JotCast | 8/13/20 Conrad's Utility Investor Live Chat

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8/13/20 Conrad's Utility Investor Live Chat

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Roger Conrad

4:58

Two things change for ONEOK since the last chat. One was price. The stock shot up in early June and then backed off later that month after management and its investment banks appeared to bungle a stock issue, but it's still well off the lows. The other thing was the court case regarding the Dakota Access Pipeline, which further strained Bakken oil and gas producers and midstreams heavily invested there like ONEOK. As I've indicated in the chat, I still think there's enough here and reflected in the Q2 results and guidance to merit holding on. But I do think dividend risk is higher than it was a few months ago and again the price is not as compelling.

In any case, relative risk is not in the same ballpark with Enbridge Inc--which is far larger, far more diversified both by operations and geographically and much stronger financially. It doesn't yield as much or have as much potential upside as OKE if everything goes to plan. But as my comments on Enbridge earnings in the Utility Report Card show, this company

Roger Conrad

5:01

hasn't missed a beat with its growth over the past year. The CEO in late July also made the statement that his company would be able to work well with a prospective Biden administration. That's in part because it doesn't have any prospective major regulatory issues with the US government the next few years, such as pipeline border crossings like Keystone XL. But if there are new limits place on other owners, it's existing infrastructure will become all the more valuable, including the Line 3 expansion in Minnesota and Line 5 in Michigan. And the company has a growing renewable energy unit as well.

We've made Enbridge Inc a recommendation in our High Yield Energy List in Energy and Income Advisor as well.

Lou E

5:09

Hello, Roger,

Thanks for your excellent guidance this year through extraordinary times.

In the event of a strong victory this November by candidates from the Democratic Party, are there thoughts as to the strengths or weaknesses of any groups or categories of stocks that might cause them to outperform or suffer due to the political change? Examples might include a positive effect on utilities and energy companies that emphasize green power, versus a negative result for those engaged in fracking. How might the investment performance of the pipeline partnerships be influenced?

Roger Conrad

5:09

My strongly held view over the years is that investors need to be especially careful during election years not to let their politics have too much influence on investment strategy. Let's leave aside the difficulty of forecasting election results and the fact politicians often say one thing during the campaign and wind up doing another. There's also the fact that intentions and results frequently don't line up--just ask anyone who bet on coal stocks the last four years. Certainly, the Trump administration has done everything it could to keep coal power plants open and even build new ones by relaxing safe air, water and waste regulation. But the pace of coal plant retirements has gone into overdrive nonetheless, as states have pushed change but mainly the economics of alternatives have improved radically, for solar and wind as well as natural gas.

But with that as a rather long preamble, I have taken a stab at analyzing Biden's current energy proposals, which I shared with readers in the July 17 Utility

Roger Conrad

5:14

Roundup "Why Utilities Might Love Biden's Energy Plan." Basically, I think what the candidate has put together is a list of broad objectives that he can accomplish mainly by executive order and basically rely heavily on utilities and industry staying on the road they're on now. That is deploying more renewable energy--possibly nuclear if Southern Company can bring Vogtle on line as management says--and cutting emissions from natural gas distribution systems. Extending the wind and solar tax credits would help things along and would take an act of Congress to get done. But for the most part, what gets done will simply be to speed up what utilities are already doing with rate base investment--which means potentially faster earnings and dividend growth.

5:17

That's the potential positive--and it could have quite a huge impact particularly if it's combined with some kind of infrastructure spending, which I think is extremely likely regardless of who wins the election in November. The negative for stocks we cover is likely to be more difficulty winning approval for major new oil and gas projects in the US--and possibly the shutdown of some including the Dakota Access Pipeline and infrastructure in the Northeast and California. But there are three very big caveats here.

5:21

First, with the economy likely to be still getting back on its feet next year, a prospective Biden administration is almost certainly going to want to focus on new investment, not forcing widespread layoffs by shutting down existing infrastructure. Second, the primary reason so many projects are getting blocked these days is opponents are extremely well funded. That's a sharp contrast to the Obama years, when federal authorities had no problems issuing permits that stood up for virtually every project proposed except Keystone XL.

