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8/31/21 Energy & Income Advisor Live Chat
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AvatarRoger Conrad
1:56
Hello everyone and thanks for joining us today for the Energy and Income Advisor August live chat. As always, there is no audio. Just type in your questions and Elliott and I will answer them as soon as we can concisely and comprehensively. We will send you a complete transcript of all of the Q&A following the conclusion of the chat, which will be when there are no more questions in the queue.
 
As usual, we’re going to start by posting answers to the questions we received prior to the chat.
 
Thanks for joining us.
 
 
 
Q. Thanks for your service over the years I really appreciate it. I have a few questions.
 
First, why does a company like Pembina Pipeline (TSX: PPL, NYSE: PBA), who was going to acquire another company but then decides not to, get CAD350 mil for changing their mind? Seems like they'd be constantly trying to make deals then back out if the punishment was a giant check.
 
Second, when I own a company like Altagas Ltd (TSX: ALA, OTC: ATGFF) I have to pay a foreign tax on the dividend. I've heard you mention a way to get that back. Is all of the fee recoverable for every foreign dividend, and I assume it’s something my accountant has to do? I also look at a company like TotalEnergies (Paris: TTE, NYSE: TTE) but am not sure what the real dividend is after that fee. Is it different for each country?
1:57
I know this isn't the REIT Sheet. But I hope I subscribe to enough of your newsletters to ask about one :) I just can’t find much research on it. What’s your opinion on Slate Grocery REIT (TSX: SGR-U, OTC: SRRTF)?
 
And lastly, other people have negative things to say about the cash flow to continue to pay the dividend for CrossAmerica Partners (NYSE: CAPL), Do you still think its ok?—Eric F.
 
A. Hi Eric. An experienced and successful management team like Pembina’s will never show its cards in a high stakes takeover. My view is they wanted some of the Inter Pipeline (TSX: IPL, OTC: IPPLF) assets but at the end of the day weren’t prepared to try to outbid Brookfield Assets Management (TSX: BAM/A, NYSE: BAM).
As you point out, they had protected themselves with a generous breakup fee that Inter Pipeline had to pay to accept Brookfield’s offer. And as Brookfield’s motivation here is obviously financial rather than strategic, Pembina might well be able to eventually buy the assets it wanted. Bottom line, I wouldn’t count on them being able to do deals like this all the time. But they certainly played this one well in my opinion.
 
Foreign withholding tax is recoverable as a credit on your US taxes. The amount withheld will be shown on the Form 1099s you receive for dividends. If you use an accountant, they should be able to make the proper entry, or you can do it yourself. The amount of foreign withholding tax varies by country, though most have a tax treaty with the US that will hold the rate to 15%. Total’s “net” payment of 64.5277 cents per share is around 15% less than the gross payment. It’s also affected by currency value, as is the case for all dividends paid by non-US companies. In this case, it’s the Euro.
The net dividend (after withholding tax) represents about a 6% yield on Total’s current price.
 
Thanks for the suggestion to cover the Canadian REIT Slate Grocery. We don’t currently track it, so I can’t offer you an opinion. In brief, the monthly distribution has been frozen since January 2020 as the business is still facing pressures from the pandemic. Occupancy (93.2%) and tenant retention (93.6%) are still pretty solid. The REIT has what it calls a “transformational” acquisition on track to close in Q3.
 
As for distribution coverage, adjusted FFO per share was up 10.5% over the last 12 months to 21 cents per unit, for a payout ratio of 102.9%. That’s tight and I think accounts for the high yield. The test is likely to come after the acquisition, when we see how much accretion there is. My view is management wants to hold the current payout level but until we see some improvement, this should be considered a higher risk REIT.
1:58
As for CrossAmerica the fuels distribution landlord, as I point out in the current issue of EIA—which actually posted yesterday—Q2 results do support the current level of payout. The company’s posted coverage was 1.22 times for the trailing 12 months, which is virtually identical to the 1.21 times for the 12 months before that. And the added scale from recent M&A appears to be helping them deal with costs beyond their control. They also amended their credit agreement in late July, which should increase their ability to add more assets going forward and further increase scale.
 
