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8/24/22 Capitalist Times Live Chat

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Jeffrey H

3:01

DEAR FOLKS, I would appreciate it if you would add Four Corners Property Trust (FCPT) and Getty Realty Corp (GTY) to the REIT Sheet coverage.

Also, do you suspect that Canadian REITS in your coverage-- I'm thinking especially of ARESF -- will sell off as strongly as their US counterparts in a recession? I am sorely tempted to pull the trigger on ARESF at its present price. I did buy Alexandria (ARE) and Prologis (PLD) when they dropped toward dream price level recently. Although it's a bit of comparing apples and oranges, would you consider ARESF to be at a similar level right now?

Many thanks for your continuing sane guidance.

Roger Conrad

3:01

Hi Jeffrey. Thanks for the suggestion about Four Corners Property Trust--being a restaurant landlord has been a volatile business. But this REIT has done a good job managing some tough times in recent years, mainly with conservative financial and operating management--demonstrated by 99.9% occupancy and collections in Q2. You can expect to see it covered in the databank next month.

REITs have already sustained meaningful losses so far in 2022, including Canadians. That doesn't mean they can't fall further--and the Canadian dollar/US dollar exchange rate will also affect returns. But the yields are higher than with US REITs. And as I pointed out in the August REIT Sheet this week, Artis' Q2 results were strong and guidance affirmed--Bottom line I think this REIT is cheap now and will not only weather a recession but is likely to benefit from rivals' weakness during one--though shares could dip a buck or so near-term if the overall stock market drops enough.

Victor

3:07

Hello Elliott, in your most recent report you said that you would “be shocked if there are NOT dips” in oil stocks. Are you expecting significant dips? For instance, your buy price on XOM is < $85. That would represent a drop of more than 13% from where it is now to be able to take a position on XOM.

Elliott Gue

3:07

XOM has been and remains one of our favorites. A 13% dip would be a big move in percentage terms but, given the volatility in the space and the market of late, it wouldn't be a huge surprise. XOM did trade as low as $86.28 this month and $80.69 back in July. We still see the potential for a significant pullback in energy and related stocks over the next month or two. And, more broadly, September could be a treacherous time for markets as volumes rise and the debates over rates/inflation and recession continue. So, I still think we could see more dips into the $80s for XOM and we decided to retain that $85 target for now rather than chasing the stock. However, we reevaluate targets on an ongoing basis and are likely to make more revisions in the next few weeks.

Ken L.

3:08

I currently own ET as well as ET Pfd C. What is your opinion of the ET preferreds as well as other preferreds in your recommended stocks.

Thanks for all your great work

Roger Conrad

3:08

Hi Ken. I think Energy Transfer preferred stock dividends are quite safe. And they're also generous, with the 7.6% perpetual preferred yielding about 8%. I don't think there nearly as attractive as Energy Transfer common units, which yield about 7.5% currently--and at the current price would yield around 10% once management restores the pre-pandemic quarterly rate of 30.5 cents per share as it's said it will do.

I guess I'm also still a bit wary of anything paying a fixed dividend, with the Federal Reserve likely to continue raising rates until inflation is quelled. Energy Transfer common units in contrast are likely to keep pace with earnings growth going forward--which looks locked in as the energy cycle moves higher and the company's long-term position strengthens. But with yields rising, we are taking a look at what we might want to recommend in fixed income at a future date. And again, ET preferreds look pretty safe with the common payout rising rapidly.

Ric M

3:17

With all the MLP recommendations can you speak on the K-3 ruling and will we add this to the complexity? Also, What do you know about OVV?

Roger Conrad

3:17

Hi Ric. I don't think there's really any relevance for MLPs regarding what the IRS has said recently about Form K-3 filing. Mainly, K-3s typically concern international income. K-1 is the relevant filing for MLPs, which by law must derive almost all earnings from operations in the US.

We track Ovintiv in the "Canada and Australia" table on the Energy and Income Advisor website. Shares currently trade a bit above our highest recommended entry point of 40. That price was hit as recently as mid-July, however, and we would look for it to be challenged again if the economy slid into a recession as we believe is increasingly likely. That said, this company is run conservatively--including use of extensive price hedging, which allows a fair degree of visibility on the dividend. The current rate of 25 cents is about 25% of the payout in 2013, the peak of the last energy cycle--so there's a lot of room for upside the next few years.

Ric M

3:23

Any updates on telecoms T, ENLAY? Is it possible satellite internet’s soon reality makes the telecoms obsolete? Maybe it’s time to part ways.