5:23

Finally, there's the fact that oil and gas is still very much used and useful. And when existing infrastructure is shut or new pipelines not built, it increases the value of what's still operating--which arguably raises the value of the pipeline and midstream companies we

5:24

have been recommending.

I'll be exploring election issues and their potential impact on coverage universe stocks in the September feature article

Phil B.

5:33

Dear Roger,

As a longtime subscriber, I am well aware of your preference for stock picking rather than investing in ETFs, and I have certainly profited from your picks over the years. That said, I’d be interested to hear your views on how best to profit from the 5G rollout beyond investing in VZ. What are your views on FIVG ETF? Are there domestic equipment makers that will particularly benefit from the present avoidance of Chinese firms?

Roger Conrad

5:33

Thank you for those comments. It's an interesting ETF. For one thing, it's weighted toward a few names that may be more difficult for US investors to buy otherwise, which is one of the main reasons to buy any mutual fund or ETF. I also see it holds Verizon as the number 8 holding at 2.8%, and down the line you have American Tower at 11th, AT&T in 12th and Charter in 14th--so key adopters as well as equipment makers. I think that could conceivably provide some ballast if this stock market rally should run out of gas.

My view of conservative long-term investors betting on 5-G development has been the same as with renewable energy. That is we're better off focusing on adopters that win regardless of what iteration of technology wins out and pay us dividends as they deploy it--rather than to put it one way trying to guess whether its VHS or Betamax that wins the day. There's no question keeping up with what wins is key to identifying the best adopters--and I think Verizon is definitely it in the US

Roger Conrad

5:35

as China Mobile is in China and NT&T is in Japan. That's one nice thing about this ETF, is you don't have to choose. And I'm definitely considering taking that approach for CUI in the future as part of coverage for "Utility Technology" as a sector. Thanks for the suggestion.

Pat M.

5:36

Hello Roger.

I think that it would be very helpful to include “dream buy” and “consider taking profits” in the Conservative and Aggressive portfolio charts. That would make it much easier to find this information especially when you update pricing.

I really appreciate your updates in between the monthly issues, especially with these volatile markets. Thanks for all your efforts, and the consistency in your advice.

Roger Conrad

5:36

Thanks for the suggestion Pat and for the kind words. I hope all is well.

JT.

5:43

Per earlier CUI recommendation, I have been long time holder of CWCO as a long term investment, but you recently reduced your recommendation. Please update your long term view. Also you view of TU versus VST, BCE. Thanks.

Roger Conrad

5:43

My very long-term view for Consolidated Water is still pretty positive. I think the Baja project could potentially be a game changer for their earnings power and ability to invest in other projects if it can get past the legal hurdles. Unfortunately, the short term picture right now is very cloudy. And while I don't think the dividend is at risk, my view is this is a name conservative investors need to be wary of for now.

In the Baja, the Mexican state government is now balking on its share of expenses, presumably a victim of Covid-19 fallout, so the project is now in doubt as is the company's ability to recover expenses made so far. There's also the challenge of a shortfall of water sales due to reduced tourism at the Caribbean. The challenge of providing safe drinking water isn't going away and this company has expertise. But there's a lot of near term risk.

Roger Conrad

5:46

As for the other names--I think Telus and BCE are pretty much on the same level of quality and upside as the dominant Canadian telecoms. That's reflected in my Utility Report Card comments in the current issue. I think dividends are safe and will continue to grow, though keep in mind the Canadian dollar's value will have an impact on US investor returns. Vistra Energy I thought had very solid earnings, as I noted in the URC comments.

It's a buy up to 25.

Gary M

5:51

1. How do you determine the value that is suggested for purchasing a security? What formula do you use? (I am referring to Mr. Conrad, not a generic "you" person). For example, I assume that at some point you calculate a measure of net asset value. Are there special inclusions or exclusions that you utilize when calculating assets and liabilities? That sort of thing is what I'm looking for.

