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8/24/22 Capitalist Times Live Chat
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AvatarRoger Conrad
1:55
Hi everyone and welcome to our August live webchat for Capitalist Times advisories.
1:57
As always, there is no audio. Just type in your questions and we'll get to them as soon as we can concisely and comprehensively. We will send you a link to a transcript of the complete Q&A some time after we sign off, which will be after we've answered everything in the queue as well as what we received prior to today via email.
Thanks again for participating today. Let's start with a few from the email bag.
Q. What are your expectations for the price of energy (oil & gas) for 2023? The price of oil is falling from its highs, even though Europe is being shut off, and trying to stop buying, Russian energy. How will that affect energy (oil, gas, MLP) stock prices?—Mr G.
 
A. Thanks for your questions. I realize the current issue of Energy and Income Advisor is more extensive than usual. That’s largely the result of having an earnings recap of our Model Portfolio and High Yield Energy List members, in addition to our feature article roundup.
 
We do explore all of these issues at length in the issue, and I would encourage everyone to check out our answers at your convenience. In brief, we believe the odds of a global recession by first half 2023 continue to grow, as the US Federal Reserve digs in on its fight against inflation, China wrestles with fallout from a major property market slowdown and continuing pandemic and supply chain related issues, Europe struggles with the effects of Russian sanctions and the
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developing world takes a hit from a rising US dollar and inflation.
 
Our expectation is a recession would temporarily bring energy prices lower, which would in turn almost certainly push even best in class energy stocks lower. Our view, however, is this emerging scenario presents another great opportunity for investors to patiently build positions in our recommendations.
 
We have taken some money off the table in stocks this year that we’ve considered to be particularly overheated. And we’ve generally refrained from raising our highest recommended entry points for fresh money as well, largely because we believe there will be better opportunities ahead. But again, we remain very long-term bullish on this sector—pullbacks are a chance to buy, not a reason to exit as they were for a good portion of the previous decade.
 
 
Q. What is your opinion of Global Ship Lease
Inc (NYSE: GSL) as an investment in a income oriented portfolio.—Monroe J. 
 
A. Hi Monroe. We would continue to be wary of most shipping companies at this point in the cycle. Global demand for shipping is likely to continue rising in coming years, with commodities a prime candidate for growth. But there’s also still very much a surplus of vessels, as new construction has outpaced retirements the past several years.
 
We’re still seeing some partnerships adding chartered vessels to their fleet, primarily as drop downs from parents. But when charters expire, they’re still rarely renewed at or above the old rates. And environmental regulation has risen as well on ship emissions, which along with rising fuel prices is driving up costs.
 
Global Ship Lease did have a good result in Q2, continuing momentum from Q1. And there appears to be a healthy level of coverage for the current distribution for at least the rest of the year. But a worsening recession would certainly put more pressure on cargoes and rates.
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There’s also evidence in GSL’s results that rising interest rates are pressuring debt service costs. And the average weighted remaining term for charters is just 2.6 years including options under its control.
 
This is probably a company we should pick up coverage of in Energy and Income Advisor. But at this point, I believe there are stocks offering the same or even higher yields with far less risk—mainly what we now have in our Model Portfolio.
 
 
Q. Roger, often times when you see a stock yielding 10 percent, it’s because it is low quality and/or there is a good chance of the dividend being cut in the near future. But Crestwood Equity Partners (NYSE: CEQP) seems to be a good quality stock that has just raised its dividend. Why do you think it still has such a high yield of 10 percent, versus
many other MLPs that yield in the 7% range? Thank you--Rick P.
 
 
A. Hi Rick. I absolutely agree. And in fact, in the current issue of Energy and Income Advisor (August 22), I repeat the buy recommendation I made for this company as one of my three top picks for 2022. I highlight Crestwood’s strong Q2 results and raised guidance for the year on page 6 of the issue. And in further discussion on page 28, I posit a couple reasons for the shares’ underperformance this year—which is basically breakeven on price and 7 percent including dividends.
 
One is the fact Crestwood has been making acquisitions this year using equity, at a time when investors clearly have a preference for share buybacks. The other is the company has considerable gathering and processing assets in the Bakken, and many are concerned producers are now focusing on other areas primarily such as the Permian Basin of west Texas and New Mexico.
2:00
I think these concerns are overblown. Crestwood is going to have to prove its recent acquisitions will generate promised returns, which likely isn’t going to happen until later this year. But Bakken results continue to surprise to the upside. And in any case, CEQP is now well diversified regionally, with in fact a rapidly growing business in the Permian.
 