Obviously, when an investment yields nearly 11%, there are going to be risks to the yield. But while this company has its share of skeptics, it’s biggest unitholder clearly isn’t one of them as he continues to add shares. I think a renewed lockdown across the US to deal with Covid pressures is a potential risk to fuel distribution volumes. But at this point, the high yield is pricing in cut already that I think management will continue
continue to try to avoid.
 
 
 
Q. Is there a reason for the order you list the holdings in your Active Managed Portfolio? It would be much easier to reference if it was alphabetical.—Loralie
 
A. Hi Loralie. The EIA Model is more than just a list of recommended stocks and MLPs. We also include a recommended number of shares for each position. That means at any given time, we’ll be more heavily weighted in some than in others and the table adjusts for that. We will take your suggestion into consideration, however, since our ultimate goal is to keep our presentation simple. Thanks.
Q. With TotalEnergies (Paris: TTE, NYSE: TTE) the fourth largest super-major, its 6.0% net dividend (after 30% French withholding tax and 15% ADR tax credit), its strong and growing LNG business, and the potential of the huge oil fields off Guyana and Suriname, what do you think of it? Could you consider giving it more coverage in your publications?—Henry T.

A. We do track TotalEnergies in the “E&P and Services” coverage universe on the Energy and Income Advisor website. It’s a buy up to 50. The company is also a recommendation in the CUI Plus Model Portfolio, also as a buy up to 50. And it’s one of a very small handful of energy companies covered in Conrad’s Utility Investor.
 
Here’s what I wrote about it regarding Q2 results:
 
1:59
“The super oil company’s Q2 results announced July 30 have long since stopped driving its share price. That’s instead fallen to oil prices, which have dropped into the mid-60s from the mid-70s this month and generally paused what’s year to date been a robust energy market rally.
Total’s Q2 numbers, however, did provide valuable clues to the company’s future direction and wealth-building power for investors. That starts with a 15 percent sequential jump in net income (from Q1), along with EBITDA 2.2 times higher than in the year ago quarter. That fueled a $1 billion increase in operating cash flow (up 17.2 percent) and enabled the company to cut debt to just 18.5 percent of assets versus an objective of 20 percent.
Like all super majors, TotalEnergies benefitted greatly from the massive rebound in global oil prices. But it also drove its "organic" cash breakeven under $25 per barrel of oil equivalent produced. That leaves tremendous room to generate free cash flow. And management now plans to allocate roughly 40 percent of the additional cash flow generated from $60 plus oil to share buybacks.
Breaking down the numbers, Exploration and Production earnings surged by 9 percent sequentially, swinging to a profit from last year’s loss. The company saw a 7 percent drop in global output, largely on natural declines of fields. But it should also see some rebound in the second half of the year, as maintainance outages are wound up and new projects come on stream.
The biggest gains were at Integrated Gas Renewables and Power (IGRP), which saw a 2.7 times year over year increase in earnings on asset additions particularly in renewable energy and stronger LNG results. Renewable power installed capacity rose by 63 percent, with growth set to continue at a robust pace. The company increased its capacity under construction by 89 percent from the year ago level, even while boosting its development pipeline by 2.3 times.
TotalEnergies’ profit will be greatly affected by oil prices for the foreseeable future, as well as by Refining and Chemicals operations that are currently soft in Europe. Longer-term, however CAPEX is strongly focused on growing the IGRP unit, which produces revenue generally not affected by the oil and gas price cycle.
That over time should increase the stock’s value as an income investment. In the meantime, the massive free cash flows generated at oil prices of $50 or higher (Brent) will continue to strengthen the balance sheet and safety of the dividend.”
 
If you’re interested in finding out more about CUI Plus, please call Sherry at 1-877-302-0749, Monday through Friday, 9 to 5 pm.
 
