JotCast | 9/30/20 Energy & Income Advisor Live Chat

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9/30/20 Energy & Income Advisor Live Chat

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Mark

2:55

Do you continue to remain optimistic about OXY and SLB and if so why and do you think they will ever reach your Buy Below $x price. If so, what would cause this and if not what do you maintain such I high level of expectation? What would be your estimate of most probably price recovery point over the next year.

Elliott Gue

2:55

We remain optimistic about both names. OXY's acquisition of APC was ill-timed; however, with a breakeven oil cost of around $33 to $35 per barrel, they'll generate copious free cash flow with oil in the $45 to $50/bbl range, which I expect we'll see in the first half of 2021 (WTI). That, coupled with ongoing non-core asset sales, will allow them to right-size their debt. The catalyst for this is simple -- oil prices north of $45/bbl sustained for a while and management just executing on its plans. SLB is the best house in a bad neighborhood. If history is any guide, the next up-cycle in oil will benefit producers first, then broaden out to services with a lag of 6 to 18 months

Ron

3:03

I know California issued a ban on gasoline fueled new car sales in 2035. If you just look at this decision by California alone it may not seem impactful to overall oil and gas growth, however, it seems to me other states and other countries will adopt this approach rather rapidly. In fact, BP believes the world is now reached peak fossil fuel growth. As renewable energy becomes less costly due to technology and perhaps a more favorable tax incentives in the future it appears the production of fossil fuels will be more costly as regulations such as Colorado setback proposal, legal battles, and limited access to drilling sites will start to drive cost up making it more challenging to compete. I am really struggling with the investment thesis in this space.

Elliott Gue

3:03

These types of gasoline bans are really nothing new -- most of the European countries issued the same sort of proclamations or bans in 2017-19. And Norway has already started to phase out the sale of new gasoline/diesel model cars. By and large, these bans have no impact on fossil fuel demand. For one thing, setting a ban to go into effect in 15 years or 20 years is basically a public relations campaign; most politicians in power today won't be in power in 2035 and, therefore, won't have to deal with the consequences. Second, passenger cars are only about 25% of global oil demand -- in Norway, where the vast majority of all new cars sold are electrics -- oil demand has bene flat for years because most consumers who own an EV also have an older diesel vehicle for weekend trips. Also, there are no practical long-haul electric trucks so that source of demand is unaffected. Moreover, EVs just aren't very popular -- just look at the US market. Last year EV sales grew a little over 2%, less than sales of Trucks/

Elliott Gue

3:04

SUVs. These types of ban announcements are, as they say in Texas, all sizzle and no steak.

Mark

3:04

What are your current thoughts for OXY and SLB. Will they ever recover to your Buy Below Price levels . Is so what has to happen and when do you think it could occur and if not why do you sustain this level of expectation and hope for your readers? What are your most probable recovery price for OXY and SLB over the next 12 months

Elliott Gue

3:04

I think this is a duplicate question .. I answered the original just above.

Fred

3:36

If I could only buy two midstreams for my IRA, which of the following would you suggest? EPD,KMI,MPLX,PBA,WNB

Roger Conrad

3:36

Probably the safest two on your list would be Enterprise Products Partners and Williams Companies, on the basis of dividend coverage and balance sheet strength. For EPD, it's size, quality of contracts and focus on exports. for WMB, it's the contracts with utilities burning natural gas for electricity and distributing it for heating. Both are trading at good entry points as well.

If you're concerned about taxes in an IRA, you might want to consider just sticking with the C-Corps on your list, which included Kinder Morgan--also a very well capitalized company with good dividend coverage and a high credit rating--also WMB. Pembina is a C-Corp though also Canadian, so it brings exposure to the USD/Canadian dollar exchange rate.

MPLX may offer the most upside, as it has the highest yield and could get a lift at some point if parent Marathon Petroleum clarifies its long-term intentions, possibly with a C-Corp conversion. That uncertainty also means it's the most at risk, and it has the biggest G&P exposure.

