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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Ted

3:12

KMI is below its dream price of $18. I'm loading up again. What's the time frame of a rebound?

Roger Conrad

3:12

Hi Ted. First, I have to repeat our standard advice on portfolio diversification and balance, which is you never want to really load up on one stock no matter how strong the business and cheap the share price appear to be. And that applies to Kinder Morgan as it does with all of our recommendations. The bullish case long-term here is that this company is generating massive amounts of free cash flow and now with deleveraging goals mostly achieved, it's deploying it toward accretive acquisitions, share buybacks and dividends. It's also developing renewable natural gas and hydrogen applications as future energy for its infrastructure. I think this is a formula that will ultimately produce big shareholder returns--though I think they're going to take patience to realize in the current market environment of interest rate worries and misperceptions about fossil fuel companies.

Guest

3:19

Hi guys, thanks for this conversation. Following up on something asked by another person regarding risks/rewards of high natural gas prices, do you see any hidden risks in any of the gas-foscused pipeline companies or gas utilities? It seems that, during commodity price dislocations such as at present, small trading arms buried within these companies tend to rear their ugly heads and can do serious damage to profits and stock prices. Any losers in midstream or utilities from high natgas prices? And then, specifically, how will KMI benefit (or not) from these high prices?

Roger Conrad

3:19

Good point about trading operations. If you're asking about natural gas distribution utilities, we track them in Conrad's Utility Investor rather than Energy and Income Advisor--and this will be something we address in the October issue, which will post Friday, October 8, though happily the list of the exposed is really just a couple companies as this is something management teams have tried to eliminate. I do think there is some possible risk for gas utilities in that some state regulators are going to bristle at large price increases. But I also think it's likely these concerns will prove overblown, since virtually all states allow for automatic pass through. As for pipeline companies, where there is exposure, it's generally on the long side--meaning companies tend to produce unexpected profits when commodity prices are higher. And keep in mind, we just went through a big gas price spike this past winter--so companies have generally been in a protection mode this year that should limit risk.

Roger Conrad

3:20

As for Kinder, it was a huge winner last winter--reaping a roughly $1 bil windfall that essentially funded its purchase of the Stagecoach natural gas system from Crestwood and Consolidated Edison. So it's reasonable to assume they have an angle on the recent spike in gas prices as well in my opinion.

John A

3:22

Thanks Elliot & Roger. Do you have opinions on uranium miners and which companies have the best short and long term potential?

Roger Conrad

3:22

Hi John. This is something we've definitely been talking about, in light of the some of the prices we've been seeing. At this point, the company we come back to is Cameco Corp (NYSE: CCJ), which has actual earnings, customers and mines. It's up a lot this year but at this point is actually well off its high point. Look for more in a future issue of EIA.

Jon B

3:27

Given that the landscape of natgas demand and prices could shift dramatically by the time they are up and running, what do you think of Tellurian?

Roger Conrad

3:27

It's a speculative name in this space and the stock has more than tripled this year--which means a lot of good news/promise is already priced in. There are no earnings and no dividend--so appeal is limited for conservative investors, especially with so many other energy stocks yielding so much now. I also note that management withdrew a $50 mil senior note offering in early September that it was offering to pay 8.25% on for a maturity in 2028. It's hard to bet against a natural gas producer when the commodity is at this price. But that's also worrisome. In short, we would advise looking at the energy stocks we recommend, rather than venturing this far up the risk spectrum at this stage of the energy cycle.

Jon B

3:34

A well known investor and facebook founder has predicted that big disruption is coming to utilities with hundreds of billions in infrastructure and investments to be turned upside down, presumably as the world marches inexorably towards renewable generation and electric cars. This is a nice sound bite but may be a little backward looking (as coal plants, for example, have already been seriously disrupted) and ignores what utilities are actually doing to adapt. HOWEVER, can you see any nuggets of truth in the comment?

Roger Conrad

3:34

Forecasting the end of utilities is certainly nothing new, though it never fails to grab headlines. At this point, basing doomsaying on utility companies supposedly not keeping up with the energy transition is pure nonsense--since they are basically driving it in the US. And they're the only industry with the investing power and reach to make this happen. The investment to transition generation/distribution/transmission systems--has been in effect for at least a decade. If there is a challenge here, it's from the energy cycle, which has not been repealed. And it's entirely possible that inflation pressures as from higher gas prices may force some utility companies to slow their pace of investment.

John A

3:41

I am not currently a subscriber to the REIT Sheet but have current positions in CCI, RYN & FPI. I have also recently considered WY. Have any of these entities recently been analyzed in the REIT Sheet. If possible would you comment on any or all of the above? In your opinion are there better candidates currently than the above?

