JotCast | 8/27/24 Capitalist Times Live Chat

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8/27/24 Capitalist Times Live Chat

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Roger Conrad

4:27

ONEOK looks a bit expensive to us at this time. We highlight its Q2 earnings, guidance and prospects in the EIA issue that posted yesterday.

Plains All-American and its parent Plains GP are still selling for less than our highest recommended entry point of $26.50 and at barely 20% of their highs of the previous cycle. We also review Q2 results and guidance in the EIA issue posted yesterday, including reasons behind the guidance boost. And we see much larger gains ahead.

Lawman

4:32

VET seems to be lagging the market? How do you view the future of this company?

Roger Conrad

4:32

As I noted answering an earlier question on Vermilion, the stock has slumped along with other primarily natural gas producers--mainly because the commodity has continued to slide. But as Q2 results and updated guidance showed once again, management is running a very conservative operating and financial policy. And as of the first half of this year, that's kept production on track and the balance sheet strong (net debt to trailing funds from operations is just 0.7 times. The company paid CAD19 mil in dividends and bought back CAD47 mil of its stock--even while paying off CAD38 mil of net debt. Ultimately, earnings, dividends and the share price won't make much headway until gas prices stabilize and rebound. And our favorite producers are those in the Model Portfolio. But Vermilion is looking very cheap for patient investors.

Lawman

4:36

As between T and VZ which do you prefer, and are either or both good buys at these levels?

Roger Conrad

4:36

My current advice on AT&T is buy at 20 or less and for Verizon its buy at 50 or less. Those with T-Mobile US (Buy<140) are my only current buy recommendations in the US telecom sector--as market share (both revenue and in terms of network traffic) continues to concentrate in the hands of the Big 3 wireless companies. Between AT&T and Verizon, I generally view VZ as the more conservative. And it's also the only one raising dividends regularly at this time, with another boost ahead for next month. But both stocks are cheap at 8.8X (AT&T) and 9X (VZ) expected next 12 months earnings. And asked to choose between them, my advice is split the difference and own both.

Lawman

4:42

Thoughts on WMB and WES?

Roger Conrad

4:42

We answered a pre-chat question on Williams that's posted a bit earlier in the chat. Generally, it's a great midstream company with many valuable natural gas pipeline assets, particularly in the East and South. And the solid 2024 guidance and Q2 results point to another mid-single digit percentage dividend increase next year. That said, WMB is trading well above our highest recommended entry point of 38 and we see much better value in our Model Portfolio midstreams.

The same is true of Western Midstream (Buy<35) --though here we have an additional concern. Mainly Occidental Petroleum is now selling down the ownership interest it acquired with the former Anadarko. It now owns 43.66%--and more sales appear likely as OXY pares down a debt load still at $27 bil plus. We're also concerned about OXY's drilling plans and their impact on WES' future growth. But in any case, we see better value in the Model Portfolio.

Robert

4:46

Good morning from the West Coast. What do you think of EPR? They are a REIT based in Kansas City. Thanks again Roger for all of your great advice.

Roger Conrad

4:46

Hi Robert. We do cover EPR Properties--formerly Entertainment Properties--in the monthly REIT Sheet service. The next issue (September) will feature our data bank of 90 or so US and Canadian REITs, along with highlights from Q2 earnings results and guidance. Current advice on EPR is a buy at 42 or less, which is a bit below the current prices. We're reluctant to raise that at this time, mainly because adjusted FFO is downtrending this year. The dividend was still well covered in Q2. But the move up in the share price this month is much more related to a chase for yield than actual company results. So we'd be patient before setting new positions at this time.

Jeff B

4:49

Thanks Elliott for the answers on TLTW and FLBL. Am I correct in understanding your answer that they both move in opposite directions as interest move?

Elliott Gue

4:49

Simply put, FLBL as an ETF will tend to move higher when yields rise and outperform on a total return basis because the loans in the ETF carry floating rates. It will tend to underperform the wider bond market when yields fall for the same reason (floating rates on loans adjust downwards when rates fall).

