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8/27/24 Capitalist Times Live Chat

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Roger Conrad

5:54

NEP is certainly priced for a pretty steep dividend cut by any measure: The yield of 14.3%, for example, compares to just 5.8% for yieldco peer Clearway Energy, despite very similar recent and guidance dividend growth rates. But that said, I don't view a dividend cut as inevitable--in fact, it only is if capital market conditions for NEP don't improve enough to restore drop downs from NEE by the end of 2026. And with the Fed pivoting to lower interest rates, I think the assumption nothing will improve by then even temporarily is pretty aggressive.

I don't think the stock is going to move much until NextEra Energy announces a financing plan for the CEPFs that start to mature in 2027 that doesn't undermine long-term value. But as management says every earnings call, they don't see a time crunch here. And there's no reason to assume NEE won't continue to support NEP in tough market conditions on the promise it will again be a useful funding vehicle--as it did in the previous decade under worse conditions.

Sohel

5:58

Hi Roger, Could you compare AES and HASI? I own HASI was thinking about adding AES.

Roger Conrad

5:58

Other than the fact they both invest in wind, solar and energy storage projects, AES and HASI are pretty much apples and oranges. HASI is I think the more aggressive of the two, as its growth depends on being able to earn returns on equity and debt investment in projects at rates that are sufficiently higher than its cost of capital. AES, by contrast, earns a guaranteed rate of return at its regulated utilities and contracted renewable energy facilities--which it operates. HASI by contrast has no operating assets.

I think both stocks are very cheap. And both companies are on track with growth plans--AES actually raised 2024 guidance earlier this month. And I would look for them to shed current stock market discounts for renewable energy exposure after the election--no matter who wins.

Susan P

6:04

Any updated thoughts on Alliance Resource Partners? Can their royalty stream grow enough to be meaningful? Also, have read that existing coal facilities are conducive to being transformed into nuclear energy sites? I understand the current price is above your buying recommendation. The distribution has been steady for the last 7 quarters but can be volatile. Not sure if any analogy to Altria's ability to hold up as a stock (due to buybacks and cash generation), despite diminishing demand, is crazy?. Thanks tons for the time and effort to answers these questions.

Roger Conrad

6:04

Hi Susan. I think the primary appeal of Alliance Resource Partners is the dividend, period. It was extremely attractive when we entered the position in the High Yield Energy List for EIA--it's less so after recent gains in the stock and we are not raising our highest recommended entry point above 22.

Alliance is still finding a market for its coal overseas. And postponed closings of certain coal plants in the Northeast--along with surging demand from data centers--has kept US demand from contracting too quickly. But really I think you've hit on a good analogy with Altria. Mainly, the play here is for ARLP and MO to replace revenue lost from their traditional market (coal and cigarettes) with other products (gas and smokeless tobacco)--as they raise earnings (and for MO dividends) with cost cutting, debt reduction and stock buybacks. They're income stocks with some growth--not growth stocks. And that does restrain what we're willing to pay for them--MO at 50 for example.

Roger Conrad

6:05

You're right about old coal plants being good potential sites for nuclear--I explored that as well as other nuclear power opportunities in the August Conrad's Utility Investor feature article.

Sohel

6:06

Hi Roger, Follow up question on AES ... is the dividend qualified?

Roger Conrad

6:06

Yes it is, just like any common stock. So is Clearway and Hannon Armstrong. Brookfield Renewable Partners (BEP) is an MLP, but its C-Corp shares (BEPC) also pay a qualified dividend for tax purposes.

BKNC

6:13

What are your preset thoughts on CVS and BCE? I Telus is in the report card, but I do not think you have recommended it. I am curious your thoughts on that as well.

Roger Conrad

6:13

Starting with BCE, as my August CUI Utility Report Card comments indicate, I think there's been too much pessimism on BCE's dividend safety. And in fact, we have seen a bit of a recovery in the share price since Q2 earnings and the guidance update, which did indicate precisely that. It's true Canadian telecoms--Telus, Rogers and Quebecor included--face an aggressive regulatory regime in Canada. The current issue is wholesale rates for fiber broadband networks that the companies have said will discourage new investment in fiber broadband. And in fact, BCE and its rivals have cut CAPEX in response. The problem here is the regulator doesn't appear to be talking to industry but rather seems to be trying to score political points for the government. But we've all seen this movie before--the end result is fiber in the ground will be more scarce and valuable and that means higher rents for owners. And the meantime, lower CAPEX means higher free cash flow for debt reduction, stock buybacks and dividends.

