You are viewing the chat in desktop mode. Click here to switch to mobile view.
X
Return toEnergy & Income Advisor
8/13/20 Conrad's Utility Investor Live Chat
powered byJotCast
Prev Page View Full Chat Next Page
AvatarRoger Conrad
2:09
As I’ve said, I don’t think there’s anything inevitable about a dividend cut. But avoiding one means management is going to have to simultaneously accomplish several things.
 
First, it needs to complete the planned CAPEX for this year and bring next projects on stream as anticipated. That will allow the company to meet the target of just $1.3 billion CAPEX for 2021, with only $500-$700 million in 2022 if needed.
 
Second, it must meet its 2020 EBITDA outlook of $10.2 to $10.5 billion, which management did affirm following the release of Q2 results. That means the “signs of recovery" management pointed to in the earnings call have to hold. Third, it has to execute on operating cost cuts, adding to the $200 million achieved so far this year. Fourth, it has to be able to continue to access capital markets on reasonable terms, which it’s still able to do with bonds of May 2050 yielding 5 percent to maturity.
2:10
Finally, I think it has to win the court battle to avoid a permanent shutdown of the Dakota Access Pipeline. The pipeline is still running, pending testimony by the US Army Corps of Engineers regarding another environmental impact study.
 
DAPL was only 3 percent of Energy Transfer’s 2019 EBITDA. But losing its steady stream of revenue would put more unwelcome pressure on leverage, which now stands at 5.1 times EBITDA, and therefore the company’s barely investment grade credit rating.
 
My view is odds favor a legal solution that allows DAPL to keep running. And in any case, Energy Transfer is certainly pricing in a sizeable dividend cut already. But as with any stock drawing a Quality Rating of less than B, anyone who owns shares must acknowledge the risk of a dividend cut.
Q. Any new thoughts on Enterprise Products Partners (NYSE: EPD)? Seems like it is "falling of the cliff"?—Ronald A.
 
A. Hi Ronald. I think Enterprise is actually managing a very difficult environment for the North American midstream sector about as well as could be expected if not hoped. Q2 numbers were certainly far from the best we've seen in this company's history. But they were also far from a total disaster with distribution coverage still 1.6 times. The company also was still able to execute $2 billion of CAPEX--roughly $1.85 billion on new assets that will increase future cash flows as they enter service. 
 
The recovery in Enterprise’s system volumes later in the quarter extended in July and apparently continues in August. And while refining customers still run about 20 percent below pre-Covid-19 fallout levels, volumes at the company’s NGL (natural gas liquids) fractionators in July were averaging 107 of pre-pandemic levels.
That's in large part from new contracted assets brought into service this year. And it demonstrates Enterprise is still executing a long-term growth strategy that will increase its dominance in what’s now a mature industry, which increasingly appears to be entering a cyclical upturn.
 
The third benchmark we've set for holding onto energy companies/recommending buying more is maintaining balance sheet strength. And here too, Enterprise is beating the bar. The bond market certainly agrees: Bonds maturing in January 2060 yield just 3.47% to maturity. That’s pretty low cost money for 40 years. In fact it's about as cheaply as this company has ever been able to borrow.
 
Bottom line--Enterprise isn't falling off a cliff as a business. And potential upside for shares is huge in coming months, as the company increases its scale and scope and the North American oil and gas cycle turns up.
Q. I noticed you don’t have Capital Power Corp (TSX: OTC: CPXWF) covered in the Utility Investor. It pays a great dividend and the numbers look ok. Too risky or is it OK?—John M.
 
A. Capital Power is definitely a stock I could cover in the Utility Report Card coverage univers. The fact it's primarily TSX traded and only sells OTC under a five-letter symbol ending in "F" would likely be a turnoff for some readers. But the yield is attractive, the balance sheet is investment grade (BBB-) and the business plan is conservative.
 
Basically, the company owns long-term contracted power generation assets. That now includes the Decatur Energy Center in Alabama that it recently re-contracted for 10 years. The company has also begun moving into renewable energy, which is the future for growth in its business. And Q2 results were generally solid as well, with earnings avoiding Covid-19 fallout.
 