That's a dramatic simplification as there are other factors such as economic conditions and the speed of decline in rates that factor in. But, it's a good rule of thumb.

TLTW will tend to be the opposite -- it's likely to perform best when rates fall and underperform when rates rise.

Dan N

4:53

Hi Roger - I recall seeing a couple Report Cards ago that Brookfield had taken a small stake in NEP. (2%?) Is there any news since then? Possible harbinger of NEP private equity financing solution?

Roger Conrad

4:53

Brookfield Corp currently holds 2.33% of NextEra Energy Partners' shares outstanding. And there is other demonstrated private capital interest in ownership of renewable energy assets operated by NEP's parent NextEra Energy.

The big question is the price these companies are willing to pay to invest--and if it will be enough to avoid significant dilution of asset values when CEPF debt starts to mature in 2027.

Our view has been that if NEP can access outside capital at an economic enough price to resume drop downs from NEE, everything else will fall into place--and the stock will recover last year's lost ground in a hurry. Meaningfully lower interest rates would be a big step in that direction. And it would likely induce private capital entities to dig into their deep pockets a bit more.

My sense is a lot of people are talking now. Until something concrete is announced, many investors are going to assume the worst with the CEPF maturities and only buy NEP if there's a dip to the low 20s or lower.

Roger Conrad

4:55

Continuing on NEP, they do have two years plus to make something happen at a good price. That for me is hard to bet against, in light of NextEra's demonstrated ability to get things done, its consistent support of NEP as a funding vehicle when times were tough and the fact that financial markets appear to be finally moving in the right direction.

Dan N

5:01

Hi Roger - market seemed to shrug off the newses that Dominion (D) acquired two more big offshore areas for wind development, one of them for what sounds like bargain price. Thoughts? Why no reaction?

Roger Conrad

5:01

Hi Dan. I was actually a bit surprised there wasn't a sharply negative reaction in Dominion shares on this news. Offshore wind is under attack on multiple sides as an energy source--in an environment where the energy debate for many is between good and evil, rather than what works to provide reliable, safe and affordable energy in a rising demand environment.

I agree that Dominion is making a very low risk investment here--winning leases that are basically adjacent to its giant Coastal Virginia Offshore Wind project at a fraction of the cost comparable leases were going for just a couple years ago. And its a safe bet they consulted with Virginia regulators in making the investment, which is key to getting regulatory support for another project if they get CVOW up on time and budget--as they are doing now. But I would not expect the stock market to reward them for the investment in the current politics charged environment--at least until after the November election is no longer headlines.

Guest

5:05

Hi guys. As a new Smart Bonds subscriber can you also provide your opinion on DSL and PDI. Both are fixed income products. Thanks Dudley

Elliott Gue

5:05

DSL primarily owns a portfolio of corporate bonds and a quick glance at their current holdings shows a large number of bonds issued by foreign companies, particularly in emerging markets. We like emerging market bonds here, particularly as the US dollar loses some altitude. So, generally, no specific issues with their portfolio. That said, this closed end fund has a duration over 5 years and employs leverage -- borrows money mainly to show a high current yield. The end result of all that is significant sensitivity to interest rates -- it will perform very well when rates fall and can get hit very hard when rates rise. We think the cycle is getting close to a point where we want to add duration to the SB model portfolio - -add exposure to longer-term government bonds. But, we'd rather do that gradually than to go all-in with a leveraged fund like DSL.

PDI has a slightly different portfolio -- more mortgage bond exposure -- but also uses leverage to enhance returns and boost their current yield (now 13.9%).

Elliott Gue

5:05

In our view, with bond ETFs and closed-end funds, the most important point is your total return rather than the annualized yield. I see (and follow) a number of closed end funds that offer sky-high yields but the total return after netting out the decline in the price of the ETF is less impressive.

Sohel

5:08

Hi Roger, Thanks for holding these chats - never miss them. Can you comment on REIT valuations in light of "soft landing" and dropping interest rates?

