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8/27/24 Capitalist Times Live Chat

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Hans

2:35

Elliott: PBF, In April this stock was at 60, last month 40 and now around 34, needless to say not a money maker in my account! What to do next.

Elliott Gue

2:35

I have been surprised at the decline we've seen in refining margins this summer. My view is generally that PBF has overreacted to the decline in margins, likely a function of "macro" concerns about (in particular) Asian energy demand/economic health. For a long-term holding, I prefer VLO -- there will always be a premium valuation on Gulf Coast capacity and I seem them earning well above-average margins through the cycle.

Elliott Gue

2:35

PBF is more of a trade -- we've recommended it in our shorter term trading portfolio. My view is that it's way undervalued at the current quote and based on current refining margins. I see limited additional downside even if margins remain low. At the same time, I am looking for a rally in energy stocks this fall that will boost PBF. Depending on how the refining fundamentals develop the next few months, we'd likely either use a rally as an opportunity to exit the PBF trade with a smaller loss or even add to the position on the view we retest the 2024 peak.

Hans

2:44

Elliott : ESI, added to the portfolio on 7/17 Year high, what is your outlook now for this one.

Elliott Gue

2:44

ESI makes chemicals used to manufacture semiconductors, so it's leveraged to the semi cycle. It's down less than 4% from our recommended entry in mid July, which is broadly inline with the SOX (Semiconductor Index) over a similar holding period. So, I think moves in the stock are mainly driven by the macro picture -- the pullback in the semis -- rather than any specific issues at ESI. Technically, ESI remains in a solid uptrend as well. We started with a small recommended position in the model portfolio and I continue to like ESI at any price under $29 (it's at around $26 to $27 now. My working hypothesis is that we'll see more upside in semis later this year as we did in late 2023. If that thesis works out, then I'd likely recommend boosting the position in ESI.

Mack

2:54

Hi Folks. I got the Smart Bonds slides from Sherry. (Haven't watched the video yet.) I was looking for a fund of muni bonds, but didn't see anything. Did I miss something? I have a good sized position in Tax Exempt Money Market yielding aprx 3.2%, and would like to move some $$$ out of that and into intermediate term bonds, Thanks.

Elliott Gue

2:54

We do have a number of Muni bond ETFs in our coverage universe, but don't currently recommend any in the model portfolio, mainly because we see better risk/reward in other corners of the bond market. We'll have a new quarterly review for Smart Bonds out late this week or first thing next week, but the bottom line is that we're at a key inflection point in the cycle with the Fed likely to cut rates next month and the economy weakening (but not yet to levels that suggest imminent recession). We will likely be making some changes to the model portfolio, including adding to some intermediate term corporate and government ETF exposure while reducing our floating rate exposure. We do offer some free commentary and a few recommendations over on the Smart Bonds Substack if you're interested is out latest thoughts (the presentation was a few weeks ago now). That's here: https://smartbonds.substack.com/

Lawman

2:58

Are you buiish on Uranium? If so, do you like Fission Uranium that has a buy out offer from Paladin pending? Do you think the Paladin purcase of Fission is consummated?

Elliott Gue

2:58

Generally we're bullish on uranium and nuclear power. However, at this stage of the cycle, we're not recommending any of the junior names like Fission. The only name we like right here is Cameco (CCJ).

Generally, uranium stocks have seen a bit of a correction this year after a tremendous runup. That's common in bull markets for the group, but it's generally not a time to reach for risk in our view, we'd rather circle our proverbial wagons around a high-quality name like CCJ.

Roger Conrad

3:01

Hi everyone. Thanks for joining us today.

Lawman

3:02

What are your thoughts on gold?

Elliott Gue

3:02

I'm bullish gold. I think we'll see $3,000 an ounce at some point in the next 12 to 18 months (that's been my target for some time) . I'm also bullish on silver which tends to follow gold higher, especially in powerful rallies for gold. . In my Creating Wealth service we have positions in GLD, SLV and gold royalty and mining firm Wheaton precious Metals (WPM).

