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9/24/24 Capitalist Times Live Chat

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Roger Conrad

3:03

FYI--I intend to do a larger piece on telecom for the October CUI--and expanding on the M&A theme will be a big part of it. I do think we'll see most of these fiber companies swallowed up--the main question is they'll be consumed by debt first, in which case shareholders won't get any benefit. In my view, Shenandoah Telecom is the most attractive of the prospective targets, since it hasn't run and is growing revenue rapidly.

Pat M

3:05

Good Afternoon Elliott and Roger,
Do you have a preference between natural gas producers Chesapeake Energy ( CHK ) and Ovintiv ( OVV).
As always I appreciate all your efforts keeping us informed.

Elliott Gue

3:05

Thanks for the question. CHK is a more direct play on natural gas whereas OVV is a more balanced producer with more oil/liquids exposure. SO, we like both names, but if you're looking for gas exposure, CHK is the better name. I'd also mention that CHK's CEO recently intimated at a conference that the deal to acquire Southwestern Energy (SWN) is on track to close early Q4 (maybe October before CHK's earnings release). We see this deal closing as a potential upside catalyst for CHK.

Dan N

3:11

3) With interests rates now officially falling, I'm seeing a lot of stocks returning to some degree of favor. I'm glad I built my stake in WEC when it was trading in the high 70s, because it's up 20% since then. But NEP has barely budged, and it's particularly confusing since falling interest rates have been touted by more than a few analysts as a precondition for business recovery (refinancings, resuming dropdowns from NEE). Thoughts?

Roger Conrad

3:11

I think NextEra Energy Partners is potentially a huge beneficiary of lower interest rates. And in fact, its cost of debt capital has plunged since mid April--with the yield to maturity on its longest dated bonds (January 2029) dropping from 7.25% to just 5.6%. Those bonds now trade at a meaningful premium to par value. And the price of nearer dated debt has surged as well, greatly increasing odds it will be refinanced on economic terms. The key is refinancing/paying off the convertible equity attached to assets and held by private capital partners that starts coming due in 2027. And the stock is still priced at a level of expectation that the company will fail to do so on economic terms. I expect that to be the case until NEP and its parent NextEra Energy announce a deal and/or resumption of drop downs. But I think there are clear incentives for NEE to support NEP through this current tough time. And I'm still convinced a resolution of the CEPFs and resumption of dropdowns will take shares to new highs.

Roger Conrad

3:15

Basically, NEP is a show me story. I think it's probably also trading at some discount because of fears the IRA tax credits for wind and solar may go away--despite management's assurances that business growth doesn't depend on subsidy. And it may have to prove that with results the next few years. But ultimately, it makes sense for NEE to have NEP as a financing vehicle given its CAPEX plans. And with NEP priced for roughly a 50% dividend cut, we're not taking on a lot of risk betting they'll succeed--as they did more than once in the previous decade. NEP is also a minnow to NEE at $2.5 bil market cap (including what NEE owns) versus $173 bil for NEE. It wouldn't take much to buy it out at a sizable premium to the current price.

James

3:19

Hi Elliott, may I get your analysis of the price action in SLB? We were stopped out of it in CW and at what level/time/price point would you consider re-entering?

Elliott Gue

3:19

Energy stocks are laser-focused on the "macro" right now. So, we're putting out a new issue this week (probably by tomorrow) which includes a deep dive into the evolving outlook for oil and natural gas prices.

My view with SLB is that it's following oil. Look at a chart of front-month WTI and there's a (very obvious) support level there around $68 to $70/bbl -- it held in December 2023, the spring and summer of 2023, multiple times dating back to late 2021. Then it cracked earlier this month and WTI sold off to around $65. For SLB, that $42.50 region has acted as support since early last year, then broke this month.

Elliott Gue

3:19

Both breakdowns failed. My view is that sentiment on oil has just become way too bearish -- record-low net speculative position in Brent and near 2 standard deviations below the 104 week average in WTI. In my mind -- it's already pricing in a recession and continued weakness in Chinese demand. Indeed, the 50% decline in WTI from its 2022 top is consistent with the correction we saw back in 2000-01 amid that recession. My view is that the bull market in oil isn't over and that the risks are skewed to the upside. So, much the same applies to SLB. I am looking for the stock to stabilize here in the low to mid $40s and will likely look for an opportunity to add it back in CW later this year.

