JotCast | 9/30/21 Energy & Income Advisor Live Chat

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9/30/21 Energy & Income Advisor Live Chat

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Roger Conrad

1:57

Hello again everyone and welcome to this month's live chat for Energy and Income Advisor members. Elliott and I are looking forward to answering your questions today. As always, there is no audio. Just type in your questions and we'll get to them as soon as we can.

1:59

Usually, I start the chat by posting answers to questions we receive via email prior to the chat. We were unable to get to them this month in advance. But rest assured, before we sign off this evening, we will be posting answers to everything we received. And we will be sending you a link to a transcript of the entire Q&A after the chat, which will also be posted on the EIA site. So thanks for tuning in today. And let's get started.

Marty

2:08

Hi guys. AES going downhill on a fast slide - any idea why and what's the recommendation? Is there an exit point? Thanks.

Roger Conrad

2:08

Hi Marty. There's really nothing unique going on with AES Corp to trigger a decline in shares, such as we've seen this month. Q2 results were solid and there's every indication Q3's will be as well. There is a new CFO, succeeding a guy who was popular with analysts and is now going onto a larger company (mining company Vale). But that change is unlikely to have any lasting impact. But other than that, news has been pretty positive--an IPO for the Fluence energy storage partnership with Siemens has been filed for, the company has a deal for a new contracted LNG import terminal in Vietnam to go with one already in operation and the company has purchased the rest of its Colombian unit, which should be immediately accretive to cash earnings. The Dow Jones Utility Average has dropped a lot this month--which I believe is due to interest rate concerns. That's also a factor that shouldn't have much lasting impact. Bottom line is AES is still a strong value at 13X expected next 12 months earnings.

Barry B

2:16

I am interested in your thoughts or comments on the rumors of PXD about to be bought?

Elliott Gue

2:16

It's possible but I just don't see it. PXD remains in my view way too cheap at current prices and I believe the stock could see significant upside into 2022 as the power of its variable dividend policy becomes clearer. I just don't think it'll be easy to convince management to agree to a deal unless it's at a significant premium and the market has tended to punish deals deemed to expensive.

Phil B

2:16

Hi Roger & Elliot. Many thanks for holding these very useful sessions. Here in the UK where I live we have seen many of the domestic energy supply companies go bust over the past few weeks. This has been caused, in part, by the currently very high price of natural gas and the failure of these companies to adequately hedge their supplies. We have also experienced quite a windless summer which has reduced the output of our windfarms and necessitated the greater use of natural gas-fired power plants. While I realise that the situation of domestic energy supply companies in the USA is rather different from that in the UK, I'd be interested to hear your views regarding the potential risks and rewards for investors in US stocks of these high natural gas prices. Do you have any buy recommendations that are linked to high natural gas prices? Should we be having another look at GLOP given the high international demand for gas in places like China?

Roger Conrad

2:16

Hi Phil. At this point, the US is pretty much at maximum export capacity--and the next LNG facilities aren't expected to come into service until closer to mid-decade. We absolutely agree that the energy transition is coming up against the reality of the energy cycle, and that the current investment deficit in oil and gas infrastructure, drilling etc is on track to lead to tighter supplies and higher prices the next few years. But at this point, the situation with tankers is still nuanced--there's demand for them but also still over supply. And that's still making it difficult to recontract, which is why GasLog Partners now pays just a penny a share dividend compared to 55 cents in November 2019. We think energy companies in the US--upstream, midstream--are likely to keep spending on the conservative side, especially with the US government still not granting new drilling permits on federal lands and the legal pathway to pipeline approvals all but impossible. We think that will maximize free cash flow

Roger Conrad

2:17

and we look for some very big gains the next few years, on top of what we've seen since last November.

Michael L

2:20

Slliott, what is your current outlook for oil prices over the next 6-12 months. Thanks!