Mari

3:09

Hello Roger,
Please comment on latest development with HE as reports came out that they don’t have money/financing available for settlement
Thanks

Roger Conrad

3:09

Hi Mari. Step one for Hawaiian Electric's recovery was a settlement of litigation in the Maui fire damages case. Management has elected to enter a deal brokered by the state of Hawaii, rather than risk litigation. And as a result, what once appeared to be a potential $5.5 bil liability has been cut to about $1.99 bil. Step two will be arranging financing. S&P today put the company's already deep junk B- credit rating on watch for a potential cut today--citing management not submitting a plan to date. And the stock has understandably dropped in the couple weeks since management acknowledged the challenge of putting a financing plan in place. It's entirely possible the company will be unable to secure financing and declare Chapter 11 at the utility level--in which case, the bank should be worth about $10 a share. But the state has gone this far to support the company. And I think they will do so once this settlement is official. Look for more on "rags to riches" utility stories in the September issue of CUI.

Lawman

3:16

Do you like TTE at this level? Do you prefer TTE over American multis such as CVX and XOM? How do you envsiion oil majors holding up in a decarbonizing world?

Elliott Gue

3:16

We do like TTE. In fact, I'd probably rank it as my favorite of the European majors with BP at the bottom of that pack sadly, though I think even BP will perform well in absolute terms amid a commodity supercycle in coming years.

The EU majors trade at a valuation discount to the US names -- XOM and CVX. Some of that is due to the US equity premium -- simply put, if we look at companies in the same industry with a primary US listing and compare valuations to a primary London or EU listing, the US names generally trade at a valuation premium. That's why we've seen names like CRH switch to a US primary listing to boost valuations. I wouldn't be surprised to see TTE and/or SHEL switch to NYSE primary eventually as management teams haven't ruled that out.

Elliott Gue

3:16

However, some of the EU discount is merited vis a vis the US majors for the simple reason that XOM/CVX have superior production growth prospects. XOM in particular is my favorite as they invested in new projects (like Guyana) at the lows of the cycle back in 2018- 2021, and are now enjoying a free cash flow waterfall from rising cheap-to-produce oil. As for decarbonizing, it's important to remember that fossil fuels still account for 81.5% of global primary energy consumption and that's only down 4 to 5 percentage points over the past 20 years. So, oil and natgas will be with us for decades to come. CVX and XOM are investing in alternative energy technologies and projects, but they've done a better job (in my view) of not starving their core oil/gas businesses of capital than the EU majors.

Kerry T

3:19

Hi Roger:

Any updates on NFE, WDS and VET?

regards.

Roger Conrad

3:19

Hi Kerry. We cover NFE (New Fortress Energy) in our EIA MLPs and Midstream coverage universe--currently rated a buy up to a much higher price. We track WDS (Woodside) and VET (Vermilion) as buys up to 25 in the Canada and Australia coverage universe.

The most recent news on NFE is a cut in its credit rating by Fitch and in its outlook to negative by Moody's--citing leverage taken on recently to expand LNG operations in Latin America, weakness in commodity prices and upcoming refinancing. Puerto Rico is 46% of cash flow, which the rates also perceive as a risk. We think the investments will pay off as the energy cycle unfolds and maintain the advice. But note that our top recommendations are always what's in the Model Portfolio.

WDS and especially VET have slipped because of weakness in natural gas prices. The good news is Q2 results showed investment plans on track and dividends. But shares aren't likely to mount a comeback until natural gas prices do.

Hans

3:25

Elliott: OVV, dividends 2.7%. Stock, last 3 month down 9%, why is this down for an oil/gas stock compared to its peers.