 
 
Q. Hi Roger. Looking down the list of “Dream Buy Prices,” I see Enterprise Products Partners (NYSE: EPD) at 20, which is reasonable. Pembina Pipeline is at 25 (OK), Kinder Morgan Inc (NYSE: KMI) at 18 also OK and then there is Valero Energy (NYSE: VLO) at 31. Do you really think that VLO might dip that low anytime in the near future? I think that sometime soon when folk break out of their confinement and start driving like crazy that VLO could hit 100? Your buy at 85 seems to imply that perhaps you agree? Thanks for everything.--Jerry F.
2:00
A. Hi Jerry. As you know, the energy sector is exceedingly volatile. The recommended entry points we set as "buy" prices are based on our assessment of sustainable growth and yield, with the idea of locking in annual returns of at least 10%. We see that for Valero, the dominant refiner in North America, at a price as high as 85. And we do believe $100 a share is quite likely going forward as the long-term energy cycle continues to turn higher, with continuing depressed investment levels reducing global supply even as demand recovers.
 
On the other hand, we set the Dream Buy prices very aggressively--and that's also the case with Valero, which did actually hit its Dream Price last year. To be clear, we do not expect such a decline in Valero shares at this time, despite the potential of the Delta variant to curb demand in the next few months. But the point with Dream Buy prices is history shows they can definitely be hit if conditions become extreme enough, as they frequently can be for a business as
cyclical as energy. Bottom line: If we can get Valero that cheaply again, we definitely want to have a marker in place for readers to buy as well.
2:01
 
 
 
 
 
 
OK that’s it for the questions we received prior to the chat. Please type in your live ones and we’ll get to them as quickly as we can.
 
 
 
Deni V.
2:18
My question: what is reason you do not like warrants as you mentioned during the last chat?
AvatarElliott Gue
2:18
We have nothing against warrants per se. If I remember correctly, the question on the last chat regarded some Occidental Petroleum (OXY) warrants. We like OXY (in fact it's one of our model portfolio favorites); however, we recommend owning OXY directly rather than via warrants. The warrants are essentially a leveraged play on OXY and they have significant embedded time value premium in them due to the time until maturity. By owning the stock you don't have to cope with the time value issue inherent in warrants. I would say that as a speculation I've recommended options on OXY on a few occasions in Energy & Income Advisor's sister publication Income Options. So, we definitely have nothing against warrants (or options, which are similar) as a speculative vehicle.
Ken in Phx
2:23
Regardless of one’s position on climate change, it seems clear that Biden and the Progressives are intent on crippling the energy industry. While you have stated many times that complete phasing out of carbon is not possible in the foreseeable future, nevertheless, a lot of damage can be done by zealots. Those of us who are retirees heavily committed to MLPs have cause to worry about our dividends.
Which of the MLP’s do you consider best positioned to withstand assaults on the energy sector from the point of view of maintaining dividends? I can cope with volatility, price declines, and little or no dividend growth over the next decade, but dividend cuts would be extremely harmful.  As you know, I don’t just go for the highest yields, but potential capital gains are less appealing at my age than cash in hand. I am not worried about estate building.
AvatarRoger Conrad
2:23
Hi Ken. Government can affect energy companies' profitability by increasing regulation to restrict action and by enacting fees. The main regulatory measures so far are what amounts to an 8-month suspension of new drilling permits on US federal lands (the courts have ordered them to resume) and cancellation of the Keystone XL pipeline. As for fees, the Democrats' Reconciliation package as it stands in the US House of Representatives includes new ones on producers as well as infrastructure (pipelines etc) owners. Our view is any final Reconciliation will contain far less than is now proposed. But in any case, we believe the threat of new fees and regulations is already causing companies to invest less than they would otherwise at this stage of the energy cycle. And that means greater scarcity and ultimately a much more volatile energy price cycle than we would otherwise see.