Dan N

3:24

4) Your thoughts on AES selling a 30% stake in AES Ohio? I'm disappointed in the sense that I thought AES prized its regulated utility business and wouldn't want to dilute it. And looking at falling interest rates, I would have thought some patience would have avoided the need for such a sale.

Roger Conrad

3:24

Selling a piece of regulated utility businesses to a passive financial partner is now a common strategy in utility world. The owner like AES keeps operating control and ability to consolidate the unit into earnings by virtue of owning more than 50%. And it can use the case to reinvest in the business or cut debt. In this case, CDPQ will also be responsible for 30% of the $1.5 bil AES plans to invest at this utility unit.

The Ohio business has actually been fairly problematic in recent years for AES. Whereas AES has an investment grade rating at the corporate level, AES Ohio does not (BB). But notably, S&P has now boosted the unit's outlook to positive, which means it's likely to move at least one notch from investment grade when the deal closes in "first half 2025." That should help further bring down the cost of funding utility rate base growth, and ultimately earnings for AES.

Bottom line: I view this deal as innovative and positive for AES--a very cheap stock at less than 9X expected 12 mo EPS

Hans

3:29

Elliott, What is happening to GGLS I did purchase it on your advice, but since then it has dropped almost every day. Thanks

Elliott Gue

3:29

GGLS is an inverse ETF on Alphabet (formerly known as Google) and it's down about 6.5% or 7% from our recommended entry back on September 11th because Google is up by a similar percentage (GGLS rises when GOOGL falls).

The Magnificent 7 stocks -- and Google is one of them -- have been weak since July. GOOGL for example is down about 15% from its July 10th peak even though the S&P 500 continues to break to new all-time highs.

Our view is that GOOGL is likely to see more downside into October. Since we recommended the trade, the stock has rallied to retest technical resistance around $165 to $168 but has been unable to break through. If GOOGL can close above resistance, we'd likely close this trade in GGLS for a loss (we'd estimate around 10% roughly). If GOOGL takes another leg lower as we expect, it's not hard to suppose we'd see some 20% of downside to the March lows, which would imply a significant gain in GGLS.

GOOGL is a volatile stock, which is why we kept the recommended position size in this

Elliott Gue

3:29

trade on the low side. But we still think the risk-reward on this trade looks solid; in fact, we'd consider adding to the recommended position in GGLS if the stock were to break lower.

Jimmy

3:34

Hawaiian Electric fell considerably today to a low (so for) of $9.52. What caused this drop? Many thanks.

Roger Conrad

3:34

Hi Jimmy. They're basically funding $500-$575 mil of their $1.91 bil wildfire settlement with an equity offering. The negative reaction in the market is to the offer price of $9.25 per share, which was a sizable discount to the stock's price before the announcement. The offer is expected to close September 25. Underwriters have the ability to purchase up to 8,101,108 shares, which would raise an additional $75 million--and I think that's likely.

The $1.91 bil is scheduled to be paid in "4 equal installments." These proceeds take the immediate pressure off as they would fund at least one payment. And the company is rumored near a deal to sell its American Savings Bank to Central Pacific Financial for $1 billion, which if accurate would cover another two.

I frankly think this is a huge step to ensure HE's ultimate recovery. If you're betting on a comeback as recommended in the most recent issue of CUI, this is the kind of news you want to hear.

Tom Lawrie

3:37

I'm hearing and reading from various pundits that Brent is going to $60 next year due to a lot of supply coming on line in the face of slowing economies. What's your take on this forecast?

Elliott Gue

3:37

We have a longer piece coming out about oil this week (probably tomorrow). However, the gist of it is that we don't see that much weakness in oil. Oil is already pricing in significant weakness in global demand (a recession at least as severe as 2001). Since the bar of expected demand growth is so low, we see the probability of an upside surprise on demand -- particularly from China -- as elevated. As for supply, that side of the equation looks very tight. OPEC has already punted a planned production increase to the end of this year and we wouldn't be surprised to seem them delay it further if prices remain low. US production growth has stalled and we'd expect to see an outright decline in oil output year-over-year with oil around $70/bbl. Estimates from IEA and elsewhere for 500,000+ bbl/day of US supply growth in 2025 just aren't consistent with the real data we're seeing on production. The physical oil market remains tight -- oil remains in backwardation -- and we just don't see the supply-demand balance

Elliott Gue

3:37

loosening enough to result in $60/bbl Brent (equivalent to around $55 WTI) in 2025.

