months earnings is the US is a relatively small piece of the
business. And it has manufacturing facilities inside tariff walls serving US companies.
2:06
Ok that appears to be it for questions received prior to the chat. Let's get to some live ones.
John A.
2:14
I am sending in this question early to make sure it gets covered in the chat.

“The portfolio in Conrad Utility Investor + includes Altria and Verizon. Is there some reason that these were chosen vis-à-vis British American Tobacco and Bell Canada?”
AvatarRoger Conrad
2:14
Hi John. Actually to avoid any confusion, Altria (NYSE: MO) is in the CUI Plus/CT Income portfolio. I do not track it in Conrad's Utility Investor (CUI) as it is not an essential services company. Also, BCE Inc (TSX: BCE, NYSE: BCE) is a CUI portfolio holding as is Verizon Communications (NYSE: VZ). Neither is in the CUI Plus/CT Income portfolio.

If you're contrasting BCE and Verizon, I would say the key difference now is that Canadian telecoms have been affected recently by a price war, which has hit sector share prices. it now appears to be subsiding, though BCE's Q2 earnings announced tomorrow should be instructive. VZ has already released results, which were very solid. I'll be reviewing both in the August CUI, which posts August 5.

As for Altria vs British American Tobacco, my view is MO has more catalysts to keep raising dividends going forward. They confirmed today by sticking to 2024 guidance.
Karl E.
2:15
Re: CHK. I have noticed that in the latest Capitalist Times Active Total Return portfolio the buy under price for CHK is $90 and in the Energy & Income Advisor portfolio the buy under price is $110. I believe that it has been like this for a while. Just wondering why the difference? While you are at it is CHK still a good nat gas play? Thanks!
AvatarElliott Gue
2:15
CHK is still one of our favorites. The buy target in CW is due to the fact we recommended adding to CHK on a dip in price and, when I scale into a position, I typically set the buy target based on the short--term technical levels prevailing at the time I make the recommendation. Buy targets aren't really our upside target for the stock -- for CHK my price target is $125 to $130 based on a discounted cash flow analysis.
Jack A
2:18
Hi Elliott:

You mentioned that you expected our production from fracking to reach a plateau in less than 2 years. When do you see production declining? What does that mean for our pipeline holdings in the model portfolio?. Which MLPs or companies could be most affected?

Thank you
AvatarElliott Gue
2:18
I think it'll be a number of years before production drops off meaningfully. Give the inventory the major producers have you could easily see a plateau of 5 to 10 years. And, if prices were to stabilize at an even higher level (say north of 100 to $110/bbl) I think that could be extended a bit as secondary drilling locations would also be profitable. I don't think that's an issue for any of the MLPs because it's more of a long-term call. The main  difference between my call on Permian output and consensus is that some forecasters (example: IEA) are forecasting very strong growth in US shale output in coming years without much of an increase in  price; I think that's (very) unlikely.
Mr G
2:20
Re : Nextra Energy Partners NEP

In the past, you have said this is a safe investment, for at least the next year or so, as the interest rates have been too high for dropdowns. Do you still feel it's OK and they'll be able to sort things out, once interest rates start to drop?
AvatarRoger Conrad
2:20
I answered a couple pre chat questions in detail on NextEra Energy Partners earlier. But the bottom line is I think you've described the situation pretty well. NextEra Energy Partners is first and last a funding vehicle for its parent NextEra Energy. Basically NEE "sells" ownership of wind/solar/storage assets it owns to NEP, and uses proceeds to invest in other assets. Since the June 2014 IPO, capital markets have been alternately receptive and unreceptive to NEP being able to raise capital on economic terms. NEE management has been patient when conditions were tough and taken advantage when they've loosened.

At this point, NEE has arranged things to give NEP a window until the end of 2026 for capital market conditions to improve enough. My view, is that should be enough time to sort things out. And that's the basis for owning NEP--and with shares  currently pricing in a 50% dividend cut, there's enormous upside if they succeed.
Dan N
2:30
Hi Roger - I've seen numerous headlines in the last few weeks describing higher electric wholesale prices. Is this a new normal now that electricity demand is rising with AI/data center expansions? Is this trend priced into electricity generator stock prices yet?  (Seems like AES and BEP remain unloved for some reason)
AvatarRoger Conrad
2:30
Hi Dan. I think it can be dangerous to rely too much on long-term projections, including for energy. But Nvidia earnings today showed once again that data center demand for artificial intelligence enabling is increasing electricity usage rapidly in real time. And combined with uptake of electrification including transportation and industrial processes, it's showing up in electric utilities' results as "weather normalized" demand growth that's roughly twice what we've seen the past couple decades.

Up until the past few months, power company stocks really weren't getting any credit for the uptick in demand. Since then, we've seen big gains in stocks like Constellation, Vistra Energy and NRG--and this summer NextEra Energy--as investors have apparently decided these companies beneficiaries of AI growth.