Roger Conrad

6:14

So while Canadian telecoms will probably lag until the regulatory environment improves, the long-term value is still there. And it's a safe bet they'll outlast the current government. I wouldn't really load up on them. But I'm comfortable sticking with BCE at this time.

6:15

CVS is a hold per my comments in the most recent CUI Plus/CT Income update. I think the underlying business and balance sheet are still solid and the long-term plan to integrate pharmacy, health care and insurance is still a very good one. But I didn't like the second guidance cut in a row and I want to see some improvement before I recommend anyone buy additional shares.

Jim N

6:17

Do you have any concern re NEP dividend?

Roger Conrad

6:17

Hi Jim. Not until 2027, when more of the CEPF portfolio matures. And as I've answered here, my view is by then NEP will again be a valuable funding vehicle for parent NextEra Energy's aggressive renewable energy buildout--and the CEPF refinancing will not be a catastrophic event.

Andy

6:26

BEP. Why in the face of the Microsoft contract and apparent new possibility of nuclear power being more acceptable do you think this stock is underperforming. It seems to be cash positive, is there a debt issue?

Roger Conrad

6:26

Hi Andy. I think it's all in the name--mainly, any company with the word "Renewable" in its name is going to be viewed with trepidation in the current election cycle, where the public and politicians talk about energy sources in quasi religious terms.

In Brookfield's case, it's name obscures the fact that at its core it's a hydro company, its wind and solar facilities are under long-term contract with the world's strongest corporations as is its development pipeline and its a 50% owner of Westinghouse in partnership with Cameco.

But the important thing for shareholders is business is growing on target with management guidance, as highlighted in my August CUI Utility Report Card comments. And sooner or later, that's going to be reflected in the share price and returns for patient investors.

Sal P

6:32

Afternoon Gentlemen Question do we cover enb ( Enbridge ) and if we do what is your outlook on the company in addition to are 15 percent taxes held on this stock .

Roger Conrad

6:32

Hi Sal. We actually cover Enbridge in Conrad's Utility Investor--as the owner of gas utilities--as well as in Energy and Income Advisor. And the current advice is to buy at 42 or lower. There is 15% Canadian dividend withholding tax, which can be recouped as a credit on your US taxes.

We like the company for its size and scale as North America's largest midstream/utility company, for its strong balance sheet and for its positioning to capitalize on North American energy exports to Asia and Europe. The big issue for the company this year has been closing the purchase of Dominion Energy's natural gas distribution utilities, a process now almost at the finish line with North Carolina regulators considering a settlement. Next year's will be at last winning permitting to reroute the Line 5 pipeline. But this company is in good shape to keep growing and paying a safe, high dividend.

Guest

6:35

Whats TLTW status? Did I miss a sell recomendation?

Elliott Gue

6:35

No, I still like it. My last article on TLTW is here: https://open.substack.com/pub/smartbonds/p/double-digit-yield-trap-or-...

BKNC

6:37

When it comes to Mid stream companies, I tend to avoid MLPs. The K1s have things that just are not clear for tax reporting, and I have found it to be not worth the hassle and potential to make a mistake. You recently sold EQT and recommended BSM. I chose not to participate. I am sure I am not the only one who avoids MLPs. Do you have other mid-steam recommendations with no K1? I assume KMI may be on that list. What would be your favorites?

Roger Conrad

6:37

First, I want to clarify for everyone that we only swapped EQT Corp for Black Stone Minerals in the CUI Plus/CT income Portfolio. We did that because--while we did made a solid profit from EQT's acquisition of the former Equitrans Midstream--the EQT shares we received yielded a good deal less than the Equitrans shares they were exchanged for. The purpose of the CUI Plus/CT Income portfolio is high income first along with safety of principal, with inflation beating growth secondary. As we exchanged a stock yielding less than 2% (EQT) for one yielding north of 10% (BSM).