As for the impact of government policy on health of companies/MLPs and dividends, there are a handful right now in the line of fire.
AvatarRoger Conrad
2:27
Continuing Ken's question, Equitrans Midstream's payout and possibly its solvency is very much at risk if the Mountain Valley Pipeline ultimately never gets built. Phillips 66 Partners LP gets more than 20% of EBITDA from the Dakota Access Pipeline, and would be at risk if the the courts ultimately close it down. But the best in class energy companies and MLPs are far less vulnerable to both the energy price cycle and government action now than a year ago, when we saw 82 dividend cuts--there have been just 9 so far in 2021. That shows through clearly in the solid results for portfolio companies--23 of which we review in the current issue of EIA.
2:30
Bottom line is government can't repeal the energy price cycle. And in fact, we think there's a good case to be made that the actions some want to take now will intensify things on the upside--and make things even more profitable for the companies we
2:31
we are recommending in our model portfolios. I understand your sentiment here but I think if anything the facts on the ground--most recently Q2 earnings and guidance--are pointing to less danger to dividends than we've seen in many years.
Sohel
2:33
Thanks for holding these chats - very helpful. It seems like XOM took a bigger hit than TOT and RDS in the past several weeks after earnings when crude dipped. Do you have any insight into why this relative underperformance?
AvatarElliott Gue
2:33
I suspect it's down to two things. First, XOM was the top-performing major heading into the recent correction, so it was more vulnerable to profit-taking. Indeed, year-to-date, even after the recent pullback XOM is still up 34%+ compared to Shell at around +12% and Total around +5.4%. Second, XOM is seen as more sensitive to oil prices given the stock's leveraged to its aggressive upstream investment portfolio in places like Guyana.
Ben F.
2:34
Roger -

Good morning. 

Quick question for the call today. Which stock in your energy universe do you see as having the best value?

Cheers,
AvatarRoger Conrad
2:34
We highlighted some best buys for fresh money in the issue of Energy and Income Advisor that posted yesterday. I think for conservative investors, it's hard to go wrong now with super oil majors like ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and TotalEnergies (NYSE: TTE). In midstream, I highlighted Enterprise Products Partners (NYSE: EPD)--8% plus yield and growing and backed by some the best assets in the industry as well as a fast growing ethylene business.
Jim N
2:41
Do you know how much damage the recent storm did to VLO and the other oil/gas companies in the Gulf of Mexico. What is the impact?
AvatarElliott Gue
2:41
Ida temporarily shut-in about 13% of US refining capacity (approximately 2.3 million bbl/day). Refineries need power to operate so it'll probably be a couple of weeks before they're totally up and running again. More than 90% of GoM oil and gas production is still shut in, but I haven't read any reports of major damage (energy companies are pretty good at dealing with storms). I suspect Ida will be a minor near-term headwind for WTI demand (due to refinery outages) but won't have a significant impact on the market balances or any of the companies we recommend.
Buddy
2:49
Please give your opinion on COG,  Thank you.
AvatarElliott Gue
2:49
COG has long been considered best of breed in terms of the Appalachian gas producers. To be honest, however, I didn't see the strategic rationale behind the deal with Cimarex. There don't appear to be many synergies and I'm not sure of the logic of adding exposure to oil/liquids in the Permian/MidCon region. I see the stock as OK but I'd rather own a producer with top-notch oil exposure and a free cash flow return story (like PXD) or a name like EOG which is mainly oil levered but with a natural gas kicker in the form of low cost reserves located adjacent to the Gulf Coast.
Jeffrey J.
2:52
Hi there, again, Thanks for another opportunity to ask some questions -- always valuable. You have been positive about Pembina for quite some time. How would you respond the the following withering commentary from Mornginstar:

"We are downgrading Pembina’s moat to none from narrow. We think it has largely grown via acquisition and paid too much for the acquired assets. A material part of the justification and premium for the recent deals was future potential projects, specifically high-profile petrochemicals and LNG efforts totaling about CAD 9 billion-CAD 10 billion in capital, have since been shelved due to poor commercial potential. As a result, Pembina has returns on invested capital that are below its cost of capital considering its bloated asset base and associated goodwill. For similar reasons (overpayment for acquisitions and a continued propensity to do so), we've also downgraded our capital allocation rating to poor from standard"