Thanks for the suggestion. I will be considering adding Capital Power to Utility Report Card coverage. Feel free to suggest
2:11
other names as well.
Q. Hi Roger. Here is an oldie but goodie I still have from the old days, PRBZF. While you can still get current TSE quotes for PBH, the OTC listing, PRBZF, seems to have become inactive. I haven’t been able to get a quote for about a month. The last quote shown is 7/13, but that didn’t change from the previous two weeks. Any idea what is going on here? PS I first bought PRBZF from the old (I think) Canadian Edge on 9/4/2013. Since, it has produced a 29.7% IRR. A nearly 30% compounded return for the last 7 years is the kind of stock I like. Thanks--Cuper

A. Premium Brands Holdings is another of those growing franchises I picked up on in Canadian Edge and doesn’t really fit into Conrad’s Utility Investor. Thanks for bringing it back up again.
They're primarily known in Canada and adjacent US states, and not so much outside that. But the brands they have are quite solid, which have kept their financial results that way consistently. The fact that Q2 revenue was actually 3.3 percent higher than a year ago is a pretty good testament to brand strength as well as leverage to the "eat in" trend. They know their market. And the acquisition-led growth strategy that attracted me to it at CE all those years ago has continued to be successful. 
 
Premium Brands’ “PRBZF” symbol is still active, though volume is sparse. The 5-letter symbols ending in “F” are really just the Toronto Stock Exchange shares as they trade in the US. There’s really not a liquidity issue, since plenty of trading went on at the TSX—it’s just no one traded it in the US under the OTC symbol. Nice job on sticking with this one.
 
 
Q. Roger--I have been with you forever as a subscriber. You have delivered some home runs and almost no whiffs over the years. In my 70's, I have a nice dividend stream thanks to you. How much of an allocation to Gold would you recommend? The US budget deficit concerns me a bit. Sincerely.—Don C.
 
A. Thanks Don. I’m glad the advice over the years has helped, and I hope it will for many years to come.
 
As the father of three, I am also concerned about the size of the federal deficit, which I’m afraid is only going to get larger the next few years. Some of that is likely to be spent on needed infrastructure improvements in this country no matter who wins November elections, which is why I mentioned MDU Resources (NYSE: MDU) again in the August CUI as a buy up to 27. The construction and materials business is really taking off now, demonstrated by the numbers it put up in Q2. And a federal initiative such as Minnesota is starting up on the state level would only fire up everything a lot more.
2:12
Regarding gold, it’s always been a piece of my personal portfolio—though rarely more than 5 percent or so. If anything will do well when America finally pays the price of not balancing our books, it will be gold, which has held its value so long as there have been markets. But if history tells us anything, it’s that gold prices and gold stocks move in anything but a straight line.
 
We’ve certainly seen that this year with the performance of the VanEck Gold Miners ETF (NYSE: GDX). And we’ve recently been successful trading in and out of it in our Pig Versus Bear trading service.
 
I think if you’re going to own something like GDX—or its major gold stock holdings like Newmont—you’ve got to resolve to take one of two approaches and stick with it. First, you can trade it as we do in PVB, selling in a disciplined way when stops are violated or preferably when profit targets are reached. Or you can simply buy and wait, riding out the ups and downs that are to be expected until the real drivers kick in.
Right now, gold prices appear to be responding negatively to a “risk on” shift by investors. That is, the past few days money has shifted to “growth” stocks as a way to ride the stock market higher, and shifted out of investments like gold that are considered disaster hedges. That may push prices lower in the near term, though it may not prove all that long lived as a trend given how uncertain the macro environment is right now.
 
In any case, that’s primarily a concern of traders, rather than investors betting on a much longer-term trend with gold. For more on gold and other gold investments, I would suggest checking out our coverage in our Deep Dive Investing service.
 