The 1.7 times dividend coverage ratio is a good indication equity issuance hasn’t caused much dilution. There’s also no maturing debt until 2024, giving management a lot of flexibility to improve its balance sheet.
 
Like all midstreams, Crestwood would be doing even better now if North American oil and gas producers’ output was approximating levels reached at this stage of previous energy cycles. That’s probably the biggest factor holding back its share price from much larger gains to date. But we continue to view higher volumes as only a matter of time.
And meanwhile, as you point out, there aren’t many stocks yielding almost 10 percent that have increased their dividend this year.
 
 
Q. Roger, based on your Conrad’s Utility Investor recommendation back in 2020, I bought BCE Inc (TSX: BCE, NYSE: BCE). Since then, I have had a nice capital gain & solid dividends. However it seems at the current price that the stock has no impetus to rise farther. Last 10-year growth of earnings is 0.79 percent. operating cash flow is 0.38 percent and sales is -1.0 percent (data from Fast Graphs)- I just don't see a case for growth. What am I missing? Thanks—Tom T
 
 
A. Hi Tom. I think the most important numbers to watch as far as driving investor returns for BCE shares are the level of dividend (now about 5.7 percent), and the level of sustainable dividend growth (5.2 percent last 12 months). Over time, the share price will follow that
dividend higher. So the focus of our analysis is always on whether the company can sustain the current level of payout increases.
 
As I point out in the Conservative Focus stock section of the August CUI issue, BCE’s Q2 results were solid, featuring steady gains in broadband and wireless users as well as a 120 basis point year-over-year increase in profit margins. That enabled management to reaffirm all of its 2022 full-year financial targets, including a range of 1-5% for revenue growth, 2-5% higher EBITDA.
 
The company appears to be gaining customers as Rogers Communications (TSX: RCI, NYSE: RCI) attempts to win regulatory approval to acquire Shaw Communications (TSX: SJR, NYSE: SJR), which would also include the sale of Shaw’s Freedom Mobile to Quebecor (TSX: QBR, OTC: QBCRF). But even if that deal is ultimately approved, BCE’s fiber/5G network convergence has given it a huge lead on quality that it continues to build on. The company is also funding still elevated
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CAPEX and dividends entirely with internally generated cash flow.
 
I think mid-single digit percentage dividend growth will be the primary driver for the share price going forward. But I would also expect to see shares expand their premium to other Canadian telecoms, if it can continue to pace of subscriber gains. And eventually the Canadian dollar/US dollar exchange rate should become a tailwind rather than a headwind, as a strong energy price environment the next few years pushes the loony up—and with it the US dollar value of BCE’s share price and dividends.
 
 
Q How come you don't cover Phillips 66 (NYSE: PSX) in the utility report card? I would think it's the type of company you would cover. It seems very comprehensive otherwise. Thanks, a loyal subscriber.—David E.
 
 
A. Hi David. Thanks for your question. I do track a small
number of super major oil stocks and midstream energy companies in Conrad’s Utility Investor that I consider to have utility-like characteristics. But our far broader coverage of energy stocks is in sister advisory Energy and Income Advisor.
 
Specifically regarding Phillips 66, I think it’s a solid company that’s likely to continue increasing dividends as this energy price cycle moves higher over the next several years, with the caveat that a recession and broader retreat in energy prices is a risk to push the share price lower later this year. I would rate the stock a buy on a retreat to 80 or lower, which it last hit briefly in early July.
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Q. I won’t be in town and don’t want to miss out on the chat. So here are my questions early. First, why do companies seem to quickly sell their Russian assets, or abandon them? Can't they just keep them until things improve? Everything eventually passes over time and I would think they would have a longer-term view on this stuff. Second, on my Enel SpA (Italy: ENEL, OTC: ENLAY) dividend of $232.46, I was charged a foreign tax of $60.44 and a new charge I've never seen before of $46.49 that says "FEE CHARGED ENEL SOCIETA PER AZIONI UNSPONSO ADR (ENLAY)” Do you know what this is? All this expense makes my yield only 4.42%.
 
Also, I wanted to thank you for your advice and dream prices. Hannon Armstrong Sustainable (NYSE: HASI) dropped below $30 a couple weeks ago and I was able to pick it up at $29.90, as well and sell $25 puts for an extra dollar in premium. While that article played on peoples’ emotions, I
was able to focus on your advice and make huge gains in just a couple weeks. Thanks--Eric F.
 