Roger Conrad

5:08

Hi Sohel. I think it really depends on the REIT. And a number of those I've pounded the table for the past couple years have now soared above my highest recommended entry points--notably AvalonBay Communities (NYSE: AVB), which is actually closing fast on a price point where it may make some sense to take some cash off the table.

Markets move very fast these days--with more money passively invested in stocks than actively managed. And we'll do best by being nimble, selling pieces of successful positions that temporarily run a long way in a hurry.

That said, lower interest rates are very bullish for many REITs as businesses the next few years--they're the best chance to unfreeze the M&A market, refinance existing debt at rates that don't eat into earnings and provide funding to spur new development. All three have been missing the past few years. A resurgence will mean faster earnings and dividend growth for REITs--and I think ultimately much higher prices than we've seen to date.

Roger Conrad

5:09

By the way, for anyone interested in getting a look at the monthly REIT Sheet, please contact Sherry at 877-302-0749 anytime M-F, 9-5 ET.

Sohel

5:14

Hi Roger, Question about the MLP WES. Bond King Bill Gross seems to love it and is touting it. I already have quite a bit of ET & EPD and so was starting to add around $36-37? Yield is solid. Your thoughts?

Roger Conrad

5:14

We do recommend it as a buy on dips to 35 or less. But we also see better values elsewhere in midstream--mainly the stocks in the Model Portfolio when they trade below highest recommended entry points.

I think Q2 results and guidance do support the dividend at the rate it was raised to earlier this year. And while there is no credit rating, the balance sheet appears to be pretty solid and Western Midstream able to issue debt at good rates--$800 mil of 10-year bonds at 5.48% earlier this month.

But that said, Occidental is selling down its stake. And its drilling plans as Western's biggest customer are not exactly clear going forward. Bottom line--we'd be patient for the lower price before buying in. It was there earlier this year.

James

5:15

Hi Elliott, what are the potential positive or negative catalyst for SLB heading into the 2nd half of 2024? The stock has been in long correction for close to 1 year since making recovery cycle highs at 62 in Sept 2023 (now at 45). I guess this is pretty standard price action for oil services in the early stages of a cycle?

Elliott Gue

5:15

Hi, thanks for the question. Yes, I've probably gone through 2 dozen+ conference calls in the past several weeks for energy companies, including SLB. My sense is that most companies are trading more on "macro" factors than company-specific fundamentals. SO, the overarching concerns are things like the level, and near-term path of oil and gas prices, rather than, for example, SLB's near term growth prospects. SO, I think near term, the key catalyst would be commodity prices -- i.e. a recession/decline in oil prices would probably keep a lid on SLB. In contrast, if the Saudis were to extend their production restraint and allow global oil inventories to fall, I'd expect to see some rotation into energy stocks and SLB. One factor is that passive flows into indices like the S&P 500 Energy Index can drive these stocks in the short-term, when markets are focused on the big picture.

Elliott Gue

5:15

Right now, I think markets are nervous about the health of the global economy. There are some jitters around recent economic data and the potential the Fed is "behind the curve" in cutting rates. This is nothing unusual -- go back and loom at a chart of energy stocks through the last big supercycle and you'll see myriad pullbacks around a longer-term trend higher. I think that's where we are now.

Guest

5:22

Hi Roger: You have been gracious in the past to request your readers to submit names of prospective REITS to be candidate companies for your REIT Sheet. What can you tell us readers about The Macerich Co REIT (MAC) and Park Hotels & Resort REIT (PK)? I have seen them recommended by 1 other newsletter and actually bought by an active index - the Baron Real Estate Income Fund

Roger Conrad

5:22

Thank you for those suggestions. Macerich is in essentially the same business as Kimco and others on my Recommended List in REIT Sheet--but with a twist. It's far more involved on the development side. I have to say management not issuing guidance after announcing Q2 results is something of a red flag for me. And despite recent asset disposals, there's still a fair amount of debt leverage. I think lower interest rates will improve business conditions and Q2 results appear to be better than many expected. But I'm more comfortable with the shopping mall REITs we have;

PK pays a variable dividend--which is a plus for sustainability given the BB- credit rating. But it also makes shares more volatile than other REITs. I prefer GLPI and ELS in the resort space. But I will consider adding it as well as Macerich to coverage--thank you.

