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8/24/22 Capitalist Times Live Chat

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FRED

4:17

Do you think it would be prudent to add to shares by paying in the mid 90's?

Roger Conrad

4:17

Hi Fred. I know it's always tempting to chase a stock higher that's done well--and ExxonMobil is getting pretty close to $100 a share. But it almost never pays off to do so. Dividend reinvestment is an option but we really advise patience.

Guest

4:21

Hi Elliott, what is your take on CCJ from a technical stock price point of view? It is having a strong day today on news that Japan is going back to nuclear, but these big high volume days for CCJ have historically resulted in a top in 1-2 days. Despite all the good fundamental news on CCJ and Uranium, the stock has generally been going sideways with high volatility frustrating buy and hold investors.

Elliott Gue

4:21

Technically CCJ has remained fairly range-bound between around $20 on the downside and $28/$30 on the upside. That's OK for traders but its been a tough stock to buy and hold, especially with other energy groups doing so well. It's a name we've considered, and continue to consider, as a potential addition to the EIA portfolio. Fundamentally, the news keeps getting better -- Japan is planning nuclear again, other countries are considering extending existing plants and CCJ has announced a raft of new long-term supply contracts in recent quarters. I'd go so far as to say that it's virtually impossible for a country to decrease carbon emissions, keep the lights on and keep prices down WITHOUT nuclear. The question is what's the catalyst to break the stock out of its funk? I think that's been what's kept us from adding it to the portfolio in recent months. Ultimately, I look at the steady increase in free cash flow projected for CCJ over the next few years and I think that perhaps the company will announce

Elliott Gue

4:21

plans to return additional capital to shareholders, which could help ignite interest in the stock. Ultimately, I think we'll see it break higher from this range, but it could require a good deal of patience.

Arthur

4:22

BUI - BlackRock Utilities, Infrastructure & Power Opportunities Trust thoughts regarding the next six months. I like it as longer term holding, just not sure whether to add to the position now or wait. thanks

Roger Conrad

4:22

I think this closed end fund, traded under the symbol BUI, should continue to hold net asset value this year--though its blue chip utilities and infrastructure holdings are by no means immune to a broad stock market selloff. I also think it will maintain its current small premium to NAV because unlike other CEFs it uses no leverage and pays at a conservative dividend level--which has historically eliminated the risk management would have to liquidate assets following a downturn to maintain leverage ratios. As I've said in CUI Plus, the majority of our return from this fund is going to come from dividends (generous at 6% plus), since management's strategy is to disburse cash to shareholders rather than build NAV. But I continue to view a low 20s price as a good entry point for this CEF.

Guest

4:25

Kinder (KMI) has an extremely diverse toolset for natural gas plays and appreciation.

Roger Conrad

4:25

I completely agree with that. The main business in natural gas pipelines--and that's where they're still focusing most of their CAPEX, including another Permian Basin pipeline announced this summer that's already contracted. But this company is also positioning itself to be a transporter and storage company for renewable natural gas harvested from farms, captured CO2 from industrial processes and eventually hydrogen. And the conservative balance sheet and operating policies ensure will benefit rather than suffer from future downturns. I like it at 22 or lower.

Guest

4:31

RE: KMI. What are some other natural gas plays you strongly believe in - especially with record high natural gas pricing? Can NG prices remain high or higher given Euro demand?

Roger Conrad

4:31

To be clear, Kinder Morgan gathers, processes, stores and especially transports natural gas. Its profitability depends on ability to keep its assets contracted, and to some extent volumes shipped. The CO2 business still does enhanced oil recovery (EOR), so its margins are affected directly by oil and gas prices. But the rest of the business is not. In fact, it arguably does better at more stable prices that encourage demand.

The same goes for other midstream companies, including those affected by the difference between prices of raw commodities like natural gas and related liquids that are split off from the gas, like propane, ethane etc.

Our view is that North American natural gas prices are likely to decline once summer temperatures moderate--which should help midstream companies. Keep in mind that may not happen in Europe, which is an entirely separate market for gas. And US LNG export capacity won't be enough for at least several years to create sufficient arbitrage.

C. Watkins

4:31

Hi Roger and Elliott,

Roger Conrad

4:31

Hi and thank you joining us today.

Clint W.

4:38

Hi Roger & Elliott:, Vermilion Energy (VET) has passed your $25 buy level but is still below the 2018 trading range. I've been considering taking some profits and was looking for your thoughts in light of the recently announced capital return framework and the current European energy situation. Thanks.

Roger Conrad

4:38

Hi Clint. I think we just want to be patient with companies like Vermilion Energy. It was a good idea to buy when the stock was cheaper and I think the share price will go a lot higher the next few years. They clearly have survived a tough challenge to their survival as a small, geographically diversified oil and gas producer. And they're clearly on the mend after reporting solid Q2 results and raising the dividend by one-third. The dividend is barely one-third the pre-pandemic rate and headed higher--and as you point out the stock at barely a third of its all-time high in June 2014. But this stock is also very leveraged to oil and gas prices. And after such a nice run, it would be vulnerable to a recession that brought down commodity prices further. I think we just sit with what we have and maybe look for a decline to add to it. I would consider taking at least some money off the table on a boost to the low to mid-20s--so long as we're in an environment of rising interest rates and recession risk.