 
A. Thanks Eric. Nice entry point for Hannon Armstrong. I do think HASI is likely to remain a volatile stock so long as short interest is this high—and it’s right now quite elevated at 12.1 percent of average daily float with 10.9 days to cover. My view remains that the accounting concerns purported by Muddy Waters are severely overstated. I do think Hannon has to continue to show investors that it can maintain healthy transactions flow in a rising interest rate environment. I think it did so very well in Q2, and management affirming guidance indicates the company is keeping its momentum in the second half of 2022. But this is a relatively aggressive income investment. And while my view is the share price is likely to revisit its old high north of $80 the next few years, we do have to keep an eye on results.
 
On Enel SpA, I’m increasingly convinced we’re going to have to pull the plus on the American Depositary
Receipt in favor of either the local shares traded as ENEL or simply the local shares traded over the counter here under the symbol “ESOCF.”
 
The “fee” ADRs are being tagged with appears to be related to administrative costs, which appear to be rising for ADRs and ADS securities across the board due to increased US regulation. We’ve seen a number of major foreign companies actually delist ADRs on that basis.
 
If you can buy local shares of Enel SpA in Europe/Italy, you’ll avoid the fees. You will still pay the 15% Italian withholding tax, which from your message also appears to be overwithheld from the ADR. But if you deal with a brokerage like interactivebrokers.com, the withholding should be correct. And you can recover the withheld taxes when you file your taxes.
 
The five-letter symbol ESOCF actually appears to be decently traded, with 11,797 traded as of 13:24 today. It’s simply the Italian share traded OTC here, so there should be no special considerations with withholding tax and no fees as with the
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ADRs.
 
I intend to watch volume on ESOCF as a possible swap with ENLAY. But the broader point is this company is still executing on its renewable energy buildout on a global basis, while covering its dividend and protecting its balance sheet. It’s facing some pressures now from currency volatility, a potential recession and Europe’s energy crisis on costs. But for aggressive investors, this still looks like a solid way to bet on renewables growth.
 
Finally, focusing on your first question about exiting Russia, it looks like Enel is going to have a more difficult time selling operations there, as the government has at least temporarily withheld approval of that transaction. The operations as we’ve said before are only about 1 percent of profits and the company has largely avoided exposure to Russian natural gas as well. So, they’re not really material to earnings, dividend growth or the balance sheet—though they’ve arguably weighed on the stock.
 
As for the broader question about why so many companies are
exiting, in most cases it’s because they’re under immense regulatory pressure to do so. I agree it’s always better to do these things gradually and I’m sure that would be management’s preference—since rapid exits will generally mean selling for less.
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OK that's all of what we had in the email queue. Let's turn to some live questions.
Jeffrey H
2:23
Dear Folks, One more question, if I may. Although some analysts may still be hemming and hawing about the prospects of the US economy, there seems greater consensus that Europe is going into recession, quicker and deeper.. If that is indeed the case, what opportunities do you see in individual equities and ETFS , both long and short? Again many thanx
AvatarElliott Gue
2:23
It's going to be very difficult for Europe to avoid recession. In addition to the issues the US faces (such as high inflation and rising rates) Europe has the added headwind of soaring energy costs due to their reliance on Russian gas imports. There are also some concerns about the precarious political situation in Italy -- Italian credit default swaps (basically the cost of insuring Italian debt against default over the next 5 years) have soared to 155 basis points of late, up from around 90 at the end of last year. There's risk of more upside if the market even begins to fear Italy wanting to withdraw from the EU. At the highs in 2011 the cost of 5Y Italian CDS stood at near 600 basis points. To be honest, right now, I'm not seeing a lot of broad opportunities in Europe or the UK. With European markets so cheap relative to the US and the euro trading under parity  to the US $, seems like a good bit of bad news is baked in so too late to short. At the same time, the risks I highlighted above suggest that its
AvatarElliott Gue
2:23
too late to call a bottom. I do think that the UK and some European markets might be interesting once we slog through the bear market and recession. That's because these markets have a higher weight in cyclicals/value groups (including energy) than here in the US and I expect value to remain in a prolonged period of outperformance relative to growth.
Lee O.
2:26
update on wtrg financials thanks
AvatarRoger Conrad
2:26
Hi Lee. Essential Utilities' A credit rating from S&P looks very secure after management reaffirmed the mid-point of its 2022 earnings per share guidance range of $1.775, as well as its long-term earnings growth target of 5-7% through 2024. The model for growth really hasn't changed much over the 30 or so years I've covered the company (and owned the stock), dating from when it was known as Philadelphia Suburban and later Aqua America. That's basically a steady pace of acquisitions supplemented by system CAPEX and customer additions from service territory growth. The company has a number of deals pending that over the next couple years could move the profit meter significantly. I'm keeping the highest recommended entry point at 50 for now, at least until some of the larger ones close.
Ben F.
2:35
Good morning Roger and team -