Sal P

5:24

Any chance we would revisit UNG even as a trade ?

Elliott Gue

5:24

YEs, always a chance in that I watch it constantly. However, right now UNG owns October gas futures which sell for $2.10 /MMBTu. October is a shoulder month before the start of winter heating season, so with gas storage bloated I struggle to see much upside there. Now, in a few weeks (mid September) UNG rolls to the November contract, which sells for closer to $2.50 -- that's a lot of contango there and that negative roll yield will tend to be bad news for UNG as an ETF. Finally, in October UNG rolls to December futures which currently fetch north of 3.00, also a lot of negative roll yield. Also, for December 2024 gas futures to sustain 3+, I think we need a cold start to winter heating season and significant normalization in bloated storage. I just don't see the trade at this time.

Mark Z

5:30

Greetings and thanks for hosting another chat. What's your take on DVN. Back in late 2023 it started to move with the likes of CVX and HES but went south when the others went north. Its been in the doghouse since.

Elliott Gue

5:30

I think DVN has had some operational issues since 2022. They've underperformed on oil production growth and weak capital efficiency (basically costs exceeding expectations). My view is that they've managed to put many of those issues in the rearview mirror. Year-to-date they've underperformed the S&P 500 Energy Index mainly because of XOM, which is a leader. However, they're up close to the same as CVX and they're beating a lot of the other independent names like OXY and OVV. Near-term it's more of a macro situation for all the energy names, but I think DVN is a valid turnaround play longer term. Not a current reco, but definitely on the radar.

Sohel

5:34

Hello Elliot, Thanks for holding these chats. Incredibly useful. I assume you are still bullish on VLO. What is the reason for the sudden drop? I thought 145-150 was good floor but that seems to have been eroded. Given the current conditions, what's a good entry point for VLO?

Elliott Gue

5:34

The market remains focused on weak refining margins. I think weakness in refining margins is at least partly a macro issue and concerns about demand growth, particularly in Asia (squishy Chinese demand has been the main concern there). My view is that longer-term VLO is the best of breed US refiner and through the cycle it'll have elevated margins. Right now, we're in a soft patch because of those macro concerns. I'd like to see some sign that margins are stabilizing again before recommending we add to the position in the model portfolio.

Susan P

5:37

Can't thank you guys enough for the opportunity to ask ??

Elliott Gue

5:37

Thanks Susan both for the kind comment and for participating in the chats. Both Roger and I find them very useful as well due, in part, to the fact it helps us understand readers' concerns regarding particular companies and sectors. Over the years I've found that very useful feedback for identifying future issue topics.

Sohel

5:48

Hi Roger, You still rank ET as aggressive, I understand that it's not in the league with EPD but how aggressive is it? Given, it's higher likelihood of capital gains and higher distributions, i would love to add a bit more ET after the recent decline. Your thoughts?

Roger Conrad

5:48

The issue with Energy Transfer--what in our eyes made it a higher risk/reward situation than say Enterprise--over the past decade or so has always been debt. And the need to cut leverage was in fact the reason the company temporarily reduced its dividend (now fully restored and then some) back in late 2020.

That said, in our view, ET has made strong progress reducing operating risk and strengthening its balance sheet the past four years. And as a result, we actually now consider it "conservative" from an investor objectives standpoint. That's indicated now in both the High Yield Energy List and the MLPs and Midstream table in the current issue of EIA. And we see ET as a buy up to 18, Our review of Q2 results and guidance can be found in the Portfolio section of the EIA issue posted on the website yesterday.

Sohel

5:54

Hi Roger, I have some NEP bought at $45-$48, it's now roughly half that. I saw your comments on rating it a hold - I sold some for tax loss perspective and plan to buy back anytime after the requisite 31 days. If the distribution is expected to drop won't there be a knee jerk reaction drop at that time - just wondering if you expect that or is that already baked in?

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