Roger Conrad

3:41

I cover all of these in the REIT Sheet, except for Farmland Partners (NYSE: FPI), which is on my list for potential eventual inclusion. Regarding FPI, I note that the REIT came out after the April 2014 IPO with a policy of twice annual dividend increases. It then froze its payout until August 2018, when it cut its dividend by more than -60%. That's a pretty good indication that this business is a good deal more cyclical and less favorable to paying out big dividends than management thought when it went public. More recently, it triggered substantial dilution by converting a preferred stock to common equity. The company is still trying to expand but the fact that a big purchase in Illinois and California is dilutive demonstrates this also isn't as easy as management once thought. We track 84 REITs currently in the REIT Sheet with buy/hold/sell advice. If you're interested, give Sherry a call at 1-877-302-0749.

Jon B

3:48

I think Atlantica is probably outside your coverage here, but perhaps you can answer the following. Some of the European utilities (and renewable developers) are getting clobbered by clawbacks on profits imposed by Spain and Italy. This has to do with the natural gas spike and its impact on power prices. Is Atlantica at risk? Trading poorly recently. Thanks!

Roger Conrad

3:48

I do cover Atlantica Sustainable Infrastructure (NSDQ: AY)--as well as its chief sponsor and 44.18% owner Algonquin Power & Utilities (NYSE: AQN)--in Conrad's Utility Investor. And Sherry can certainly put a sample issue in your hands with a call to 877-302-0749. The short answer to your question is this company does have a substantial presence in Spain and during the Q2 earnings call CEO Santiago Seage Medela stated that they would expand further at the right price--though he noted lower rates on recent contracts as a potential impediment, as well as the fact Atlantica has ample investment opportunities elsewhere.

Again, I think it's a good idea when a stock's price weakens to try to find out why. But in this case, the business case is still strong and the more likely explanation for downside is selling pressure on the 96 indexes and related ETFs that hold Atlantica.

Jon B

3:54

In a previous answer, you (Roger) wrote: "And it's entirely possible that inflation pressures as from higher gas prices may force some utility companies to slow their pace of investment." Can you elaborate on how inflation in commodity prices (nat gas) would translate to lower investment by utilities? Wouldn't it drive even faster adoption of renewables?

Roger Conrad

3:54

Like I said, this is one of the questions I'll be addressing on a comprehensive basis for each of the 190 or so utilities we track in Conrad's Utility Investor in the October issue, which will post a week from tomorrow. But the base concern is this: Higher gas prices passed through to customers by law will push up rates, which could make regulators in at least some states less willing to allow investment in renewable energy to go into rates.

In other words, despite the fact that using more offshore wind, solar/storage etc would arguably reduce dependence on gas and limit price spike risk, passing the renewables investment through as needed would push rates up higher in the near term. Identifying potentially vulnerable companies is something I'll look to do in the issue.

Hans

3:58

Is BHP a good buy now. Thanks

Roger Conrad

3:58

Hi Hans. Yes very much so, with the caveat that you should be prepared for BHP to pay a lower dividend next year than the semi-annual payment of $4 per ADR it made earlier this month, unless iron ore and copper prices beat what are currently very low investor expectations. Please see my answers earlier in the chat for more detail on BHP. And note that we don't track the stock in EIA--it is a recommendation in CUI Plus/DDI Income. And if you're interested in finding out more about our mining stock coverage in Deep Dive Investing, I invite you to contact Sherry at 1-877-302-0749. Thanks!

John A

4:00

SLB has been in a trading range since 7/7/21. Do you anticipate any significant good or bad news in their upcoming earnings (10/22/21)?

Roger Conrad

4:00

The upcoming issue of Energy and Income Advisor addresses our big picture forecast for the energy market and should be in your hands sometime in the next few days--and where we are in the cycle will have a major impact on how soon Schlumberger--still the world's leading energy services company--will break above its current trading range. But in the meantime, we see the stock as a strong bargain for those who don't already own it.

Roger Conrad

4:09

Here's one from the emailed questions:Roger & Elliott.

MMP has dropped about 6% in the last 30 days, and almost 8% from the high within the last 30 days. I haven't seen any news on the company to justify the drop. Do you think this is anything more than concerns over demand for their crude slumping as a result of the Delta variant?

Thanks,

Michael L

4:12

Hi Michael, Magellan's share price since mid-June looks very much like that of pretty much every other best in class energy midstream company we track. And like the other best in class companies we've been recommending to you, our view is what's been happening has everything to do with selling of dividend paying stocks in general and basically nothing to do with what's happening at the company itself--which as we saw in Q2 numbers and guidance is benefitting from Americans' return to the road and now the skies. It's frustrating to watch a holding that had been recovering sharply this year suddenly run out of gas. But the key is the energy cycle has shifted upwards and what this company has is only going to become more valuable--even as its BBB+ balance sheet and now 9% dividend are safe.