Elliott Gue

2:20

We're just putting the finishing touches on an EIA issue where we cover out outlook for oil and natgas prices, though we focus more on gas in that piece given the absolute mess in Europe right now (record high gas prices). My view on oil is that it would be well supported on any dip to $65-$70/bbl (WTI) and will likely average around the mid-70s to low-80s/bbl in 2022. That said, the risk of an upside spike to $100/bbl remains far higher than the chance of a break below $65/bbl. So we remain bullish oil.

Michael L

2:22

Among the producers, OXY, EOG, Pioneer, Marathon etc., which do you think has the most upside from here?

Elliott Gue

2:22

OXY likely ahs the most upside in percentage terms because it's the most depressed due to worries over the debt it took on to buy Anadarko back in 2019. Out view there is that the stock will see $40 by early next year and could easily be worth $60 to $70 once it's able to bring its debt burden down more in line with its peers. That could happen quickly as it's generating eye-popping free cash flow with oil at these prices.

Dragomir

2:23

Hi Roger & Elliott,

Could you comment on BHP? I don't know if you cover it. Thanks.

Roger Conrad

2:23

We don't cover BHP in Energy and Income Advisor. It is one of our recommended stocks in the Deep Dive Investing/CUI Plus Income Portfolio, where we recently added to our position near the current price. BHP like fellow major minor Rio Tinto is a major producer of iron ore with China the primary market. It paid a record semi-annual dividend ($4 per share) in late September in large part because of surging iron ore prices and its ability to ramp up to meet Chinese demand despite the pandemic. That sent shares to the $80 range, where despite our expectation of a $100 plus share price for BHP eventually, we did sell a portion of our position. Now it's pricing in all that downside for iron ore and then some and we think its a great value for patient investors. The spinoff/merger of company oil and gas assets with Woodside Petroleum should also be greatly accretive to investors as this energy cycle moves higher.

Guest

2:23

I am interested in your thoughts and comments on rumors that PXD is about to be purchased by another company?

Elliott Gue

2:23

I covered this in answering a prior question but I don't see it as likely because I think it would be tough to come to terms that would satisfy both buyer and seller.

Fred Schachat

2:24

The introductory remarks are all that I have received: is the chat ongoing?

Elliott Gue

2:24

Yes, we've answered a number of questions...if you're having trouble seeing the Q&A, you might want to try logging out and then logging back in.

Lee B.

2:30

Gentlemen,
My largest position seems to be also my poorest performer. Is there any reason to think EPD’s business has changed?

Roger Conrad

2:30

No. This company demonstrated its resilience during the pandemic year. And Q2 results along with guidance make it pretty clear the company is still incrementally adding new assets and holding throughput steady throughout its system. while accessing low cost capital--the latest demonstration in early September when it sold $1 bil in 31-year bonds at a coupon interest rate of just 3.3%. Insider buying has also picked up since early August and all 27 analysts who rate the stock have it buy. Enterprise is well represented in various energy and dividend ETFs (65 indexes), which have come under pressure this month despite obviously very strong oil and gas prices, very likely because of worries about interest rates. But we see very little risk for patient long-term investors who buy it and lock away the 8% plus yield.

Fred Schachat

2:30

Will the recent Nat Gas discoveries off Israel, Egypt and Crete affected the future Nat last shipments to Europe?

Elliott Gue

2:30

I don't think it's going to do much in terms of putting a dent in the region's gas supply shortfall. Germany's decision to close down all its nuclear capacity coupled with rising emissions prices and other factors have dramatically increased the region's reliance on imported natgas, particularly imported Russian gas. That leaves Europe/UK vulnerable to factors such as low wind speed/output, low hydro reserves, gas pipeline disruptions or even just unusual weather.

Jerry B.

2:34

With the current market conditions what priorities would you suggest for investing new money between utilities, energy or REIT?

Thanks to both of you for your years of good advice!

