JotCast | 7/31/24 Capitalist Times Live Chat

Return to

7/31/24 Capitalist Times Live Chat

powered by

Prev Page View Full Chat Next Page

JT

2:43

Hi Elliott, you mentioned in the past about the seasonal pattern for natural gas to be bullish between 7/21 to 9/15. Do you see it setting up to be another bullish move this year between those dates?

Elliott Gue

2:43

From a trading perspective, front-month gas prices do tend to rally in late summer and early fall. The problem this year, as we outlined in the last issue, is that storage remains elevated and we're likely to reach the end of injection season (early November) with above-average gas in storage. So, I continue to think front-month gas prices find support around $2/MMBtu but struggle to put in a rally towards $3/MMBtu this summer and early fall. The big catalysts I'm watching include: 1. The potential for more production declines due to low prices that could help rebalance storage later this year. 2. The potential for La Nina to drive a colder winter that kickstarts demand. 3. LNG export capacity opening up in H1 2025. Currently, the 12-momnth calendar strip for gas is $2.90/MMBTu and I think we'll need to see that rise above $3.50/MMBtu to catalyze a rally in the gas stocks like EQT and CHK. I'd expect that to happen at some point in the second half of this year. But, I do think the near-term storage situation

Elliott Gue

2:43

will tend to blunt any normal seasonal patterns.

Dan N

2:46

Hi Roger - your early thoughts on the possible Maui wildfire settlement? Is the market guessing on the value of HE after the price popped, or is there more clarity now?

Roger Conrad

2:46

The potential global settlement became public knowledge in mid-July. Since then, Maui County has authorized a settlement with as yet undisclosed terms, but with what has been leaked suggesting Hawaiian Electric will be on the hook for about $1.5 bil and other parties the rest.

That's obviously a lot less than the $5.5 bil in total claims currently filed against the company. And in my view, it suggests the as yet undisclosed conclusions of the US ATF investigation are at worst ambiguous and at best back up the utility's contention that there were two fires that day--and the one causing the loss of life and damage ignited after its power lines were de-energized.

The ups and downs of HE stock over the past week or so reflect the rise and fall of investor expectations of a definitive settlement--fueled in part by Wall Street Journal coverage. But the bottom line here is the same as it's been for several months: Mainly, the state is committed to keeping Hawaiian Electric financial whole and able to execute

Roger Conrad

2:49

Continuing with Hawaiian Electric: able to execute the state's ambitious plans to harden its grid and convert to 100% renewable energy by 2040. That won't happen without a healthy utility. So I expect a settlement, probably by the end of Q3 and possibly by the time HE announces earnings August 9.

Pamela

2:52

Question Regarding the Mandatory Merger of Enerplus (ERF) and Chord Energy (CHRD)

Hello Roger!

I’ve held ERF ever since the days of your “Canadian Edge” publication. I should have sold it long ago, but I missed my opportunity… but amazingly, it came back in these past few years, and around June 3rd of this year, suddenly, I found it had merged with Chord Energy (CHRD), along with a cash payment to ERF share holders.

I don’t know anything about CHRD, but it’s chart looks good and after a little research, it looks like a good stock to hold.

What is your take on this merger, and what is your opinion of CHRD?

Thanks

Roger Conrad

2:52

We have picked up Chord Energy in Energy and Income Advisor in our Canada and Australia coverage universe, where the former Enerplus was tracked. We currently rate it a buy at 170 or lower.

The combined company pays a much higher dividend than Enerplus did on its own, though it is variable and in large part linked to energy prices. Q2 earnings are August 7, at which time it will declare another payment. The assets are good, finances solid and we think it will go a lot higher as this energy upcycle continues.

Denisimo

2:59

Elliot/Roger:

Thanks for doing these chats. They are the highlite of my month !

I see OKE is now well above (mid 80's) your recommended buy-in price (below 70).

Is it time to take some profits?

And... isn't there a merger coming up ?

Roger Conrad

2:59

Thank you Denisimo. We enjoy them as well--always great questions and comments.

ONEOK Inc (NYSE: OKE) has been one of the top performing North American midstream energy companies since closing its acquisition of the former Magellan Midstream last September. Our view is this deal added needed scale for both merger partners that would increase free cash flow and investment opportunity. And they've delivered on dividend growth projections as well.