If you’re interested, please call our client services director Sherry Roberts anytime from 9-5 eastern time, Monday through Friday at 1-877-302-0749.
Q. Roger. I have a question about a REIT. What do you think of Preferred Apartment Communities Inc (NYSE: APTS)? Thanks—Arthur W.
 
A. It’s a residential REIT I added to coverage in my “REIT Sheet,” following a webinar I held for subscribers earlier this summer. The residential/multi-family sector has historically been resilient during economic downturns and the stronger players like AvalonBay Communities (NYSE: AVB) have generally proven up to the test so far.
 
Preferred Apartments has a somewhat different business model that includes holding loans. And it’s proven somewhat less resilient this cycle, with the REIT cutting its distribution for July from 26.25 cents to 17.5 cents.
The challenge landlords face now is simply rent collections. Those that have focused on higher quality properties and higher income tenants are generally collecting on time. Those renting further down the income scale, however, have faced non-payments. And in many areas, the law has barred them from evictions.
 
I’ll leave aside the argument of whether such government actions will ultimately prove helpful or harmful. But from the point of view of affected landlords, it’s a major potential threat to solvency in some cases. And it’s made residential REITs a place for investors to tread very carefully. That’s especially the case for Preferred Apartment, which also owns grocery anchored retail centers and office properties.
 
The good news is the company appears to now be collecting 99 percent of multi-housing, 82 percent retail and 99 percent of its office portfolio rents. That’s strong backing for the reduced dividend. Bottom line is I’d rate APTS a hold at its current price.
2:13
Q. Hi Roger. Can you comment on why Dominion Energy is worth buying or holding? With their energy assets sale to Warren Buffet will be drastically reducing their dividend from $3.76 to $2.50. Not good for an income investor.
 
It seems [D] has decided to abandon their energy assets in hopes of becoming another Next Era Energy which I believe will take a long time unless they go out and aggressively buy existing assets similar to SCE&G which was a distress sale opportunity purchase. Perhaps they would go after Santee Cooper once they close with Buffet.
 
I also read an Internet piece that indicated it will take 15 years for Dominion to recover to the same level of profitability. Is this and the slashed dividend not going to cause a drastic drop in the stock price? Would it be better to sell now giving up the last higher dividend in September and possibly buying the stock back when it crashes $10 or $20 a share? Kind regards—Jim C.
A. Hi Jim. On July 6, I penned an Alert “Addition by Subtraction: Dominion and Duke Shelve the ACP.” My first point was that Dominion’s sale of its natural gas midstream assets to Berkshire Hathaway was at an amicable price for both sides of roughly 10 times trailing 12 months EBITDA. For example, it compares to an EBITDA multiple of less than 9 times for Enterprise Products Partners. I believe that made it a good deal for both partners.
 
Second, I noted shedding the Atlantic Coast Pipeline and the midstream assets would reduce Dominion’s long-term operating risk considerably. Despite a successful appeal to the US Supreme Court that upheld a Forest Service permit, ACP still faced considerable additional legal challenges before it could even begin construction. And unlike when it was first announced, the project had become controversial in Virginia.
That meant almost certain additional delays and cost increases, as well as uncertainty that would hang over the stock potentially for years. Dumping the project did bring some pain in a $2.8 billion writeoff in Q2. But that was hardly fatal for a company with $111 billion plus of enterprise value. And again, the decision shed a great deal of potential operating, legal and regulatory risk. So did the sale of the midstream assets, which are basically ownership stakes in several large natural gas pipelines.
 
As I’ve pointed out, selling the natural gas midstream assets also eliminates a fair chunk of earnings. And Dominion has drawn clear line for how much by reducing its projected 2020 earnings guidance to $3.37 to $3.63 per share, down from a previous $4.25 to $4.60. It’s also downsized its dividend to the lower earnings range, with one more payment of 94 cents on September 20 and then a cut to roughly 63 cents starting in December this year when the midstream sale is completed.
That’s painful and for disclosure purposes I have been a Dominion DRIP holder for many years. But it’s also now very old news for investors, so I would heartily disagree that a drop in shares is inevitable when the dividend cut comes. And I would also offer you several reasons why I think Dominion shares are likely to go a lot higher in coming years, despite paying a lower dividend next year.
 