Dudley

3:47

Thanks for holding these informative sessions. My question is on ETR. With more interest in nuclear energy now it seems their stock is undervalued. They’re currently above your recommended price but seems to me ETR may be undervalued. Your thoughts please.

Roger Conrad

3:47

Hi Dudley, I set highest recommended entry points based on (1) business quality and (2) valuation, of which my favorite measure is the sum of dividend yield plus dividend growth. My general rule has been to set the price at a point where that sum is 10% or higher for top quality utilities--as I believe Entergy Corp to be. And that level is a bit below where the stock is now, in large part because big money pools are boosting their investment in big cap utilities.

Entergy handled Francine far better than it did Ida a couple years ago. And the FERC settlement of the Grand Gulf nuclear plant dispute is another plus. But my advice at this point is to be patient if you didn't get in before.

Also, regarding nuclear, ETR's regulated plants have a great operating record. And they stand to gain from IRA subsidy, as well as potential improvements. But the company also closed and sold the plants it used to operate in the Northeast US--so that limits upside to the nuclear renaissance. More of a slow and steady stock.

John

3:51

Thanks to Roger several years ago, I purchased PBA a few different times and still hold all the shares. Sweet yield.

Roger Conrad

3:51

Hi John. Yes, Pembina has been a very good one. And I think there's ultimately a lot more in the tank--the natural gas midstream venture with KKR in western Canada is just scratching the surface for opportunities, as Canada gears up to export larger amounts of LNG and NGLs. And the acquisition of the Veren assets further position the partnership to capitalize with gathering and processing that feeds right into Pembina's Peace Pipeline system.

If we've learned anything about Pembina the past 20 plus years--since it was a charter member of the portfolio of an advisory I had on Canada (Canadian Edge), it's that management thinks investments through and executes on them well. I think the stock has run a bit here and I would advise patience for fresh money. But this is one I would plan to hold for a long time to come.

Susan P

3:52

Your answer around how you use management's guidance was great. Moreover, it exemplifies why I value your opinion so much...thanks again.

Roger Conrad

3:52

Thank you Susan. Much appreciated.

Tommy L

3:59

NEP is a company discussed every month it seems. Any update on outlook? Thanks for these sessions.

Roger Conrad

3:59

HI Tommy. Yeah, it's pretty much the same story here as it has been the past year. NextEra Energy Partners will declare another quarterly dividend later this month (Oct 23 expected), and the consensus is another sequential boost to 91.75 cents per quarter. That would be about 6% higher than the year ago level and right in line with management's guidance. NEP and parent NextEra Energy (NYSE: NEE) are expected to release Q3 results and update guidance at the same time. And I expect to see more robust order growth for solar, wind and storage facilities at NextEra's unregulated unit NEER--which is the primary feeder for drop downs to NEP.

In a previous question, I noted the big drop in NEP's cost of debt capital over the last 5 months. We've yet to see a corresponding drop in the cost of equity capital, with the shares still trading mid-20s. And I don't think we will until NEE/NEP highlight a plan for funding the CEPFs coming due in 2026 and later. But that's still my expectation.

Dave

4:01

Hi Roger and Elloitt -- Could you please provide your thoughts on National Oilwell Varco (NOV) and DNOW, Inc. (DNOW)? Thanks!

Elliott Gue

4:01

NOV is a good company overall, and I like their exposure to almost 50% offshore and more than 60% international (ex North America). However, the company has had a tough cycle due, in large part, to discipline from the contract drillers. Drillers have been cannibalizing old rigs rather than ordering new equipment where possible. Rig CAPEX is always lumpy but even worse than usual this cycle. Granted, NOV has expanded beyond their historic rig market, but it's still a large part of their business and I think we'll need to get later in the cycle before we start seeing the contract drillers spend more freely. I don't follow DNOW as closely -- I'll add it to my notes to take a closer look. I last really looked at them back in February when they announced an acquisition and the stock had a nice run. My sense has been that they have too much onshore/shale exposure to be a name we'd add to the portfolio right now. I think onshore activity will remain pretty restrained until we see oil prices back above $90 or so on a

Elliott Gue

4:01

more sustainable basis.