As you point out, the stock is above our highest recommended entry point of 70 for some time. The company will release earnings August 5 and may give us reason to raise that level. At this point, we see better value in our other midstreams. But we would also expect this stock to move higher by the end of the cycle and it's not at a profit taking point yet,

Don

3:02

Elliott—I have been following Adams Natural

Elliott—I have been following Adams Natural Resources Fund (formerly Petroleum & Resources—PEO) for years. A closed end fund, it is trading at a discount of 12% to net asset value. Also, their new dividend policy is to pay out 8% per year. Would this be a good income holding for an old codger such as I? Thanks for the great work that you and Roger do.

Elliott Gue

3:02

I wasn't familiar with that one, but just took a quick look. In terms of holdings, the top 3 are Exxon, Chevron and ConocoPhillips, which account for upwards of 40% of the fund and 25% in XOM alone. My favorite of the supermajors is XOM because of its superior growth prospects; I also respect the fact they "zigged" while the rest of the industry "zagged," increasing their investments in key growth projects like Guyana at the lows of the cycle. That said, all of those top holdings are decent energy names. I guess my main issue here is that none of these stocks yield close to 8% -- XOM is at 3.2%, CVX at 4.1% and COP at less than 3%. It appears PEO doesn't employ leverage, so the only way I can see them meeting their distribution target is by selling off some of their holdings, realizing gains and then distributing those gains to holders. That's a little bit like the farmer that eats their seed corn in my view. The fund does trade at a discount to NAV, but the average discount over the past 12 months is 15%+,

Elliott Gue

3:02

so the current 12.2% discount is actually a bit lower than normal. So, the way I'd put it is that I don't see any holdings in there that are terrible, so the fund is likely to perform in line with the S&P 500 Energy Index. However, I am just not a big fan of that 8% minimum distribution target if it means they're selling down portfolio holdings to make distributions.

George

3:04

What's going on with AES?

Roger Conrad

3:04

AES Corp will release its Q2 results tomorrow. I will have a recap of what's important from the numbers and guidance call in the August issue of CUI, posting on the 5th. But at this point, there's no reason not to expect them to affirm guidance for 2024 and longer term--with AI-enabled data centers driving demand especially in the US.

As I indicated answering an earlier question, I think there's still a lot of misplaced fear that any company with renewable energy exposure would be at risk in a second Trump Administration. But again, I would point out that renewable energy stocks were top performers in the first Trump years and have been abysmal during the Biden Administration. AES is growing and shares are priced at just 9.3X expected next 12 months earnings.

Pamela

3:12

Hello Roger,

And once again thank you for hosting these webinars.

I am confused as to why Artis REIT has collapsed so spectacularly. What do you attribute this too, and do you think this stock is worth holding onto?

Also, Algonquin … another “collapse“ and should I just dump it?

Your thoughts?

Thanks again

Roger Conrad

3:12

Hi Pamela. Canadian REITs in general have underperformed this year because of concerns about the Canadian economy in large part--and US prices have also taken a hit from weakness in the Canadian dollar, now at only about 71 US cents. Artis is actually pretty flat this year. But it is down substantially from mid-2022, I think in large part because investors haven't yet warmed up to strategy of operating as a "portfolio" rather than conventional property owning and managing REIT. For example, Artis owns 13.9% of Dream Office REIT (TSX: D-U), a REIT that's had its share of ups and downs. I unloaded Artis from the REIT Sheet Recommended List some time ago but I actually think management is doing a pretty good job and risk is fairly low at this point--while the yield has become increasingly attractive at almost 9%.

As for Algonquin, earnings are August 9. It's a comeback story with some work to do. But it appears to be on the right track with debt reduction and the dividend is covered by utility operations.

Alex M.

3:13

This is more of a comment than a question: How the heck can the government keep reporting that inflation is coming down when important costs like my homeowner insurance just went up by over 20%? I've never filed a claim nor do I live in a high-risk area. Many friends and family in various parts of the country are reporting the same thing with car insurance, property insurance, and other forms of coverage. Are personal insurance policies excluded from economic inflation calculations? Thanks.

Elliott Gue

3:13

To answer your question, insurance is included in most inflation calculations. Homeowners and renters insurance have a 0.43% weight in CPI and auto insurance looks like it's around 3%. So, while those costs are in there, they're small enough they can get dominated by bigger components of CPI.