First, this deal simplifies its story, though I think the better comparison is with a company like Xcel Energy (NYSE: XEL)—which is a company set to grow earnings at a mid-single digit rate by rate-basing renewable energy. That is they’re making investments in grid upgrades, EV charging infrastructure, renewable energy and storage that go into rates and earn what amounts to a guaranteed return of 9 to 10 percent on equity.
Dominion has announced some $55 billion in Virginia renewables investment alone through 2035, and a total of $22 to $23 million over the next five years on its system. Again that will pretty much be all rate based in very supportive state regulatory environments, mainly Virginia and South Carolina but also Utah and North Carolina.
 
Shedding the midstream assets frees up the company to focus on that investment, which is expected to accelerate Dominion’s annual earnings and dividend growth to mid-single digits. Using the target 6.5 percent growth rate for the payout, it will take the company a little more than six years to reach the dividend level it pays now. And it will be more than 10 years for it to catch up to the dividend paid, had the company been able to keep growing the payout 2.5 percent a year over that time.
2:14
Ironically, the higher growth rate off the lower payout level will also be much more secure than the lower growth rate off the higher payout level. That’s because rate based utility investment growth is far more predictable and stable than midstream investment—which has never been at greater risk as we’ve seen from the ACP’s cancellation and the court threat to the Dakota Access Pipeline staying open after running safely more than two years.
 
I admit I didn’t like the dividend reduction. But it’s also true that the move has been favorably viewed by credit raters as reducing operating and financial risks, with S&P boosting the outlook on the BBB+ rating to positive. And after an initial selloff on the news, the stock market is now viewing the move favorably as well—Dominion now trades at 22 times the reduced 2020 guidance versus a previous mid-teens multiple. And that’s still below Xcel’s 26 times, so there’s room for upside there as well.
Bottom line: Dominion’s yield next year will be lower. But the stock will also be arguably much safer with its regulated utility focus and faster growing as well. It’s possible the company will add Santee Cooper, which would nicely complement the purchase of the former SCANA. And I think a mega-merger with Duke Energy could also be in the cards, depending on how the latter resolves its coal ash waste challenges in North Carolina.
 
But even if neither happens, my view is Dominion can still deliver rapid high quality growth though its huge investment opportunity in Virginia, which is now committed as a state on a multi-year basis to an aggressive energy transition. And it’s likely to have the same in South Carolina in coming years.
A lot has changed at this company for sure—but I’m keeping my buy up to target at 85. And again, the market has already reacted to Dominion’s restructuring. There could be a retreat in the stock of course, especially if the market’s rally ends. But don’t expect a big decline in this stock on the basis of old news the market has already processed
Q. From what I see of the results AGL Energy Ltd (AGLNF) and its CEO Brett Redman reported this week, this company seems to be changing rapidly and hopefully coming a better stock. Can you provide your opinion?—Christopher B.
 
A. AGL is an Australian power company I’ve followed since I was senior editor of an advisory called Australian Edge. It’s been a member of CUI’s Aggressive Holdings since December 2013 with generally good results, thanks to consistently generous dividends. Management also had the foresight a few years ago to bet on higher natural gas and electricity prices resulting from the rapid increase in that country’s LNG exports to Asia.
 
In retrospect, we could have booked a very substantial profit in this stock a couple years ago. That’s when it first became evident that the Australia’s ruling National/Liberal party coalition was not happy with management’s push to renewable energy. And after the government narrowly won re-election, it’s continued to squeeze power companies like AGL to cut customers rates, a process that’s speeded up with Covid-19 fallout hitting the economy.
 