2. And how is the "Dream" price created?

3. Do you have a reference(s) that would help in the general understanding of utilities? I have the book "Utilities" which was produced by Fisher Investments in 2011 but am looking for something more current and more thorough. Suggestions?

Thanks for this valuable service.

Roger Conrad

5:51

Thanks for those questions Gary. I basically combine my Quality Grades with a shorthand measure for annual total returns--which is loosely yield plus sustainable annual dividend growth. Over time, my research shows share prices of dividend paying companies will follow rising dividends higher. The gains are not synched, meaning some years a stock will rise much further than its dividend increases and some years it will lag or actually decline as the payout is increased. But it is a very reliable driver of long-term returns. The 5-part Quality Grades run from A to F--depending on how companies stack up on multiple data points used for each one. I've discussed these components at length in CUI--most recently the July issue though they're also listed in the Utility Report Card key. And every three months, URC comments show how each company stacks up on each criteria.

Roger Conrad

5:56

I'm not sure how useful net asset value in determining value or predicting investor returns--which is what we're trying to do at CUI. Certainly, we can look at metrics like equity or book value to assess value--though these provide at best a snap shot of where companies are at a specific point in time. I tend to prefer more dynamic numbers like cash flow--and I've had too much accounting training not to be suspicious of single numbers that attempt to say exactly what something is worth. Quality of assets for example--what they're worth to a business--is not something you can necessarily pick out on a balance sheet. But these numbers can be valuable assessing the value of a company and the odds shareholders will come to recognize value, if used in conjunction with a wider range of factors. Not sure if that's what you're looking for here but it is my system.

5:58

The Dream prices as I've said are set at calm times for the market at levels that would only be reached under extreme circumstances. Here too the basic tools for setting the numbers are the same as for highest recommended entry points or buy targets I set--we're just looking for a lot lower points of entry.

6:01

I wrote a book back in 2002 "Power Hungry: Strategic Investing in Telecommunications, Utilities and Essential Services." I think it still holds up pretty well, though it's probably in need of some updates. As an alternative, all issues of CUI are archived on the website--so you can certainly see what read has been since the first issue in August 2013 (it's now our seventh anniversary). If you're trying to understand regulatory accounting, there are many potential resources--depending on how technical you want to get. I would also suggest checking out the Edison Electric Institute--the industry's leading trade organization.

6:02

Thanks for your questions

Gerald L

6:07

Hi Roger. A couple questions for you:

1) Is now an opportunity to buy into FE, or do you think it's better to see how this situation plays out?

2) Just curious on your opinion of BPMP and PSXP. They seem to be two of the better-run MLPs out there, but they are obviously facing challenges like many of their peers. What are your thoughts on these two?

Thanks for all that you do!

Roger Conrad

6:07

My official advice for First Energy is to buy below 45 and I believe investors are right now pricing in too much risk based on what we know about the federal investigation of state lobbying in Ohio. But as I've also indicated earlier in this chat, there is still a lot we don't know about the case and I'm not ready yet to add it to the CUI Portfolio. The delay of the 10-Q is a development since the August issue went to press, which makes me a little more cautious now than I was at that point. I think we should see how the situation plays out a bit more. But don't be too surprised if you see a recommendation before the September issue depending on how things go.

I think both BP Midstream and Phillips 66 Partners have great parents and solid assets. The big question--and what makes their dividends at somewhat greater risk than those at Enterprise, for example--is what their parents decide to do with them, given that the environment for MLPs is considerably worse than when they went public. And PSXP also gets

Roger Conrad

6:10

18% of EBITDA from the Dakota Access Pipeline--which if shut would deliver a huge hit to distributable cash flow and basically eliminate almost all the surplus after dividends. One solution could be a buyout--Phillips 66 owns 74.35% of PSXP, BP owns most of BPMP. And the question is at what price? BP it should also be said is targeting at 40% reduction in oil and gas output by 2030. How would that affect throughput at BPMP is an open questions as well.