We did NOT recommend selling EQT Corp in Energy and Income Advisor--where it remains a strong buy in our Model Portfolio. EQT after buying Equitrans is set to be one of the lowest cost natural gas producers in the world. And while low gas prices have hit gas producers across the board this year, we still believe we'll see at least a double and maybe a triple this cycle in EQT shares.

Bottom line: Two great stocks, but two different portfolios

Roger Conrad

6:39

As for avoiding MLPs, that's my usual practice in the CUI Plus/CT Portfolio mainly to avoid complications. Black Stone in my view is worth the added complexity and for disclosure I will say I do own MLPs in my SEP--every year, I get a K-1 but also a notice from the custodian that my total account UBTI is not more than $1,000--so there's no additional filing or taxes due.

6:43

The other reason for buying Black Stone is it gives us a play on a recovery in natural gas--which is key to the diversification of the portfolio as well. If you're looking for an alternative, the best place would be the variable rate dividend companies I highlighted back in June in Energy and Income Advisor. You can use the search function (the magnifying glass at the top of the page) to find the article. There's nothing that currently yields as much as BSM there. But several companies like Chord Energy (NSDQ: CHRD)--not an MLP--are likely to ramp up payouts with energy prices in coming years.

Dan N

6:49

Thoughts on ET's acquisition streak? Another recently completed, and a JV formed with the Sunoco assets... what will the consolidator grab next? I find myself wondering if they'll go big and try to grab PAA before someone else does.

Roger Conrad

6:49

Hi Dan. I think there's a lot more in the tank here, though it's an open question where they'll move next--and how much they'll balance that against their continuing deleveraging and the possibility of stock buybacks. I think you always have to consider a buy-in of Sunoco LP (NYSE: SUN) as a possibility, especially in light of the recently announced Permian Basin JV. And ET is also the GP of USA Compression Partners (NYSE: USAC), which at $2.6 bil market cap would be barely an inhale for Energy Transfer at $55 bil. Even after WPG and other deals, there's still a bit of the Permian midstream held by private capital as non-core assets. And this may come on the market as interest rates drop and players look for other opportunities. Also, Occidental is definitely selling its stake in Western Midstream, which will likely be negative for WES' share price. ET may be reluctant to move here given OXY's conservatism with drilling. But these are good assets.

Roger Conrad

6:52

As for Plains, I could see that as a good fit as well--if ET is willing to take on a higher regulatory hurdle to get it done. The company's assets are arguably a lot more exposed to volumes than the rest of ET, which might be a disincentive as well. But I do think Plains is going to be bought by someone--ONEOK would be a candidate for sure as several key assets acquired with Magellan are closely linked already.

Frank

6:53

I currently own both VZ and T which I feel is redundent. Should I swap out T for BCE?

Roger Conrad

6:53

Hi Frank. I have all three in the CUI Model Portfolios, so I see them as complementary. But at this point, BCE is much more deeply discounted than AT&T in terms of yield.

Dan N

7:01

Roger, any thoughts on whether geothermal power will make a major contribution to US clean energy anytime soon? I've seen articles describing projects by Sage Geosystems and Fervo Energy, but these seem like they are still in proof-of-principle/scalability stage and neither company looks publicly traded. Given the need for clean energy round the clock, the idea certainly sounds timely if it works. Any traded companies to consider, or will we have to be very patient?

Roger Conrad

7:01

There is one company making good money operating under contract as well as building new geothermal facilities. That's Nevada-based Ormat Technologies (NYSE: ORA), which I do track in Conrad's Utility Investor in the Utility Report Card as a buy at 80 or less.

The business model is solid--they don't do anything without a long-term contract. And the company has also expanded that to energy storage, signing two grid-level deals in Texas earlier this month under 7-year contracts.

That said, I'm generally skeptical of other names I've seen in the space for three main reasons: (1)Most have little or no recurring earnings or long-term contracts with creditworthy buyers for that matter, (2)Many are heavily hyped in investment media and (3)Actual places to build viable geothermal energy projects are basically limited to geologically unstable areas--even Ormat has taken earnings hits from the impact of volcanic activity on facilities on occasion.