We saw the impact in full in AGL’s fiscal year 2020 results (end June 30) and especially in its cautious forecast for the next 12 months. There are some very clear signs the companies is both navigating this environment and improving market position for the long term. Those include declining customer churn, an increase in customer numbers in part with the integration of Southern Phone’s broadband service, improved safety metrics, revamped big data-enabled customer marketing/service and considerable success adopting renewable energy and battery grid-level storage
2:15
technology.
 
All of these moves are setting the stage for enhanced profitability as the Australian economy cycles out of its pandemic recession. And management will declare “special dividends” in fiscal 2021, which will prevent its payout from following earnings lower in what will very likely be a bottom year.
 
Under CEO Redman, once openly hostile relations with the National/Liberal party government appear to be at least cordial. With hindsight, it was a mistake for me to believe AGL could resist federal government pressure and push ahead with an energy transition in Australia the way US utilities have a the past four years.
 
Before this announcement, my expectation was AGL would report weaker numbers due to the combination of reduced retail demand, government rate controls and lower wholesale power prices. I also thought management guidance would reflect the expectation of continuing difficult conditions well into calendar year 2021, but that low valuations were already reflecting that likelihood.
 
As it’s turned out, news and guidance were apparently actually worse than consensus and shares have dropped a bit since the announcement. My view is AGL shares are likely to rise from here. For one thing, they’re back to a level where there’s been substantial insider buying this year. And we’ve seen our first bearish-to-bullish shift by one of the 13 research houses covering the company.
 
But at this point, like all well run utilities, the company has learned to adapt to a regulatory environment where the federal government is pushing aggressively one way and the states another. And by remaining financially strong despite the negative impact of a horrific bushfire season on top of Covid-19 fallout, AGL has proven its long-term resilience.
 
I’m not a believer in doubling down or chasing a falling stock you already own lower. But there’s nothing in the earnings news or guidance to shake my view that it’s only a matter of time before the ADRs we own in the Aggressive Portfolio are trading above our highest recommended entry point of 18.
2:16
Whew!. Well those are my answers to emails received. Now let's get to some live ones.
Bonnie
2:22
I am wondering what your outlook is with SJI and D.    SJI is down in my portfolio right now, and I am thinking of buying more shares.   I also added XOM to my portfolio when the price of oil went way down.   I believe you have XOM as a buy on the Utility Report Card, but it is not in any of the portfolios, and I wanted to know why or if you are considering adding XOM?
AvatarRoger Conrad
2:22
Hi Bonnie. South Jersey Industries is I think attractive now for several reasons--though you'll have to make the judgment on how much you want to  own to stay diversified and balanced. The yield of nearly 5% is very competitive and safe, with management reaffirming guidance of $1.50 to $1.60 per share for 2020 after reporting what were pretty solid Q2 results this month. And I look for another low single digit increase to be announced in November after Q3 numbers are in. The company at $2.4 bil market capitalization remains a perpetual takeover candidate. Decoupling of natural gas sales from revenues removes a very big risk at the regulated utilities, which continue to grow by adding customers (mostly conversions from heating oil and propane) and system modernization investment--which is automatically recovered in rates. It's also a cheap stock at 14.4x projected 2020 earnings.
AvatarRoger Conrad
2:25
Regarding Dominion, I answered an email question on the company about two back in the emailed Q&A. Suffice to say, I think the new direction as an electric company with $22-$23 bil in 5-year rate based growth investments--shed of the natural gas midstream risks--is a good one. And the lower dividend to be paid next year is already well in the stock, while speeded up dividend growth and a likely higher valuation to match peers is not. Still a buy up to 85.
2:26
Finally, for ExxonMobil, I probably will not be adding it to any model portfolios--as we already have Chevron in the Top 10 DRIPs. I will continue to cover it in the Utility Report Card and I believe it is a value at the current price--still very much a fan of the super major business model as I wrote in the August issue. XOM is also a Portfolio holding in Energy and Income Advisor--which obviously has much more coverage of oil and gas companies than does CUI.
Lynn H.
2:33
Hi Roger!  I'm one of your OLD TIME subscribers and I bought Enerplus Corp (ERF) back when you recommended it in your Canadian letter. I remember you had said it was a good one and it's weathered many storms... but it's sure looks like it will never return from the "dead" this time. I'd appreciate your thoughts on this stock-- something I wish I had sold ages ago!
AvatarRoger Conrad
2:33
First of all, thank you for being an OLD TIME subscriber. I truly appreciate it.