6:12

Both of these stocks are still rated buys in our Energy and Income Advisor coverage universe--mainly because with 12% plus yields they're already pricing in dividend cuts that odds still favor not happening. But again I generally prefer midstreams that don't have these ownership issues at this time, such as EPD, KMI, TRP etc.

John K

6:17

Roger, you recently disseminated an informative article commenting on the impact a Biden presidency's energy plan may have on utilities. What of the energy companies themselves -- particularly mid-stream pipeline infrastructure companies? Thank you.

Roger Conrad

6:17

I did give a pretty in depth answer to that same question a bit earlier in the chat. The short version is I think the "11 midstreams that matter" that I identified in Energy and Income Advisor recently would likely benefit from a more restrictive regulatory environment for new midstream infrastructure--and even if currently operating pipelines are challenged. That's because the world is still using a lot of oil and gas and pipelines are still by far the cheapest, safest and most reliable way to get it there. To the extent new pipes aren't built and old ones are shut, the value of those still operating (and their owners) will increase. And that will be good news for the EPDs and KMIs of the world as the economy recovers.

Also one thing I did not mention in the earlier answer is candidate Biden's continuing support of LNG exports--environmentally to speed conversion from coal fired power in the developing world but also as an economic engine for places that need it like West Virginia.

Roger Conrad

6:21

One last point is I think the energy industry would really benefit from a cooling down of the nation's political temperature--which has greatly increased the ability of groups to fund lawsuits against projects that are otherwise supported by communities. In other words, the current president has arguably been the greatest fund raiser in chief for the Sierra Club et al. Maybe a change at the top would actually make it easier for responsible projects to operate or even get built? Maybe not, but it's certainly food for thought I think, and clearly while elections have consequences it pays to keep an open mind on what they might be.

Bonnie

6:27

Thank you Roger! I always appreciate your guidance.

Roger Conrad

6:27

Thank you so much for participating today!

barry

6:32

Gentlemen: You recommended South Jersey Industries in our last issue of CUI. Its history appears to have been most unremarkable since Sept 2010. Its price is at the same level. Can you kindly tell us readers why investing in this company may be better than Duke, Dominion or others? Thanks.

Roger Conrad

6:32

It's really apples and oranges. For one thing, South Jersey has a market cap of just $2.4 bil, whereas Duke is $60 bil plus and Dominion is $66 bil or so. That plus a focus on regulated natural gas distribution assets makes SJI a more likely takeover candidate--though as I've said I would not be at all surprised at a Duke/Dominion tie up eventually. And the consequence of SJI's flat decade long performance--we only added it to the Portfolio last December BTW--is it's also a lot cheaper on a valuation basis 14.4X 2020 estimated vs 22X for Dominion and 16.8X for Duke. (I do think all three are good buys now for conservative income investors).

donna

6:37

Would you have some advice on OKE?....Ive had such a slide down with it. Fidelity rates it bearish.

Roger Conrad

6:37

Hi Donna. I have answered a couple questions on ONEOK during the chat that I think could be helpful. Basically, it's a very cheap stock (11.7X expected 2020 earnings) that's carrying elevated dividend risk--due to an extreme environment for the energy midstream business where it operates. As I indicated earlier in the chat, Q2 numbers were bad (less than 80% dividend coverage with distributable cash flow) as volumes were down across the board. But management did offer some hopeful signs that second half 2020 would be much better and that it would have no problems funding both CAPEX and dividends fully with operating cash flow with room to spare for cutting debt.

I think you can look at ONEOK as an aggressive stock that could slip if dividends are cut in the second half--but also a stock that could easily be trading at twice current levels a year from now if management's guidance delivered in late July proves on the mark. I'm not sure what Fidelity's methodology is for being bearish.

Roger Conrad

6:38

The count for analysts tracked by Bloomberg is 7 buys, 17 holds and 1 sell. The key issue is again how fast ONEOK's system volumes rebound--and if that happens before they have to cut the dividend to preserve the investment grade credit rating. I'm still rating the stock a hold.

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