Roger Conrad

3:23

Hi Ric. Enel SpA is not a telecom but a major global producer of renewable energy. It's definitely been an underperforming stock this year--in large part because of Europe's current energy market turmoil and aggressive expansion plans. But as I noted answering a question earlier in the chat, its CAPEX plans, balance sheet and dividend growth are still very much on track, as management affirmed releasing Q2 results and affirming guidance. I think it's likely to take patience for this stock to recover. But my view is still that's only a matter of time.

Regarding AT&T, I don't think the satellite Internet is ever going to really be competitive outside of remote locations--given the speed and power of fiber broadband and now 5G wireless infrastructure. The real question is if the company can avoid another quarter of sliding guidance, putting pressure on free cash flow and therefore the dividend. But as I noted earlier in the chat, that risk more than reflected right now in the low valuation.

FRED

3:26

I know you suggest entering a position in EXXON AROUND 85.

Elliott Gue

3:26

Thanks for the question. We covered XOM at some length earlier in the chat. Our view, in a nutshell, is that we decided to retain the buy under on XOM at $85 because we see some near-term downside risks of a pullback. So, we recommend waiting for dips under $85 to accumulate. Also, we do reevaluate targets frequently, so we may have updated recommendations if we see downside risks recede over the next few weeks.

jim

3:26

Roger, my energy stocks ET, WMB, PAA, MPLX, EPD have been cyclical, and we are at a high point, from a dip of 70%; and back to where I was 3 or more years ago. I like the dividends that approximate inflation, but a burnt chicken dreads fire. The anguishing decision for me is whether to pull out and collect dry powder for the next dip, or stay for the dividends in the belief that these stocks have room to run at least 25% on a 6 to 12 month horizon. I would also like to know why not expect another significant dip as the sector returns to disfavor in the next 6 to 12 months. My going in strategy was to own ultra high quality assets that were paid for, and producing solid returns that required nothing but "dont screw up" from management. But I see external cyclical forces as a pattern. If I shifted to something more stable with lower yields that are more dip resistant - I could have that dry powder. Do you think there is substantial upside for the sector? How about downside risk of the sector.

John M.

3:35

APA group is thinly traded in the US. They seem to be doing well but I would like your opinion on the company going forward.
Also there is a lot of negativity regarding Verizon and AT&T. I know you respect CFRA’s opinion which is a sell. Do you feel it’s still a good opportunity to buy more while it’s low? Thanks

Roger Conrad

3:35

Hi John. I think APA Group is in great shape as Australia's leading natural gas midstream company. The country has basically faced a shortage of gas in its most heavily populated regions over the past couple years--as those state governments have largely blocked new development and energy-rich states like Queensland have been exporting LNG in rising amounts to Asian countries. The company has a reliable pipeline of new projects the next few years to ship gas, as well as a growing business generating renewable energy. And I think that should generate upper single digit percentage earnings growth the next few years very reliably. The OTC listing as "APAJF" is relatively thinly traded in the US and is not an ADR. So I would use a limit order to buy at USD8 or less. If you have access to the Australian market directly, I would buy the ASX: APA listing.

I've answered a couple of questions of AT&T and Verizon earlier in the chat and won't repeat what I've said then. Low prices reflect the risks at this time.

Victor

3:41

There is speculation that the Fed will cave (as they’ve done it before) and at some point cut rates early next year just to avoid a recession. This sentiment is making oil prices go up. Nobody knows what’s going to happen, but would you be taking some profits at this point? If that’s the case, what names do you have in mind?

Elliott Gue

3:41

The stock market is basically waiting for another Fed-driven V-shaped bottom similar to what we experienced back in 2020 and before that in 2018. Really this is an extension of the pattern that's been in place since the crisis years of 2007-09 as the Fed has repeatedly bailed out markets with QE/stimulus. Do a simple regression of the S&P against the Fed's balance sheet since 2009 and you'll find that Fed activity "explains" more than half of stock market returns. The problem with this is two-fold. First, each successive round of QE has been larger than the last (in dollar and percentage terms) but has had a less pronounced impact on the S&P 500. Second, the last times the Fed has "caved" inflation wasn't a problem, whereas today it is. So, the prospect for a durable Fed-driven V-shaped rebound in stocks are limited -- pivot too early and you get stagflation, which is even worse than recession. So, that's why, as we noted in the last issue of EIA, we've retained a rather cautious stance towards oil and energy

Elliott Gue

3:41

stocks near term. That said, the supply side is (very) bullish, setting us up for a situation similar to the 70s where oil/energy see dips but are one of the only asset classes to actually produce strong positive returns. So, we haven't advised taking any profits beyond what we advised last spring on the last major rally but we do advise sticking to our buy targets for now and not chasing the rally in some names that have popped recently. If we get more upside, we may recommend booking gains on some names; in contrast, if oil does decline to our "price floor" in the 70 to 80 range noted in the last issue we'd probably be looking to add exposure.