Roger Conrad

7:02

I believe very strongly that we're in an all of the above world for energy--and different solutions will make the most sense in different locations and for different uses. Ormat has proven that geothermal belongs in the mix. And New Zealand's Contact Energy is rapidly doing the same down under. But it's not a one size fits all energy solution by any means. And with all the hype, I think investors really need to pay attention to who is making money.

Stan

7:08

What are the prospects for Nisource and TRP going up further in the next year or two? I'm overweight on NI and want to sell some.

Roger Conrad

7:08

Hi Stan. I rate NiSource a buy at 32 or lower--it's a bit above that right now. I think the risk is low to guidance for earnings and dividend growth and at some point it will be a takeover target. That said, I also believe strongly in portfolio balance and there are other stocks that present better bargains at this point.

I do think one of them is TC Energy, which later this year will spin off its oil pipelines to shareholders as a new company South Bow--including the Keystone pipeline system. I think the sum of the parts here is worth well north of $60--sooner rather than later if Republicans win the White House as the Keystone XL pipeline northern expansion project is revived, as South Bow will quickly become a takeover target. TC has also promised the combined company dividend will start out at least at the current rate paid by pre-spin TC--with both companies growing thereafter. The stock has stormed back from the low 30s this spring. But it's still a buy up to 50.

Randy D

7:13

Hi guys... What do you think about logo

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Yieldmax XOM Option Income Strategy ETF
(Ticker symbol XOMO)?

Roger Conrad

7:13

Hi Randy. it's certainly an interesting strategy trading around ExxonMobil's common stock. It actually looks pretty range bound since inception in August of last year, with a total return of 2.5% including dividends--which compares rather poorly to XOM the common stock at 12.3%. Also the dividend is highly variable, as opposed to the steady growth of the common. Preferring the common at this point, though it's a bit above where we'd want to buy in now.

Frank

7:22

I like royalties and own gold, oil/gas royalty companies. I would like to add a uranium royalty but the only thing I see is UROY which though it has no debt and many strong future streams, they don't pay a dividend. When will they start to throw off some dividends and are there any other uranium royalty plays?

Roger Conrad

7:22

Unfortunately, this looks like a fairly undeveloped sector so far as real investor options are concerned. That's one reason we've pretty much held our recommendations to the large and steady, the best example being Canada's Cameco (TSX: CCO, NYSE: CCJ). And our best advice for a uranium play at this point is still to buy Cameco on dips to 40 or lower.

The main reason there are so few suitable uranium plays is this market is so heavily consolidated--sanctioned Russia is the industry kingpin with Cameco the leader in the West. I would credit/blame the fact that there's been so little new nuclear construction in the US, which has meant mainly government entities as buyers--which has allowed a few dominant players to essentially corner the market. I would expect that to change in coming years if the US starts building again. But at this point, the picking are slim.

Susan P

7:28

Thanks again for these chats. Roger mentioned Hannon as a BDC earlier yet, I have seen it listed on the REIT sheet. I may misunderstand but wondered if you could clarify. Additionally, EPR was mentioned earlier: do you have thoughts on Apple Hospitality REIT. Covid hit them hard, like EPR, but since the start of 2022, its cash flow has supported a monthly distribution that's appealing. Any perspective on this REIT, whose share price hasn't performed very well in years since IPOing in 2015 but might be stabilizing. Best wishes to you both.

Roger Conrad

7:28

Thank you Susan. Hannon was organized as a REIT. But this year, management elected to convert to a C-Corp. I've dropped it from REIT Sheet coverage but it's still a recommendation of Conrad's Utility Investor--where it was before I launched the REIT Sheet. The company has stuck to guidance for earnings and dividend growth. And I think it's headed back to its old high north of $70, where we sold it from the CUI Portfolio back in early 2021 at the peak of the renewable energy stock bubble.

I do track Apple Hospitality REIT in the REIT Sheet, The most recent recommendation is a hold. And I will be updating that along with Q2 earnings analysis and guidance in the September REIT Sheet--where I'll feature the data bank. In brief, I think APLE has proven it has staying power--as you say, Covid was an unprecedented challenge to hospitality. However, the reduction in guidance following Q2 results is a little disturbing and makes me reluctant to raise the recommendation at this time to buy.

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