I think Enerplus still has very good assets in the Bakken (oil) and Marcellus shale (natural gas). And it's done a very good job of growing reserves and cutting costs in those places, while preserving overall financial strength by self-financing CAPEX and dividends without taking on a lot of debt. There's CAD797 mil in untapped credit lines and no maturing debt this year--with just CAD58 mil next and CAD27 mil in 2022--which is very much thanks to such conservative financial policies.

Like other North American energy companies, they are contending with low realized selling prices as Covid-19 fallout has sapped demand and there's a supply glut especially of natural gas. They're also at risk if the Dakota Access Pipeline is shut by the courts, though management says it can ship by rail if needed.

But this company is a survivor and management has also reinstated 2020 guidance. I think it's still worth holding.
Lee
2:38
Roger will you repeat the Conversion feature of the Centerpoint  Enegy pref.
AvatarRoger Conrad
2:38
Yes. I highlighted the particulars for this mandatory convertible preferred in the June 10 Alert "Swapping Suburban Propane Partners for Centerpoint Preferred B (NYSE: CNP B). The basics are this preferred will be converted into common shares of Centerpoint Energy (NYSE: CNP) on September 1, 2021. The “depositary shares” traded NYSE will be swapped for between 1.5291 to 1.8349 shares of the common. Investors get maximum shares if Centerpoint common then trades at $27.25 or less. You get the minimum if its price is $32.70 or higher. If the common trades somewhere in between, the number of shares received adjusts to reach a conversion value of $50.

Bottom line is the further Centerpoint shares rises, the greater the value of this preferred at the mandatory conversion. And of course we get a dividend of 87.5 cents a quarter versus 15 cents for holding the common now.
Paul
2:54
I am looking to move money from IRA to
Roth.  I would like to something depressed now with a good chance of going up in a few years.   I am thinking maybe OKE.  Do you have a better suggestion?
AvatarRoger Conrad
2:54
I thought ONEOK gave us quite a bit of good detail on its business health in its Q2 earnings release and guidance call. And while Q2 numbers were as bad as I thought they'd be--maybe even a bit worse on EBITDA--I thought they provided sufficient evidence that throughputs are rebounding and costs coming down fast enough for them to keep paying the current dividend rate of 93.5 cents the rest of the year. That said, I also think they carry by far the most dividend risk of any of the 40 stocks in the CUI Portfolios. I do think this is a stock that could easily be triple where it is now in a couple years--on the other hand, if DAPL shuts for good and enough Bakken producers abandon the area as some fear, it could easily be a mid-teens stock then as well.

I highlighted the stocks now trading under Dream Buy prices in the August CUI Feature article toward the end. I think all of them are also deeply undervalued, so you might want to consider them as well for a high reward/higher risk investment: AGL Energy
AvatarRoger Conrad
2:54
China Mobile are two with AT&T today under its Dream Buy price of 30.
Hans
3:01
Any reason for the drop in HASI today?
AvatarRoger Conrad
3:01
A Bank of America analyst cut the stock to "neutral" from buy, apparently on a valuation basis. I would agree. This is a high quality stock in a fast growing business--lending and otherwise investing in renewable energy and energy efficiency projects both behind the meter and for the grid. A couple years ago, management has demonstrated its ability to take a punch from volatile interest rates while preserving dividend and balance sheet strength and investing for the future. And the business model has proven far more resilient to Covid-19 fallout this year than I thought it would--with Q2 results quite robust.

I highlight the key points regarding Hannon Armstrong's Q2 results and guidance in Utility Report Card comments this month, and they are impressive. At this point, however, it's still well above my highest recommended entry point of 28--effectively a hold until there's a dip or more growth in the dividend.
Connecting…