Jimmy

4:40

Hi Elliot,
In a recent report, you mentioned that market speculators were bearish as of Aug 9 (used as a contrarian indicator). New data was released on Aug 19th. Have you had a chance to look at that data? Any thoughts on whether the recent pull back is the start of the next bear leg or just a short term pullback to scare everyone and then move higher?

Elliott Gue

4:40

Speculators remain very bearish (net short) S&P 500 futures; in fact, I currently calculate their net position as a full 3 standard deviations below the 2-year average (this is based on the data released 8/19 updated through 8/16). Interestingly, they're also very net short ultra long bonds (basically 20+ year Treasuries) at negative 2.25 standard deviations -- this is a bet on higher rates/yields on government bonds and lower prices. Honestly, the meaning of these unusually large short positions is a little difficult to unpack. Here's how I'm looking at it right now. For the stock market, my intermediate and longer-term indicators are pointing to a recession and continuation of the bear market this fall, but this HUGE speculative short position gives me pause and makes me reluctant to get aggressively short the market right now or to recommend taking on large broader market hedges with inverse ETFs.

Elliott Gue

4:40

There are examples (like June 2002) where the market kept selling off despite a large speculative short position, but this situation does raise the risk of more short-covering near term before the market rolls. As far as bonds, we've seen a significant sell-off in Treasuries heading into this Friday's Jackson Hole event -- given the sheer scale of bets Powell will be hawkish I think there's risk bonds could spike/rates could fall near term almost regardless of what he says. I think he'd have to really shock markets to see a significant near term break higher in rates. Of course, remember that the futures positioning data is most useful over the short-to-intermediate term and it has less meaning for the long-haul outlook.

Guest

4:46

What are your current views on Devon Energy for new money? Thanks

Elliott Gue

4:46

Generally we like DVN though we prefer the producers in the model portfolio like EOG, CHK and PXD. Most of the producers are above our recommended buy targets after the recent advance, so we're advising you wait for a dip to commit new money. While we don't publish a specific buy target for Devon since it's not in the portfolio, it's following the names in the portfolio pretty closely.

Pete

4:46

What are your current thoughts on HEP, Holly Energy Partners? Thank you!

Roger Conrad

4:46

We've been somewhat cautious on Holly Energy Partners and its parent/principal customer HollyFrontier Corp, mainly because of what we've believed is inferior market position as a refiner vis a vis the blue chip Valero Energy (NYSE: VLO). It's notable that HEP has not raised its quarterly dividend since cutting it almost in half in May 2020. And the primary reason is margins really haven't improved as they have for other midstream companies--such as those in our model portfolio. Q2 results were improved at the top line by the acquisition of Sinclair Transportation Company. But other than that, there wasn't much to get excited about, particularly with recession a risk to reduce volumes in coming quarters. Dividend coverage is good at 1.77 times in Q2 and there's no immediate debt refinancing pressure, with the next maturing in 2025. But the credit rating is junk at Ba2 from Moody's and growth catalysts are few. Bottom line: We much prefer the midstreams in the portfolio and High Yield Energy List.

Victor

4:50

Hello Elliot. MRO experienced volatility in the past couple of months. However, as of the middle of July it developed a nice uptrend. Do you feel that it still has more on the upside or is it time to take some profits? Same situation with PDCE, do you see more upside there?

Elliott Gue

4:50

They're generally going to follow trends in the other energy names like PXD, EOG, CHK, OXY, so I do think the short-term trend remains higher and we could see some upside. However, we still see some intermediate to longer-term risks and would probably use any significant advance to near the spring highs as an opportunity to recommend taking some profits.

Clint W.

4:52

Hi Roger & Elliott: What is the biggest risk to the bullish thesis for Plains All American pipeline? Is the bullish case primarily dependent on volume recovery in the Permian? If so, if there is no significant volume recovery, what is your outlook on PAA just based on the company reaching their debt target? Thanks.

Roger Conrad

4:52

I think you've pretty much summed up the situation with Plains as a volumes dependent midstream company. I do think strong Q2 results and the guidance boost demonstrate clearly that management has successfully adjusted operating and financial policy to a tepid volumes environment overall in North America. And that limits risk even in a recession to the investment grade balance sheet and dividend, which in fact is likely to be raised at least 10% next spring. Attaining the debt reduction target and raising dividends should also push the stock higher over the next 12 to 18 months. Long-term, however, I think it's going to take a real volumes recovery to push PAA and PAGP toward our ultimate upside target, which is a return to the highs of the previous cycle in the 60s and 70s. By the way, Permian volumes are booming. What's holding Plains back now is tepid activity elsewhere. But again, our view is that will ultimately change as this energy cycle progresses.

Mary

4:52

Hiya Team,

Roger Conrad

4:52

Hi Mary. Thanks for joining today.