As to your broader point, I generally agree with you. I remember back in the 1990s when I spent considerable time looking at various inflation measures in the US and Europe. And the tendency has always been for economists to "adjust" incoming inflation data to exclude various components. The problem is that when you start excluding particular items you can basically generate any number you'd like too. Obviously the Fed is guilt of this too as they often highlight particular nonstandard measures of inflation when setting policy like "Supercore" inflation. So, while inflation data is important to monitor because it impacts policy, I don't think there are any completely satisfactory measures out there.

Roger Conrad

3:13

I intend to stick with Algonquin as its comeback unfolds and I think the price will reach double digits again in the next 12-18 months.

JT

3:17

For the CW portfolio, do you recommend that we re-invest dividends back into TLTW? I have held it for some time, and I have watched the value of the shares fall due to distributed dividends and the fall of bond prices. However, when you report returns of TLTW, it includes dividends and makes we wonder if I should take all the dividends I have received thus far, and buy more of TLTW.

Elliott Gue

3:17

For purposes of portfolio return calculations, I assume readers just add the TLTW distros to their cash account, preferably held in an interest-bearing account. I include the distributions in the return on TLTW because they're (by far) the most important source of returns from the ETF over time. I generally don't recommend reinvesting distributions in CW -- I simply include that in the model portfolio cash allocation and then look to allocate it to new opportunities or to boost the size of existing holdings. Generally I'd rather decide where to add distributions rather than mechanically reinvesting them in the same stock or ETF.

JT

3:27

Elliott, BKR stock price is performing better than its peers SLB and HAL. Can I get your thoughts on this relative performance and whether there is something going on that makes BRK a better investment than SLB? Time for a change in leadership? SLB has been a laggard.

Elliott Gue

3:27

BKR's natural gas business has been doing well thanks to the build out of LNG capacity around the world. Indeed that's the main reason we recommended the stock. Also BKR has done well over the past couple of years due to "base effects" in the sense the stock got slammed two years ago amid concerns about their exposure to Russia. It's still a name we like of course. However, if you look at returns through the ongoing energy up-cycle, SLB hasn't been a laggard. Indeed, since the end of 2020 -- a decent start date for the cycle -- SLB is the best performer of the big services names +136% vs 105% for BKR and 93.4% for HAL. We continue to think concerns about SLB's international growth are overblown and that it remains among the best-placed services names as we move through the cycle.

Dan N

3:33

Roger, I saw the Vineyard Wind farm got shut down due to blade breakage, and I read that there is now deeper investigation into the parts etc. How many other operations could be impacted if this defect risk is found to be systemic? CVOW, for example?

Roger Conrad

3:33

Hi Dan. Vineyard's broken wind turbine blade has given the offshore wind sector a black eye in the US, just as development appeared to get a second wind. And I think projects are likely to face tighter regulation as a result. The fact that fiberglass fragments washed up on a Nantucket beach frequented by wealthy Americans likely means Vineyard's developer Iberdrola SA is going to be challenged to ramp up output at the facility, and it may delay its New England 1 & 2 projects as well.

That said, however, these are not first mover projects. And offshore wind facilities have now been operating around the globe in numerous locations, including more than a few with far harsher conditions like the North Sea. GE Vernova has launched its own quality control investigation, in addition to the ongoing federal probe of what caused the accident. But these are machines with a track record of working. And I don't see this as a real threat to Dominion Energy's CVOW at this time,

Roger Conrad

3:35

I do think Dominion will certainly be asked about the Vineyard accident's impact on its earnings call tomorrow. And offshore wind is certainly highly politicized now. But at point, I don't think this will delay CVOW--as it's in the monopile phase.

Alex M.

3:38

Hi Elliott. As the yield curve steepens and un-inverts, do you expect long-term treasury rates (20-30 year) to remain above 400 basis points, or do you expect them to retreat lower as well? Thanks.

Elliott Gue

3:38

I think we're nearing a key point in the cycle I like to call the duration tipping point, when it becomes advantageous to buy longer maturity (longer duration) government bonds as they tend to see the most upside (downside in yields). Historically that happens in a big way when there's a hard landing (recession), but also there's some downside to yields in long duration Treasuries when there's a soft landing as the Fed starts cutting. So, I do think we're headed sub-4% on the 30-year. However, right now this remains more of a key turning point I'm watching for rather than a call I'm positioning for in various model portfolios. In our Smart Bonds service model portfolio, for example, I'm still staying short on duration (about 3.2 years on a weighted average basis in the model) and the only long-duration exposure we have in the model now is TLTW, which is a unique case.