Thank you for holding these chats and all of the hard work.

I am concerned about Verizon. Verizon has missed two straight earnings and the stock is languishing.

On a separate note, my family used to have Verizon.  My wife switched us to Comcast and we cut our bill in half. Amazing given Comcast using the Verizon network. Same service at half the price. We did not buy any phone or change the service.  

How can Verizon compete when it is selling its services through a competitor for half off? 

Cheers
AvatarRoger Conrad
2:35
Hi Ben. The answer to that is Verizon realizes a pretty substantial wholesale margin when Comcast effectively resells its service--revenue is less but so are costs. So this business is much more a driver of growth, rather than a drain. And so long as Charter Communications and Comcast are reselling, Verizon doesn't have to worry about another rival network. As I've noted in CUI, sliding guidance is a concern for both AT&T and Verizon. That's balanced by the fact these companies are growing revenue--not going out of business. And investor sentiment is extremely low, as demonstrated by yield of nearly 6% and single digit earnings multiples. Where I would consider selling is if revenue actually declined and free cash flow dropped enough for dividends to come under pressure. We're not there yet by a long shot, so I'm willing to be patient.
Mike C.
2:40
Good morning gentlemen and Sherry!
 
For today’s chat: first, you’ve mentioned that you see a coming dip in prices for energy stocks, and I’m struck by how it looks like the energy sector is breaking out right now. Do you see a moment when it would be worth harvesting some profits this fall, sooner rather than later? It seems like we’re headed for a retest of June highs.
 
Second, I’ve been reading about fuel switching in Europe (for both utilities and manufacturers) from natgas to oil, with the implication that the oil is coming from the US. I’m curious about your thoughts on this, particularly if this changes the supply/demand dynamic (in that we might see only minimal recession-related demand destruction).
 