Dan E.

3:42

Hi Roger, with respect to MDU’s spin-off of Knife River, is there an estimate of the appropriate value of Knife River represented in each current MDU share price.

Thanks for your insight.

Roger Conrad

3:42

Hi Dan. MDU Resources was actually the featured aggressive focus stock in the August issue. And as I said there, I'm bullish on this spin. I do think Knife would have been more highly valued a year or so ago, before inflation began to pressure margins in earnest. But I think even now it deserves a valuation at least equal to its all-time high order backlog, which at $1.13 billion is in the neighborhood of $5.50 per current MDU share. The other piece of the spinoff, however, is the rest of the company deserving a higher multiple for safety after shedding its commodity price-sensitive operations. In the August issue, I said I though sum of the parts this deal should be worth north of $40. That's still my view, though again timing this spin with recession risk rising could mean it will take longer to get there.

Pete

3:49

Sure appreciate you guys! Are there preferreds you like now? Also there any bonds you like now? Regards, pete

Roger Conrad

3:49

Hi Pete. Thank you for tuning in today! As I indicated earlier in the chat, I'm still wary of most fixed income with the Fed raising interest rates to battle inflation--and with a recession likely to hurt prices as credit risk is perceived to rise. Exceptions would include any bonds maturing in two years or less issued by companies we recommend--provided yields to maturity are 3% or higher. Preferred stocks don't have designated maturity dates, so they will lose ground if rates or rise or perceived credit risk grows. So while yields are certainly more generous than they've been in some time, I'd still like to see lower prices before really getting aggressive. That said, I will be posting another yield-focused issue of Conrad's Utility Investor this fall, which will no doubt include a fair amount of fixed income. But I prefer common stocks by far at this time--on the basis that our favorites will raise dividends ahead of inflation.

Buddy

3:54

I own SLB, HAL and BKR; two (BKR and SLB) are on your buy list. SLB and HAL had very impressive quarterly results and issued very optimistic guidance. Meanwhile, BKR disappointed big time, which seems to be their history. On what basis are you recommending BKR, which has been a loser stock for ever since it got tied up with GE. Is it worth holding or adding to here in the mid-20s?

Elliott Gue

3:54

Thanks for the question. We covered BKR, and their results, at some length in the most recent issue earlier this week. Our rationale rests for continuing to recommend BKS rests on two pillars. 1. The recent "miss" was due entirely to the need to bail on their Russian assets due to sanctions. Subsequent to their quarter, they announce a management buy out of that unit, which draws a line under the issue. 2. BKR has more leverage to the boom in LNG trade than any other service name out there and this business continues to perform well. Finally, note that GE owns less than 4 million shares of BKR at this time, which is equivalent to less than 0.4% of the outstanding stock, so there's no longer a significant overhang there or any remaining control exerted by GE.

Buddy

3:56

On the recent dip in crude oil prices, which was significant, why did you not add to you buy list? The timing was perfect.

Roger Conrad

3:56

Hi Buddy. As we've said in this chat, we believe the risk of recession has grown the past few months, rather than faded. And our view remains that downside is more likely than upside for oil and gas prices in the near term. As we also point out in the August 22 issue, we believe this energy cycle has a long way to run. So we don't view this as a time to run for the hills. But certainly we could still see prices of stocks head lower from here in the near term--so we're going to make our moves gradually.

As you'll also see in the EIA issue, Elliott has become a little more bullish on a couple of our names that have given up considerable ground this summer. And before that, we took profits on some names that really ran up. But I think it's also worth pointing out that we have buy points for every stock we recommend, as well as Dream Buy prices. And the best way to build in positions is to focus on when those individual names are bargains.

Arthur

3:58

Gentlemen, any thoughts on OVV - Ovintiv Inc. Any more room to run - any target price? I am up substantially, but have a very small position so was thinking of selling and redeploying the funds as I am trying trim my total holdings

Roger Conrad

3:58

Hi Arthur, I hope you saw may comments on Ovintiv answering a previous question. It's a great company and I think the stock and dividend are headed a lot higher the next few years But that said, it's currently trading well above our highest recommended entry point, which we believe would be revisited in a real recession. Note that this stock is covered in our "Canada and Australia" coverage universe table on the Energy and Income Advisor website.