Elliott Gue

3:25

OVV has more natgas exposure than a name like EOG, for example and the gas market remains oversupplied. So, if we look at the last 3 months, you have the oilier names like EOG up (+5.15% since late May), the oil/gas mix names like OVV down mid single digits and the gassy names down the most like EQT/CHK. I believe gas prices have limited downside from the current quote, especially with US production now falling again. However, I don't see huge upside for gas prices this year as storage is still bloated. In 2025, I think we'll see gas benefit from new US LNG export capacity and that will benefit high quality gas names like EQT/CHK as well as the gassier mixed producers like OVV.

Kimberly in Oregon

3:30

Hi Roger & Elliot,

I’ve had a nice gain on Solaris Oil Fields (SOI) after picking it up at the beginning of the year for its juicy dividend. SOI recently jumped up on news of an acquisition. After listening to the earnings call, I don’t hear a growth story and was going to sell into strength & redeploy the cash. Thoughts?

Thank you

Roger Conrad

3:30

Hi Kimberly. We've rated Solaris a hold in our EIA "E&P an Services" coverage universe for some time, as we have the vast majority of services companies--the exceptions being Baker Hughes and SLB, both in the Model Portfolio. Services companies are typically last to the party in energy upcycles and this time around is pretty much happening the same way.

Solaris was a top recommendation in the previous cycle. And we continue to be impressed with management's long-term strategy expanding its niche providing low cost solutions for proppant used in hydraulic fracturing. The business is still quite cyclical, with drilling volume the key driver of revenue. The announced acquisition of a company providing mobile equipment for completion of oil and gas wells with potential application for data centers created excitement in the stock that may not last. But this is also a stock trading at less than half its high of the previous cycle. It's proven staying power and shares should go much higher this cycle.

Pamela

3:39

Hi Roger ..

And, as usual, thank you for doing these webchats. They are quite helpful.

Can you please give us your opinion on Artis Reit? I have held this stock for many years and just wonder whether it is worth holding given the big drop in value.

Also, what is your feeling on Innergex? Thanks

Roger Conrad

3:39

Hi Pamela. Artis is selling for basically the same price it did a year ago in local currency (Canadian dollar) terms--though it's half where it was two years ago. I think management's decision to shift strategy from running property to just investing in it has made it difficult for investors to value, which has earned the stock a persistent discount to other Canadian REITs. That said, management has been effective increasing net asset value the past couple years while boosting the balance sheet. And investments like the recently acquired 20% of Dream Office show a willingness to buy low--for the promise of selling high when market conditions improve. The REIT has also been effective selling "high"--including the sale of 9 industrial properties in Arizona earlier this month.

I cover Artis and other Canadian REIT in my REIT Sheet service. And anyone interested should contact Sherry at 877-302-0749, M-F, 9-5 ET. I had it on the Recommended REITs List for some time, then recommended selling and it's now a hold.

Roger Conrad

3:41

Continuing with Pamela's question on Artis--the stock increasingly appears to have bottomed, as cash flow is now regularly covering the dividend. And net asset value is roughly twice the current price--so I'm starting to warm up to it again. Stay tuned.

Lawman

3:47

AES below dream price. To what do you attribute this poor price action, and is this a buy, or a falling knife?

Roger Conrad

3:47

Hi Lawman. I think weakness in AES is probably due to some combination of three main factors: (1)The company is associated with US renewable energy investment in an election year with a presidential candidate professing hostility to solar and wind, (2) Though AES has shifted its investment strategy more conservatively the past few years it still has substantial investment in the developing world, and (3) Though the company has now achieved investment grade ratings at the parent level, there's still some concern about overall debt leverage.

I think the company answered these concerns quite well in Q2 results and guidance, which I highlighted in the August CUI Utility Report Card comments--including the boost in 2024 guidance not counting "tax attributes." And in the meantime at 8.65 times expected next 12 months earnings, it's certainly pricing in worst case scenarios.

Can it drop further? Absolutely. But AES is certainly a good opportunity to buy low now for a much higher price later in the energy cycle.