Roger Conrad

2:34

Hi Jerry. I think you basically want to look at individual companies in these sectors--specifically, when shares of a best in class REIT, energy midstream or utility fall to attractive prices, they're worth targeting with fresh money, within the discipline of diversification and balance. As sectors, all of these are currently under pressure because of the conventional wisdom that dividend paying stocks always lose money when interest rates rise, and the 10-year Treasury note yield is now over 1.5% again. That's a contention the data does not support--in fact all of these sectors have had big returns in calendar years when benchmark rates have risen, and their worst years have been when rates have fallen furthest. But it continues to have an impact on prices for these stocks that we can use to buy low.

Michael C.

2:38

Hi gentlemen (and Sherry) – thanks as always for rock-solid analysis and insight. What’s your best guess for how long the surge in energy names lasts? (Or, how long does the supply/demand imbalance last?) Seems like we’re on a path towards energy outperforming well into next year, but I’d value your updated sense of the road ahead from both a short-term trading and long-term investing perspective.

Many thanks –

Elliott Gue

2:38

Thanks for the question and kind comments about our work. I believe we're in the early stages of a multi-year rally in commodity prices. I'd argue one of the more dangerous fallouts of the 2014-2020 energy price collapse is that it seems to have convinced many, including some in positions of power, that the Petroleum Era is drawing to a close and that we're on the eve of Peak Demand for oil or, more broadly, fossil fuels. This means that investment in new oil projects remained depressed and new oil discoveries worldwide has plummeted to the lowest levels in 70+ years. It's also pretty easy for policymakers to promise to phase out internal combustion engines or reduce carbon emissions by 55% when energy prices are low and consumers are happy. We're now beginning to see strong evidence that global oil demand is still rising and it will likely continue to do so for years. As a result, the supply shortfall after years of underinvestment on the supply side is just becoming apaprent.

Jack A.

2:40

Hi Guys:

I've been very disappointed at the performance of the midstream MLPs and companies - specifically EPD and KMI.......... And I'm trying to understand the reason - especially in light of the run up in the price of oil and natural gas.....

Is the poor price performance due to the recent hurricanes in the Gulf Coast??.... Or is it due to the recalibration of the price investors are willing to pay in light of pressure to reduce fossil fuel development?........ I have to keep in mind that their income is mostly tied to volume, rather than the price of the commodity.............. Perhaps now that the commodity is rising in price due to its scarcity, (which you predicted), perhaps our investment dollars should be focused on the exploration and production companies, rather than the midstream assets....

Your thoughts? Thanks.

Roger Conrad

2:40

Hi Jack. I really don't think it's any of those. Rather, as I answered to Jerry's question just now, the pressure on these stocks right now is almost certainly because they pay dividends, benchmark interest rates are rising and the conventional wisdom--despite all the evidence to the contrary--is that dividend paying stocks must lose money when rates are rising. Selling is almost certainly accelerated by the fact Kinder and Enterprise are both members of multiple indexes and ETFs set up to track energy and dividend paying stocks. Kinder is part of 172 of them. As for fundamentals, as we saw in Q2 results, KMI, EPD and indeed all best in class energy companies are focused on generating free cash flow after all dividends and CAPEX, for the purpose of cutting debt. That protects them from rising rates and restrictive government policies on new development/investor reluctance to invest in fossil fuels etc. And in the meantime, growing scarcity makes what they own increasingly valuable.

Roger Conrad

2:43

We're disappointed in share price performance to. But after 30 plus years in this business, we're also used to the short-term sentiment in the stock market at least temporarily derailing long-term investment themes. And we encourage everyone to try to look beyond the current weakness in these names--which will almost surely report even better Q3 results this month than they had in Q2.

Elliott Gue

2:43

Another way to look at this is that energy is currently just 2.75% of the S&P 500 while tech is 27.6%. I can easily see Energy rising to 5% to 7% of the S&P 500 over the next 3 to 5 years; after all, that's still less than half the highs in recent years. Meanwhile, with inflation likely on the rise long-duration tech should shrink as a % of the S&P 500.