Roger Conrad

3:36

Bottom line is all of these are fine companies though.

Hans

3:41

Colorado oil/gas commission voted for drilling cutbacks, what stocks could be affected by this

Roger Conrad

3:41

Hans, I think this has been the expectation for some time in Colorado, since the state gave local authorities more power to block or restrict new projects. But this is really not new and the state has consistently delivered a strong level of support for the companies doing business there as the revenue is important to the treasury. Noble Midstream is a company that has been exposed but at this point the driver for the shares is the ongoing acquisition of parent and general partner Noble Energy by Chevron--NBLX is 62.46% owned by NBL and the super oil is rumored considering buying the rest of it in after the NBL deal is done. NBLX has a market cap of just $642 mil including the NBL interest so it won't cost much at this price.

Hans

3:41

OXY had a rating of 45 the end of July, now 25 what happened

Elliott Gue

3:41

Buy Under Prices aren't long-term targets for a stock. They're designed to prevent readers from buying a stock at a bad price due to a short-term spike in the stock. (This isn't an issue for OXY but it is an issue when the sector sees a lot of momentum such as back in early June). Sometimes we revisit those prices for that reason but it doesn't reflect any change in our underlying outlook for the companies.

Herm

3:43

Would appreciate your review of the DVN -WPX merger. What do think about a competing offer. I believe youhave DVN as a sale?

Elliott Gue

3:43

DVN isn't among our favorites in terms of resource base. WPX is a well-run producer that just doesn't have the scale to remain independent/ Wouldn't be surprised to see a competing offer and I do think you're going to see more M&A in this sector in coming months -- it's normal at the bottom of a cycle.

David LaRiccia

3:46

I was just reading this morning that many of the pipeline companies have been offering customers sweeter terms under existing contracts along with reduced rates when contracts are renegotiated. Do you think this type of thing will cause any issues with distribution coverage. The companies mentioned are EPD, MMP and ET.

Roger Conrad

3:46

It's actually pretty old news--E&Ps have been renegotiating for more than a year at this point and we've seen a number of midstreams scaling back previously scheduled expansion as a result. Of these three, Energy Transfer seems to have the most exposure, particularly regarding contracts with bankrupt Chesapeake Energy. And it is fighting in court to protect its rights, particularly regarding a $586 mil capacity based contract. I think ET is definitely pricing in a court loss here yielding 22% plus though. It is possible all three will see more contract renegotiations over the next few months. And Q3 results due out in late Oct/early Nov will give us a better assessment of risks. But at this point EPD and MMP appear pretty well protected--and there's a limit to how much E&Ps can push without cutting their own necks when prices rebound.

ED

4:02

I know events happen that are unforeseen-- but I just looked at OXY, I have a 78% loss from when I purchased it after it after being recommended, with a 1 cent per share dividend coming up. To get to breakeven I need about a 225% swing. Is that realistic or should I take a tax loss and move on. There are several other similar losses in my energy portfolio. When I bought these recommended energy stocks I did not envision these type of losses. Any suggestions for limiting losses in the future?

Roger Conrad

4:02

I'm not sure what else we can on Occidental beyond what Elliott has said. At this point, the best way to look at the company is a high leverage situation to an eventual energy sector recovery--and that has proven a certain degree of resiliency in this worst of all worlds environment for oil and gas producers. And if you look at the price action over the years--we're right now back to where the stock traded in the 1990s--you can see that it historically moved pretty quickly. We've taken losses along with you on this one. But again the way to look at OXY is that it has a history of following the cycle in a leveraged way--and we believe the stock right now is a good way to bet on an upturn in that cycle, even though it may take a while to pan out.

Peter

4:31

What are your thoughts on shlx? Is it a deep value situation with a large parent company?