Thanks
AvatarRoger Conrad
2:52
They're entitled to their opinion. But I think we should clarify a couple of things. First, the Jordan Cove LNG export facility in Oregon was a project of the former Veresen--Pembina has kept its options open but has generally not invested in it since. And I think its fair to say Veresen's struggles getting it built were well reflected in the price paid by Pembina to buy that company back in 2017. Similarly, the company bought Kinder Morgan Canada after that company had sold the Trans Mountain Pipeline to the Canadian government. And more recently, I frankly don't see how anyone can view Pembina's decision not to enter a bidding war over Inter Pipeline with Brookfield--but rather to walk away with CAD350 mil--as not being a very good sign of capital markets discipline. Equally, so has been the decision to put a petrochemicals venture with a Middle East sovereign wealth fund on hold pending improved market conditions. Yes, it's been a tough few years for energy companies and the numbers of many companies
AvatarRoger Conrad
2:54
are not pretty. But it's hard to fault a midstream company with good dividend coverage generating free cash flow after dividends. A
Guest
2:56
Given the cycle of full oil production / cut oil production - now that times seem to call for increased production - which are your best picks for a rebound?  OXY?  MRO?  FANG? VNOM?
AvatarElliott Gue
2:56
Our favorite oil E&Ps are names that meet 3 basic underlying criteria: 1. Low cost producers, preferably able to cover maintenance CAPEX and sustain dividends with oil in the low $30s or better. 2. We generally prefer exposure to quality acreage in a Tier 1 play (like Permian) with years of drilling inventory ahead. 3. We generally prefer a well-communicated plan for returning capital to shareholders via dividends/special dividends, share buybacks and/or paying down debt (which increases shareholder's claim on the enterprise). We like Occidental, the company should be able to generate more of $12 billion in free cash flow over the 18 months ended next year, which will allow them to pay down debt. We like PXD, which just accelerated its first planned variable dividend payout from early 2022 to September, we like EOG for its low breakeven costs, history of consistent efficiency gains and cost improvements and planned base dividend increases.
AvatarRoger Conrad
2:59
And ROE the last 12 months is basically the same as Kinder Morgan's and is higher than Enbridge's. Couple of other relevant numbers: Pembina total debt/book cap 43.69% versus industry average 57.01%, EBITDA/interst 6.1 times versus 4.17 times for the industry. I have no idea what they mean by "moat" but that looks like pretty good dividend protection in any case for a company that's grown to become Canada's third largest midstream since I started tracking it in the early '00s. Also note that Morningstar actually rate Pembina a hold according to Bloomberg Intelligence--so much for having the courage of convictions. Pembina currently has 10 buys, 6 holds and no sells among analysts tracked by BI.
Guest
3:10
I have positions in several of your "best in class" E&P and Midstream companies. I'm considering a few small positions in E&P companies that have potentially higher upside if we do experience a positive cycle. I see a number of smaller Canadian companies that are trading at a fraction of their averages for the last ten or so years. It appears they have been in a longer and more pronounced bear market than most US companies for the same time period. I see you have "Buy" amounts for some of the smaller companies on your Canadian list, such as ARC Resources, EnerPlus, Ovintiv, Peyto, Vermilion and Whitecap. (Canadian based, but operate in various places.) What generally do you think of using the smaller stocks off the Canadian list for the purpose I described as compared to US companies? Is there a reason to avoid Canadian oil companies or is there a potentially deeper value opportunity there?
AvatarRoger Conrad
3:10
Since the US shale revolution picked up steam in the previous decade, Canadian oil and gas producers have had a harder time getting their product to the US Gulf Coast. As a result, they've had to sell output at massive price discounts to US benchmarks. That's still the case today, with Western Canada Select selling at a $12 plus per barrel discount to WTI Cushing--though that discount has been as much as $40 in the past five years or so. Enbridge's Line 3 expansion appears set to enter service later this year, and combined with reduced output in the US should narrow the discount even more. And expanding gas export capacity from Canada's Pacific Coast should help that business as well.

We upgraded the companies you name to buy mainly because they've proven their ability to survive discounted oil and gas prices and now appear poised to ride the energy price cycle up. If we have any reservation, it's that they're likely to come into their own later in the cycle, and we want to focus on first movers now--such as
AvatarRoger Conrad
3:10
the best in class midstreams and producers we now feature in the portfolios. But these are good bets for the patient from these prices.
Sohel
3:16
Hi Roger, Which MLP do you see as the best for new money at current prices?
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