My view is AES, Brookfield, Clearway and others will eventually see that benefit. Right now, however, they appear held back by politics--mainly the fear that a second Trump Administration would shut down
John C
2:30
Good afternoon.

You have stated many times that we are still in the early innings of the oil and gas boom.
Considering most of which I hear and read, I am growing concerned as to what catalyst will increase oil and gas prices. Even trouble in the Middle East doesn’t move the price anymore, and OPEC members cheat on production quotas. The last issue of Energy and Income Advisor seemed to not be that bullish. Your thoughts would be most appreciated.
AvatarElliott Gue
2:30
Geopolitical headlines rarely move the needle on oil prices except over the shortest holding periods. In fact, in our trading service, one of our favorite trade set-ups has been to "fade" politically-driven "pops" in the price of crude, such as the drone attacks on Saudi production facilities in the autumn of 2019. Over holding periods of longer than a few days, in my view, geopolitics or events in the Middle East is always a bad reason to buy (or sell) oil. What really moves oil is supply and demand and the last issue of EIA certainly wasn't intended to give a bearish take on oil. I think it's important to think about oil in terms of a short-, intermediate and long-term view. In the short term, markets are worried about the slowing global economy and the potential for that to hit demand; in the intermediate and long-term global demand continues to grow at a healthy clip, powered primarily by emerging markets like India. On the supply side of the equation the outlook is even more bullish. The only OPEC member
AvatarElliott Gue
2:30
that really matters is Saudi Arabia (and a small handful of its Gulf allies). The other members really don't manage their production -- they're production levels depend on their true capacity to produce oil, which is generally below their official quotas. And Saudi has remained very tight, cutting exports through June and likely July. Outside OPEC the main sources of growth are Guyana and the US. Guyana is legitimate, but growth there is pretty predictable as Exxon opens up its project in stages. US production growth is overstated -- our view has been (and remains) that output is reaching a plateau in key regions like the Permian. So, we continue to believe that supports a floor under WTI in the mid $70s and likely a significantly higher plateau for prices over the intermediate to long-term.
Jack A
2:30
Hi Elliott:

The price action of Chesapeake Energy and EQT, our major natural gas holdings, has been disappointing. Do you see much of a change?. Also, despite the price of oil decreasing, we're seeing a rise in the value of our oil exploration and production companies, what do you attribute this to?

Thanks
AvatarElliott Gue
2:35
CHK and EQT are mainly following the front-month price of natural gas as that's what tends to drive sentiment. However, we continue to see much healthier gas prices into 2025 as new LNG export capacity opens up and production tails off due to shut-ins and deferred turn-in-lines. Even at $3.50/MMBTu long-term gas price assumptions we see significant upside for both CHK and EQT using our discounted cash flow valuation technique. Broadly, I think that energy stocks always have some commodity leverage of course but what you're also seeing is the group benefit from rotation out of the erstwhile dominant leaders -- tech and the Mag 7 -- into formerly laggard groups like energy and financials. In my view that can continue for some time because tech has just become too dominant in the S&P 500 and there are too many institutional managers overweight the group, so when they reduce their holdings in favor of other groups you get relative strength for energy/financials.
AvatarRoger Conrad
2:30
Continuing Dan's question: That a second Trump administration would shut down renewable energy in the US with repeal of wind and solar tax credits.
2:32
I would just point out that renewable energy stocks were the top performing energy group during the first Trump Administration, while oil and gas was among the worst. Also, they've switched places during the Biden Administration, with renewables sinking and oil and gas the top performing sector beating even big Tech.
2:33
That's not the say the Trump Administration didn't try to do what it could for oil and gas, or that the Biden Administration didn't favor renewables. But politics matter a lot less than you might think.
Clint W.
2:38
Hi Roger and Elliott.

What are your latest thoughts regarding NEP? Is it time to move on? The recent earnings call seemed to emphasize they are only sticking with the projected growth rate of 6% “for now” and “all options are on the table”. The CFO seemed to dodge a question asking him how confident he was regarding being able to address the cost of capital issue.

Thanks for hosting the chat.
AvatarRoger Conrad
2:38
Hi Clint. Thank you for joining us! As you probably gathered from my comments on NextEra Energy Partners during this chat, I think the stock is pricing in a dividend cut of at least 50% at a time when management still has numerous options to avoid one--and in fact to keep raising dividends.

I would also not try to parse management's words too finely from the guidance calls this month and last month. I think it's been very consistent: They think NEP will again be able to raise capital on economic terms and--with asset sales essentially giving NEP until the end of 2026 to do that--management intends to be patient and opportunistic.

Is there a risk of a dividend cut? Absolutely. Is it inevitable--absolutely not. And again the stock is pricing in a pretty big one already, so avoiding one means a lot of upside to the share price in addition to the huge (and still rising) current dividend.
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