John C

4:56

If TTE is able to sell its natural gas production in Europe, without the cost of having to produce LNG, shouldn’t it reap a windfall in profits, especially considering how much higher natural gas prices are in Europe as opposed to the U.S?

Roger Conrad

4:56

Hi John. If you look closely at TotalEnergies' Q2 results, you'll see it's actually reaping a windfall in multiple areas. And you're right that what it actually produces in Europe it doesn't have to convert and ship as LNG, which saves considerably on cost. The problem for Europe ex-Russia is it doesn't produce nearly enough gas to meet its own needs, which is why it needs to import with LNG now that Russia is increasingly not an option. But for TTE, there's really an opportunity now on all ends of its business--including its rapidly growing pool of renewable energy assets. And I like the stock all the way up to 60.

Tom L

5:06

Roger, Now that the Biden legislation (Inflation Reduction Act) is law, how do you see this impacting the earnings and stock prices of your favorite utility stocks covered in CUI? Thanks from a long time subscriber to CUI and CUI+.

Roger Conrad

5:06

Thanks Tom. I think the tax credits in the IRA--combined with the spending in the infrastructure bill before it--is a real opportunity for utilities to accelerate rate base spending they're already doing in a wide range of areas. That definitely includes wind, solar and storage but also green hydrogen, carbon capture and wires and pipes infrastructure. I highlighted some of the individual opportunities at length in the August Feature article of CUI and plan to spotlight others going forward. The key is the tax credits will reduce cost of deployment, so while adding assets grows rate base, earnings and dividends, the impact of customer rates will be manageable. And the prospective dollar amounts are so huge that they should offset the negative impact on investment of rising interest rates and supply chain pressures as well.

Share prices have already moved up on the news, mainly by increasing utilities' outperformance of other sectors. These companies invest long-term, so earnings impact will be too.

Roger Conrad

5:08

Continuing Tom's question, as I pointed out in the August issue, the key to utility valuations going forward is being able to maintain earnings growth guidance-which for best in class companies is a mid-to-upper single digits percentage annually. IRA's tax credits certainly enhance their odds of being able to do so, even in an environment of high inflation and rising recession risk. I would not expect windfall gains in these stocks that are by definition long-term movers. But sticking to guidance growth in earnings and dividends is the surest driver of higher stock prices over time. So, yeah, IRA is really bullish for utiltiies.

Guest

5:15

Dear Roger, I know that you are not too bullish on fixed income at the present time. In your CUI plus you advocate the Vanguard Intermediate Tax Exempt fund.(vwitx) Are you still advocating purchases of this fund at current levels?

Roger Conrad

5:15

Yes, VWITX is one of those exceptions to my wariness of fixed income for several reasons. One, there's little real credit risk, given the fund holds over 14,000 individual bonds with an average credit rating north of A, and everything it owns backed by municipal authorities with taxing power. Two, fund duration is low, which limits risk to rising interest rates. Even in this extraordinary year of 40-year high inflation and with the benchmark 10-year Treasury note yield more than doubling, this fund is lower by just -6.7 percent. Obviously, we don't invest to lose money, but this is extraordinary resilience--and it also contrasts sharply with the big losses elsewhere in the bond market. And finally, the yield on the fund has now climbed to an attractive tax advantaged 2.4%--also a contrast to anything of similar risk. I am recommending the fund at 14.60 or lower and continue to hold a small position in the CUI Plus portfolio.

Aaron

5:19

Dear Roger, I have a large note maturing at the end of August.( $375,000.) Given the choices of VWITX, a money market, or individual muni-bonds, which makes the most sense to you at the present? Any suggestions are appreciated...I am 75 years old and currently have 40% equities and 60% bonds. Thank you.

Roger Conrad

5:19

Hi Aaron. I think if you're a high net worth individual and have a good broker who can find and buy individual municipal bonds with yields to maturity of 2.5-3%, investment grade quality and maturities of 2 years or less, then that's a great way to go to preserve capital and realize decent income. Failing that, VWITX is a great choice. I do, however, generally prefer the higher yields and dividend increasing power of high quality individual stocks to bonds of any stripe.

Tom L

5:25

How do you rate Enbridge's position in the natural gs export market? Also, how is their dividend reported at year end...as K-1 or standard qualified dividend? Thank you.

Roger Conrad

5:25

Enbridge is a corporation, so there is no K-1 to file. Rather, you receive what amounts to a 1099 at tax time, which includes the amount of "qualified dividend" (almost always 100%) as well as what's been withheld by Canadian tax authorities that you can reclaim as a credit on your own taxes.

As for exports, the company is a heavy shipper to the US and a player in both oil and natural gas. But management is currently considerably more aggressive in oil export transport than natural gas, earlier this month swapping gas assets for oil assets with Phillips 66. I rate the stock a buy on a dip to 42 or lower.

Victor

5:33

Hi Roger, I bought NEP at $15 when you recommended it over 5 years ago. It was an awesome pick Thank You!. Some analyst are neutral on this one. Is this something that you would keep no matter what happens with the economy/recession? I'm reluctant to take profits on this one.

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