Thanks as always for excellent guidance and analysis!
Best
AvatarElliott Gue
2:40
Thanks for the question and kind words about the service. We have seen some upside in select energy names of late including some of the stocks we highlighted and raised targets on in the last issue of EIA like CHK and EOG. From a portfolio management perspective, our view remains that the group is in a multi-year bull market "supercycle" and, therefore, we've recommended taking some profits off the table on the big rallies (last spring) and then buying dips in quality names as they dip back under our buy under targets (or tough dream buy prices). Consistent with that, if we were to get another big rally or retest of the spring highs, we might well recommend taking some money off the table again. Now, that's the big picture strategy. From a cyclical standpoint, the global economy is weakening and it's going to be tough for the US, and other major economies, to avoid recession. Even China is clearly slowing.  This will ultimately result in lower (or lower growth in) global oil demand. Yes, fuel switching
AvatarElliott Gue
2:40
and other factors can soften that blow, but the truth is that recessions always ultimately cause demand to moderate. Concerns about recession are what brought oil prices down from $120+ WTI earlier this year to under $90 last week. The supply side, however, remains very bullish. I highlighted a number of reasons why in the most recent issue but I think what's really bullish from a supply perspective is that Saudi Arabia really tipped there hand this week. Simply put, for many months now the US and other countries have been trying to convince/cajol Saudi to boost output at a faster pace. However, the problem isn't that Saudi is unwilling to boost output, it's that they can't. Saudi output is at almost 10.8 million bbl/day right now, near the highest in history dating back to the 1960s. They simply can't sustain that forever as they're probably really taxing their older fields. So, they'll probably jump on any excuse to cut output back towards a more comfortable 10 million bbl/day or so. Bottom line:
Alan E
2:40
KMI seems to be a good candidate for reliable future investment returns but doesn't receive the coverage given many other companies. Would appreciate your comments.
AvatarRoger Conrad
2:40
Hi Alan. i think a lot of investors still haven't forgiven Chairman/so-founder Richard Kinder for cutting this company's dividend in late 2015. Others have become dissatisfied with the pace of dividend growth since--which management has slowed to a low single digit percentage for the time being in favor of fully funding CAPEX, dividends, debt reduction and stock buybacks with operating cash flow. The stock's recent rally to $19 plus may reflect growing appreciation that these conservative financial policies ensure against an increasingly likely recession. But what's most attractive to me about Kinder now is that the company has multiple businesses that could produce rapid growth this decade--from servicing LNG exports to the largest US carbon transportation and storage network. I think it's a great buy up to 22--a Dream buy under 18.
AvatarElliott Gue
2:40
Supply issues will keep a floor under crude and we expect the recession pullback in energy to be relatively short and shallow.
FRED
2:48
Regarding EOG, just saw where a "Death cross" has formed on its chart pattern.
AvatarElliott Gue
2:48
A death cross is a technical signal where the 50-day moving average crosses from above to below the 200-day moving average of a stock's price. I have not found this -- or its inverse the "golden" cross -- to be a useful signal. In bull markets, you will often see a stock or index register a death cross near the lows of a pullback, before a major advance. And in a bear market, you can sometimes see a golden cross at the peak of a countertrend rally. I prefer to use the 50-day and 200-day MAs in isolation -- often the 200-day in particular acts as support in uptrends and resistance in downtrends. So, I don't see EOG's recent death cross as a concern. Tough to say where EOG will be in six months -- the short-term trend is clearly higher tough and we believe it will be trading higher in 12 to 24 months than it is today (plus additional returns from dividends).
FRED
2:48
Should this be a concern, or, do you see EOG going higher over th next 6 months?
Guest
2:51
Hi Roger and Elliott,
I am always confused by gaps in the price of dividend paying stocks on certain dates. PXD has a dividend of $8.57 coming up. Ex-dividend date is 9/2/22 and dividend pay date is 9/16/22. Does this mean that PXD shareholders of record on the close of 9/1/22 (one day before the ex-dividend date) will receive the dividend in accounts on 9/16/22? Then on 9/2/22, PXD shares will gap down by roughly $8.57 (+/- market fluctuations) to reflect the dividend payout? 

If I want to sell some of my PXD shares but want to wait to get the dividend before selling, when would be the earliest that I can sell and does it make a difference since there will be a gap down?
AvatarRoger Conrad
2:51
The key date for a dividend is the record date. That's when a dividend is officially owed to "shareholders of record." And even if you sell the day after, you're entitled to that dividend--which will be credited to your account on the announced "pay date." In the case of Pioneer's $8.57 per share dividend, the record date is September 6 and the pay date is September 16.

Also, there is no automatic relationship between a dividend payment and a share price. Pioneer's dividend for September is in two parts: A "base" dividend of $1.10 per share per quarter and a "variable" part of $6.67, which reflects the portion management considers due to unexpectedly high realized selling prices for its oil and gas in Q2. The base is an amount considered safe at much lower prices.

One could make the case that Pioneer shares should fall by the variable amount following the record date. But I would argue the shares are more likely to follow what happens to oil prices on that date.
Victor
2:58
Thank you guys for your most recent issue of the EIA report. Great review on stocks that reported recently and lots of good information overall. Do we know when the Biden administration is supposed to replenish the SPR? At some point Biden knowingly or unknowingly will be generating new demand by buying large quantities of oil.
AvatarElliott Gue
2:58
They've published a "Notice of Proposed Rulemaking: Procedures for the Acquisition of Petroleum for the Strategic Petroleum Reserve" -- it's at this website if you'd like to read it: https://www.energy.gov/notice-proposed-rulemaking-procedures-acquisiti.... Basically, their plan is to announce
AvatarElliott Gue
2:58
a call for bids to purchase certain quantities and types of oil. The plan is to start with 60 million barrels, likely for purchase after fiscal year 2023. The idea is that by announcing bids for oil well in advance, they might be able to boost long-term futures prices for oil top encourage supply without having as much of an impact on short-term "spot" supply and demand. It's all still a bit vague. I think the bigger issue near term will be that they've been adding around 800,000 to 1 million bbl/day to US supply and will need to stop soon, tightening the market a bit. Then, clearly it's going to be really difficult for them to announce oil buys if prices remain high, but if they do decide to go ahead, that would eventually tighten up the market even more.
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