Guest

4:00

Hi Elliot,
Energy shares have had a nice bounce off recent lows. Do you feel that they are now over-extended given the likelihood of a recession and lower oil/gas prices? If so, are you look to sell some of the positions in EIA and which ones?

Elliott Gue

4:00

We haven't decided to sell any recommendations in EIA yet though we might recommend taking some partial profits on further upside in the next month or two in any names that get extended. We're just not at that point yet. While we think there remains risk of recession and a further pullback in oil prices, we see the downside capped by the ongoing and intractable shortage of oil/natgas supply globally. So, we'll likely view bouts of selling as an opportunity to add to positions in the portfolio.

Mary

4:03

Do you know of any companies that are plugging old wells?

Elliott Gue

4:03

Most companies refer to plugging older wells under the broader term of well "abandonment," which can include other services such as inspecting wells for leaks and pipeline decommissioning. Most of the publicly traded service firms do at least some of that work as well as a lot of private firms out there. In the US/Canada I know that HAL is a significant player in this work.

Sohel

4:04

Hi Roger, Thanks for holding these chats. Find them incredibly useful. I see that you donDo you establish sell at price targets on stocks just as you set buy under target

Roger Conrad

4:04

Hi Sohel. Thank you for joining us today. As we've said before, we find the chats incredibly useful as well, particularly from the point of view of seeing what you guys are interested in and what we maybe need to clarify or answer in addition to what we post.

Regarding sell/profit taking targets, we do set them on recommended stocks in all of our advisories--probably most overtly in Conrad's Utility Investor with the "Trading Above Target" table in the Portfolio section. Given the early stage of this energy price cycle, we haven't really had enough candidates in EIA to do an equivalent table--but rather have made partial sales of individual stocks in the Model Portfolio, for example EOG earlier this year. But the further we get into this cycle, the more likely we will work up something along the same lines. Thanks for the suggestion.

Mary

4:08

Should I be concerned about a class action filed in Wyoming against EOG for not paying interest on late royalty payments to the tune of $6M. If there is one then there are 10 in the wings, right?

Elliott Gue

4:08

Lawsuits of this nature aren't uncommon, especially for a large producer with a geographically diverse footprint like EOG. In most cases they're unlikely to have a significant impact on the results of the company as a whole -- for example, EOG's net income this year is likely to approach $8 billion so even 20 times that $6 million claim would represent only about 1.5% of annual profits.

Dipak G.

4:09

Hi Roger/Elliot:Which E&P/Pipeline/Processing companies have the most upside from the emerging LNG export opportunities ? Also, your latest thinking on TELL... is it wise nibbling on it ?

Roger Conrad

4:09

Hi Dipak. Thanks for joining us today. I think Tellurian Inc is fairly speculative--small size, no investment grade credit rating and no dividend. That in my view is a big disadvantage when it comes to competing for business in the LNG space with giants like the Sempra Energy (NYSE: SRE)/TotalEnergies (Paris: TTE, NYSE: TTE) partnership or Cheniere Energy--though I do like the Haynesville acreage it just purchased and it could well wind up a takeover target.

As far as midstream companies set up to serve the LNG business, the leader is Kinder Morgan Inc. But Energy Transfer LP also has a building presence, and like Kinder it owns and operates LNG export facilities as well. Enterprise Products Partners is of course the leader in NGL exports, which at this point are a bigger deal than LNG in the US. Pembina Pipeline (TSX: PPL, NYSE: PBA) and TC Energy (TSX: TRP, NYSE: TRP) have the pole position in Canada.

Jimmy

4:15

Roger, good afternoon. I would like to ask about PCG. Do you think it has turned the corner in correcting its course? From the current price of 12, how many years would you guess it will take to double? Thanks.

Roger Conrad

4:15

Hi Jimmy. Every quarter PG&E (NYSE: PCG) avoids significant new wildfire liability brings the utility closer to full financial recovery and restoration of its dividend, which in my view makes it a mid-20s stock. New CEO Pat Poppe--formerly CEO of CMS Energy (NYSE: CMS)--increasingly looks like the perfect person to run the show here, managing regulatory relations while driving efficiency and grid hardening. There are still some bridges to cross here. But Q2 results are solid with management maintaining guidance is on track. And the company could be in line for a windfall, if California manages to provide support for it to keep the Diablo Canyon nuclear plant operating beyond the scheduled retirement of its two reactors in 2024 and 2025. The biggest risk to recovery is obviously another catastrophic wildfire that undermines Poppe's credibility and would almost certainly elevate support for municipalization. But barring that, I think we'll see the stock in the 20s in the next couple years.

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