Eric

2:49

Can you give your outlook on SPH, after the past dividend cuts, do you think this one is safe for the future now

Roger Conrad

2:49

I think Suburban's distribution cut in July 2020 did pretty much the same thing that its cut in October 2017 did. That is, it saved enough cash for management to accelerate debt reduction and to continue with scaling up and cost cutting, which are really the only way fuel distributors can offset the risk of very mild winters and wholesale fuel cost volatility--which we're seeing this year--as well as competition from other heating sources such as piped in natural gas. My view is Suburban is primarily attractive now as a takeover target, with either UGI's Amerigas or Superior Plus of Canada as acquirers. I think if it does stay independent, it's going to have to get bigger by making a lot more acquisitions, or else in a couple of years it's going to be looking at cutting its dividend again to raise cash. It's a buy up to 15 but for aggressive investors only--certainly not in the quality category of Enterprise Products Partners though it has a nearly identical yield.

Michael L

2:55

Roger, MPW has languished for some time. Do you see a catylist for pushing the price higher in the next 6 months?

Roger Conrad

2:55

Hi Michael. The share price has been in the low 20s for some time. But the actual REIT itself has definitely not been sitting still--as we've pointed out to readers of CUI Plus and The REIT Sheet, where we track it as a net lessor of healthcare facilities in the US and Europe. As I've pointed out there, I think what investors are likely waiting for is more evidence that the recent series of property purchases in the US and UK are being economically financed and integrated in the whole business--and that Medical Properties Trust is weaning off dependence off the Steward group, which was obliquely panned some months ago in a Wall Street Journal article. I think their Q2 results and developments since indicate big steps in doing all of this--and that's been affirmed by a big drop in short interest as well as fresh buy recommendations from several major research houses. It looks like a great fresh money buy to me for those who don't already own it--not many REITs paying a safe 5.5%.

Roger Conrad

2:57

And again, recent weakness in MPW is almost certainly due to interest rate worries that should once again prove to be just a short-term negative for shares. As far as actual borrowing costs, the company just issued EUR500 mil in new 5-year bonds at a coupon yield of just 0.993%--matched to Euro earning assets. They're still raising low cost capital, and Moody's has them Ba1 with a positive outlook.

Eric

3:02

RIO is of course very inviting with this recent super high dividend, but what do you think the outlook is for future dividends? Even if the dividend returns to a 2019 or 2018 level, it still looks like it might be attractive.

Roger Conrad

3:02

Hi Eric. I think even the major mining companies like Rio Tinto and BHP--which I answered a question on above--are going to vary their dividends with profits in any given year. RIO like BHP paid a big dividend this month, reflecting robust iron ore and copper prices mainly. And with iron ore prices backing off, it will likely pay less next year--unless of course (as is likely) the Chinese economy doesn't crack in the face of the Evergrande meltdown and demand remains robust. Bottom line is I wouldn't count on either RIO or BHP paying out at the same rate they did in September. But after their recent selloffs, these stocks are very cheap considering what they produce is absolutely essential--including for any transition to wind, solar, storage, electric vehicles etc. For more on mining companies, please check out our Deep Dive Investing advisory by calling Sherry at 1-877-302-0749 Monday through Friday, 9-5 ET.

Ted

3:07

Is BEP - Brookfield Renwable Energy - still hold? It's now below the $40 dream price.

Roger Conrad

3:07

The Dream Buy price for Brookfield Renewable Energy is actually 24, and we're a long way from there at this point. But the partnership shares (BEP) of this contracted hydro, wind and solar power producer with global operations are indeed below our maximum recommended entry point of 40, and so are the C-Corp shares that trade as BEPC--which may be more suitable for some investors as there is no K-1 at tax time. The latest news on the company is from an Analyst Day in late September, at which management increased its annual equity deployment guidance by roughly 20-25%--largely because of a larger number of economic new projects. It's pretty simple. The more BEP/BEPC invests, the greater underlying cash flow growth and the safer/faster growing are dividends. Its a conservative play but a good one at the current price. Note we have never recommended paying more than $40 for either BEP or BEPC and still don't.

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