Roger Conrad

4:31

Shell Midstream Partners has great assets that generate highly reliable cash flow--and have over a long period of time. What makes us somewhat less enthusiastic about it as an investment these days is the continuing ambiguity about the ultimate intentions of general partner and 68.51% owner Royal Dutch Shell. RDS has obviously had some tougher times recently, though the dividend cut this year is more than anything else a tacit admission it paid too much for BG in the previous decade and needed to cut debt. We don't like the way RDS has refused to provide longer term dividend guidance or even to assure that SHLX will stay independent or bought back in. Until they do, we can expect this stock to trade as deep value. We currently rate Shell Midstream a hold.

ED

4:37

Maybe an additional better question would be what do you see as a ballpark numbers for OXY's EPS and PE and price being when it recovers? Thanks for your patience.

Elliott Gue

4:37

In valuing you can't really look at EPS or P/E for this year or next because it's the bottom of the cycle. I think you need to value a stock like that in 1 of 2 ways. Either projected mid-cycle estimates. What will the company earn per year in the middle of an oil up-cycle when prices are neither depressed nor very high. Obviously an exercise very prone to error; but, I don't think it's all that hard to get to around $3 per share. I think a 15x P/E is reasonable for a target in the $45 range. Alternative valuation technique is discounted cash flow. Again, though, it's not hard to see OXY generating $3 billion+ in free cash flow with oil in the $50-ish range. Again, subject to wide variations depending on commodity price estimates, but not hard to get to around $40 per share even with moderate oil prices over the next 5 years.

Jim N

4:57

Could you add another column to the “Dream Price” tables in your newsletters? I would find it more useful if you included a “Recent Price” column. Also, I really appreciate these monthly Chats.

Roger Conrad

4:57

Thanks for the suggestion. I would point out that every stock on the Dream Buy List is also a Model Portfolio or High Income Energy List stock--and we do publish recent prices in those portfolio tables in the regular issues.

Robert P.

5:46

Hi Roger and Elliott, hope all is well and surely get good analysis with every Live Chat, reading all the investors questions and your answers. Interested in your thoughts on mlp consolidation. I am waiting for something to give for some of the best in class companies in their long term needs and do you think it is a good time to see some consolidation?

Roger Conrad

5:46

Actually, M&A is the subject for the upcoming issue of EIA, which we plan to get out early next week--with midstream obviously a big part of the discussion. Our general feeling is there have been too many owners of midstream assets in the US for some time. So far individual assets have changed hands but deals for whole companies--with the debt and usually MLP structure as issues--have been scarce, other than parents/GPs swallowing their MLPs. We think there's potential for the other kind as well and will have some companies to talk about.

Mack

5:50

Getting on here late so sorry if this is redundant..... Do you see a time in the not too distant future when you will be able to move SHLX and ENLC to a "buy?" Thanks...

Roger Conrad

5:50

No it's not, and thank you for participating today.

I did comment on Shell Midstream earlier. The problem with that one is Royal Dutch Shell has not committed to date to a long-term plan for dividends or even the MLP staying independent So while the assets are good and cash flow steady, there's enough risk of a dividend cut or takeunder by the parent at a low price to keep it a hold. EnLink we have not been bullish on for some time either--though it does appear to have a stable general partner in Global Infrastructure Partners. The company has a lot of volume exposure that has kept the distribution at risk this year. We'll be interested in Q3 results due out November 4--and whether or not there's evidence of stability. But at this time, even at the low price we're not interested in nibbling.

Roger Conrad

5:53

Well that's all we have in the queue for this month, as well as from emails we received prior to the chat. Thanks again to everyone who participated. We'll be sending a link to the complete transcript of all the Q&A shortly after I sign off. It will also be posted to the EIA website.

5:55

We really appreciate your loyalty as a subscriber to EIA. We realize this has been a continuing tough time for this sector. But we're convinced that a well chosen portfolio of best in class energy companies--the kind we're recommending at EIA--features both high and reliable dividends and explosive upside from these prices when the cycle inevitably turns higher. That's in spite of the headlines and politics. Thanks again for tuning in everyone!

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