Herm

3:43

OVV reported earning today and appears to have missed on both earnings and revenue. Your comments would be appreciate.

Elliott Gue

3:43

I don't watch earnings for the producers because that's a measure that includes too many non-cash charges to be useful in my view. On a free cash flow basis, which excludes non-cash charges like depreciation and depletion, they produced a little over $400 million in Q4, which was actually very slightly above our forecast. OVV also raised full year production forecasts and the stock is up more than the S&P 500 energy index. All in, a good report and we continue to like the name.

Jay H.

3:43

Sherry-
Please ask Roger for his thoughts on FPI… the farmland REIT. It’s down …. buy more or just hold. I’m down ~15%.
Thanks for everything!
Jay

Roger Conrad

3:43

Hi Jay. Farmland Partners actually had a nice recovery today. The dip we saw earlier this month was in response to earnings. I thought the most important development was management raised the bottom end of 2024 adjusted FFO per share guidance to 20 cents from the previous 19 cents--with 26 cents the upper end maintained. And Q2 AFFO per share was also right in line with the consensus estimate and up from a loss a year ago. Management also reported progress cutting operating costs (-7%) and reduced debt, the result of successful asset sales.

I think sellers were reacting in part to management statements indicating headwinds to the farm economy, though it also said "there is no broad based economic problem" and affirmed an expectation for rent increases with zero bad debt.

Bottom line: As I've said in the REIT Sheet, FPI has the most volatile business of any of the Recommended List. And the yield is on the low end as well. But it's also well run and linked to commodity prices, a long-term positive.

Bill G.

3:49

Hi Roger / Elliott:
Wonder if there is value in buying SMLP as it converts to C Corp.
Thanks

Roger Conrad

3:49

Hi Bill. Our view on Summit is basically that there are far better values in energy midstream. The company hasn't paid a dividend for a while and there's no indication they will after converting to a C-Corp. The company is also quite small, which means it has no scale advantages in a sector that demands them. The recent surge in price is due to excitement about the C-Corp conversion, debt reduction--though Summit still has a rating of just B2 from Moody's--and potential appeal as a takeover target as the company is now almost exclusively focused in the Permian Basin after recent asset sales.

That may indeed happen. But at this point after what appears to have been a vicious short squeeze, that possibility looks well priced in.

nolan01@verizon.net

3:55

Could you explain the Guyana situation with CVX-HES and XOM

Elliott Gue

3:55

In a nutshell, XOM owns the majority stake in a production block offshore Guyana called Stabroek. XOM owns 45% and is the operator, HES has 30% and the remaining 25% is China National Offshore Oil Company (CNOOC). CVX announced the acquisition of HES late last year because they want a stake in the Stabroek project, which has emerged as an exciting, world-class project with 2 dozen+ major discoveries announced since 2015. The agreement between the partners in the project has a "change of control" clause, meaning that if one of the operators wants to sell their stake in Stabroek, the deal gives XOM/CNOOC a right of first refusal to acquire the stake. Normally, such clauses don't apply when an entire company is sold, but would only matter if, for example, HES wanted to sell its stake in Stabroek to CVX but remain an independent business. However, my understanding is that the agreement in this case is a little ambiguous, mainly because when it was signed no one thought Stabroek would amount to much (Shell

Elliott Gue

3:55

actually passed on the deal). So, XOM has stated it intends to enforce the right to make an offer on Stabroek and CVX/HEs have disputed that claim, so it goes to arbitration. At this point, if XOM wins, then I suspect the CVX-HES deal doesn't go through and HED remains an independent player with a 30% stake in Stabroek. XOM might well then decide it wants to acquire HES instead. And, if XOM loses, the deal goes ahead and CVX gets a 30% stake in Stabroek. More likely all parties come to some sort of a mutually beneficial arrangement.

Susan P

3:56

You guys are amazingly helpful and unique in the world of investment advice. Thank you for your hard work and accessibility. I have two utility-focused questions: 1. Given the run-up in many names (e.g., Eversource, Pinnacle West, etc.), any thoughts on the pros/cons of waiting for potential pullbacks to initiate or add to positions? 2. American Electric Power's new CEO and Board member changes stem from Carl Ichan's 1% stake. Do you think he might get as involved as he was with Southwest Gas that ultimately impacted the share price positively. And, if you already addressed these queries in this chat, no need to take more time given the helpful transcript sent out tomorrow. Thanks again.

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