Guest

4:11

Hi Roger: Is BSM treated and taxed as an MLP the same way that ET and EPD are? Thanks. Barry

Roger Conrad

4:11

Hi Barry. Yes, Black Stone Minerals is organized as an MLP, as is Energy Transfer LP and Enterprise Products Partners. As an oil and gas royalty producer rather than a midstream, the nature of the income may be different. But essentially, you receive a K-1 at tax time.

I realize a number of readers want to avoid MLPs because of the K-1s. And as an alternative that will do pretty much the same thing in an income portfolio, I have recommended producers that pay a portion of their dividends as variable, with the amount depending on free cash flow that in turn is heavily affected by commodity prices. We are bullish on oil and gas going forward. And a stock that raises dividends with higher prices can provide income seekers a big boost.

Frank

4:17

Love royalty stocks. Have FNV for gold; BSM for hydrocarbons, and am looking at RPRX Royalty Pharma for the drug space. Do you have any opinion?

Roger Conrad

4:17

Hi Frank. It's not one we've covered in the past. But with the Big Pharma we've featured running to new highs, i will put it on our list for consideration. It's an interesting business model--basically buying future royalty streams for treatments in latter stages of commercial release. And the steadiness of dividends from RPRX since inception testifies to general reliability of revenue, with growth basically fueled by investment. I thought Q2 results were pretty solid. And it's notable the stock is priced at about half where it was at in 2020 and below the IPO price. I'm not ready to make a call on it at this point. But it's now on our radar. Thanks.

Frank

4:18

I am very uneasy about the price of oil. It's not dictated by supply and demand but is artificially propped up by OPEC+ holding back production, specifically Saudi Arabia. This can change on a dime as it did in I believe 2014 when they put the squeeze on US fracking. You talk about supply/demand but we are nowhere operating on a normal, even playing field. Your thoughts

Elliott Gue

4:18

Historically, OPEC is good at managing demand-led cycles but not so good at managing supply-led cycles.

We were very bearish oil in mid-to-late 2014 because the root problem then was supply. Specifically, US shale output ramped up quickly starting in 2010-11 and we were seeing growth rates of 1 million + bbl/day out of the US. To maintain the price of oil around $100/bbl OPEC -- really Saudi Arabia -- was having to continually restrain its own production to accommodate growing shale barrels. Saudi essentially financed the shale boom via artificially inflated oil prices.

Elliott Gue

4:18

Saudi began to talk about this issue in 2013 and even more in 2014. It wasn't really a surprise. THE decline was then made worse by the fact speculators in the WTI futures market had a huge long position in oil in mid-2014, which they had to exit en masse. This time around, non-OPEC supply isn't the issue -- US shale production would be likely to decline outright with prices around or under $70/bbl. Year-to-date US oil production is flat to lower. The problem today is demand and, specifically, weak demand from China and risk of recession. In 2001, Saudi and OPEC cut production to support oil when demand fell and we got a V-shaped recovery in prices. Same thing in 2008-09. OPEC can cut production when demand is weak without fear of losing market share.

Dave

4:26

Hi Roger, could you please provide your thoughts on two REITs, Pebblebrook Hotel Trust (PEB) and Retail Opportunity Investments (ROIC)? Thanks!

Roger Conrad

4:26

Hi Dave. We're not currently covering either in REIT Sheet. But I will put them on the list for consideration.

Generally speaking, the hotel/hospitality sector REITs we do track have had a nice recovery from the disaster of the pandemic year in terms of occupancy and revenue per available room--though the gains have slowed a bit this year. Pebblebrook appears to be on track to beat the guidance it laid out at the beginning of the year, largely the result of better margins and getting a hurricane impacted facility back into service in Florida. They've yet to start to ramp up the dividend again. I think it's likely but I would rate PEB a hold until they do, especially with recession still a risk.

Retail Opportunity Investments appears to be in the same business as Kimco Realty (NYSE: KIM)--grocery anchored outdoor malls--which has been on my Recommended List and is my preferred holding as a buy up to 25. ROIC is much smaller and therefore a potential takeover play. I would also rate it hold.

Susan P

4:26

Elliott's answer around interest rates v.v. recession was terrific and amply 'satisfying'...Thanks for sharing your knowledge and experience. You mentioned shifting to intermediate Treasuries and IG corporates. Wondering if iShares Fallen Angel ETF (FALN), with a effective duration around 5yrs, is worth the risk for its higher yield, compared to your cited treasuries +/or investment grades. Thanks again. PS: Sherry is wonderful asset for Capitalist Times and deserves thanks as well.

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