Lawman

3:51

What are the positive and negative catalyts for AETUF? Are there better energy comanies to invest in?

Roger Conrad

3:51

Our favorites in the energy producer space are always going to be the companies in our Energy and Income Advisor Model Portfolio. We do cover a number of other companies like Canada's ARC Resources--which I've actually tracked now for more than 20 years. And I think Q2 results showed once again the resilience of the investment plans, particularly as Canada develops export infrastructure on its west coast to sell very low cost LNG and NGLs to Asia. And despite weakness in gas prices this year, management affirmed 2024 guidance. So we like ARC and rate the stock a buy up to USD18 in our EIA Canada and Australia coverage universe--but again our favorites are always in the Model Portfolio.

Lawman

3:59

BEP is another stock below its dream price. Is the future of this comany, as well as AES, dependent upon the democrats holding the white house, or could these stocks do well under a republican administration?

Roger Conrad

3:59

I think investors need to be very careful not to be distracted by (1) potential outcomes of November elections and (2) supposed policy consequences if one side or the other wins. A lot of money has already been lost this year following politics-based investing strategies and I suspect a great deal more will. For example, oil and gas has been the top performing S&P 500 sector under the Biden Administration, while renewable energy has been among the worst. And it was the precise opposite in the Trump years.

AES, Brookfield Renewable, Clearway and others are successful as businesses to the extent they can sign long-term contracts with creditworthy counterparties. They were during the Trump years and have been under Biden, demonstrated by consistently meeting guidance and raising dividends. And there's every indication to expect they'll do the same whether Trump or Harris wins in November. And that's what's important to investors now with these stocks cheap as they are.

Roger Conrad

4:05

Continuing on Lawman's politics based investing question, there is some concern--evident on Q2 earnings calls--that (1) Republicans may repeal IRA tax credits and (2) that will derail these companies' investment plans. I think #1 is possible--though 18 Republicans in the House recently urged leadership not to try, as their districts have benefitted greatly. But I see no chance of #2 so long as these companies execute. They were growing before IRA tax credits. And demand from corporate customers they rely on is largely immune to politics.

Lawman

4:17

Are EPD, ETE, and KMI still good values at current levels? Do you like the MLP space and, if so, what stocks do you like best, and why?

Roger Conrad

4:17

All three of these midstreams have posted solid stock market returns this year--as well as operating results as we noted in the EIA issue that posted yesterday. But all three are still selling below their highest recommended entry points--and well below their highs for the previous cycle.

As we've said before, midstream stocks don't reach full valuations until fairly late in energy price cycles. And in our view, the midstream stocks we hold in the Model Portfolio have a very long way to run. They would likely lose ground in a full-on stock market selloff. But at the current low level of valuation--high yields especially--we think that's a risk well worth taking.

Lawman

4:20

Any thoughts on MLP ETF's such as KYN?

Roger Conrad

4:20

KYN is not an exchange traded fund--it's a closed-end fund, meaning holdings are actively managed and the quarterly dividend is at the discretion of management.

In general, we prefer buying individual stocks to funds--we have control over what we own, how much and at what price. But I like Kayne Anderson Energy Infrastructure as a triple play on energy stocks: High yield, appreciating stocks and a potential closing of the current 15% discount to net asset value.

Lawman

4:23

Thoiughts on MPLX?

Roger Conrad

4:23

MPLX is currently trading above our highest recommended entry point of 40. But it has given investors opportunities this summer to buy at that price and those looking to enter new positions should be patient for a pullback to that price.

As noted in the issue of EIA that posted yesterday and is currently on the website, MPLX had solid Q2 results that likely point to a guidance boost later this year--as well as an upper single digit percentage dividend boost. There's also the possibility that 63.44% owner Marathon Petroleum makes a high premium bid for the rest of the company.

Lawman

4:27

Thoughts on OKE and PAA/PAGP?

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