4:14

And another: Have you looked into Rolls Royce (RUCEY)? They are applying their nuclear powered submarine technology to the development of mini nuclear power plants, which apparently minimize the risks of nuclear power generation. The company is burdened by uncertainty surrounding its aircraft engine business, but this is possibly a major source of alternative clean energy.--Terry

4:20

I believe Rolls Royce is now privately held. That does sound interesting about the mini-nuclear plants, though I have to confess I'm taking very much a show me view of that technology. Biggest challenge right now for nuclear in this country is Southern Company getting over the finish line with Vogtle in Georgia with the next major update in late October. They're AP1000 reactors so full sized. But people have to get comfortable that they work I think before we're going to see much support for anything else, including mini-reactors that are really pretty much in concept stage.

Hans

4:23

Atgff I have sold some of it what is your opinion and outlook of this stock. Thanks

Roger Conrad

4:23

I think Altagas is pretty solid right now, with its well-managed natural gas distribution utilities and what appears to be expansion opportunity for the propane export terminal on the Pacific Coast of British Columbia. Those who purchased it in the 2019-2020 time frame are sitting on some solid gains now. But I continue to believe this stock will ultimately make it back to the $30 area as it steadily invests in its low risk system and raises dividends. In the meantime, it's not expensive yielding around 4%.

Roger Conrad

4:24

DEAR FOLKS, I am hoping to sneak this question in -- because it does deal with energy-related matters. In another publication, you opined that BHP would hit the century mark by late summer. Well, it's now down 30%, into the low fifties, since mid August. Some people say this is fallout from the Woodbine Petroleum merger; others say it's because of the reported slowdown in Chinese manufacturing as a result of power constraints. And there are also concerns about the US infrastructure legislation. Are you still bullish on BHP? Do you see further downside in the near future? I hate catching the proverbial falling knife. Thank you. Jeffrey H.

ReplyReply allForward

4:30

Hi Jeffrey. I have talked quite a bit about BHP during this chat. And again, my view is the recent price action is all about worries for iron ore prices that I think will reverse--though no one should count on another huge semi-annual dividend of $4 this year. I will comment briefly on the Woodside Petroleum merger of the company's oil and gas properties. I've covered Woodside since I used to do an advisory on Australian stocks and I've been impressed by its management's ability to bring LNG export projects into service, especially down under. I think the greater scale of this combination will result in much greater efficiencies and new investment than would have been possible if BHP had held onto its oil and gas properties. And I think as the energy cycle progresses, that's going to lead to pretty big dividends for the shares of Woodside we'll receive as BHP shareholders. I also want to point out once again that we did sell a portion of our position in BHP when the shares hit $80 earlier this year--and we've

4:32

since then bought back most of the position around the current price. The near term is going to depend on iron ore prices. But at this level, all that bad news and more is priced in--and this is truly a dominant metals company with a strong presence certainly in everything needed for a world of greater use of electric vehicles, renewable energy etc.

And another:

4:33

It appears to be that BHP group and Rio Tinto are excellent values, each with a 10% dividend that have recently been raised. Both mine copper and other essential ingredients for the expanding battery market. Even if earnings slide a little next year, the long term looks good from here. Are we considering adding these names into future portfolios.--Monroe J.

4:36

Hi Monroe. I have talked quite a bit about BHP and Rio Tinto in this chat. I fully agree with you on all counts as reasons to be long-term bullish--as well as why they rate strong buys now for patient investors. We will probably not be adding them to Energy and Income Advisor portfolios as they are not per se energy stocks. We do cover Woodside Petroleum--which as I said will acquire all of BHP's oil and gas assets--in our Energy and Income Advisor Canada and Australia coverage universe. And it currently rates a buy. But if you're interested in our shop's mining stock coverage, I would suggest checking out our Deep Dive Investing service by calling Sherry Monday through Friday, 9-5 ET at 1-877-302-0749. BHP is a member of the DDI Income Portfolio, which we also offer separately as CUI Plus.

Lee B

4:40

like so many of your subscribers I want to express gratitude for these chats, which I find always helpful. Considering your outlook for Nat gas and oil prices, would shares in Dorchester..DMLP be a good way to play the commodity cycle?

Roger Conrad

4:40

Hi Lee. Thanks for those kind words. We do cover DMLP in our "MLPs and Midstream" coverage universe, which can be accessed under the Portfolios tab. We currently rate it a hold. But we do like the model of paying a variable dividend based on royalties received--and higher natural gas prices will tend to mean both more production on its lands and higher realized selling prices, both of which boost that royalty income. We will be taking a look at companies paying under this model in the near future--though we continue to see more upside in the producers we currently have in the model portfolio. Thanks for your question.

Roger Conrad

4:41

Dear Folks, Do you have any additional thoughts about how the termination of the Penn East Pipe Line will affect SJI and NJR. Are the dividends safe? How much will profit growth suffer? I've read your comments in your sister publication dealing with utilities, and there (if I read you correctly) you suggest that the effects will be manageable for SJI and perhaps a bit more substantial for NJR.
I would appreciate some additional clarification of the natural gas situation in New Jersey.

Many thanx.

Jeffrey H.

4:46

Both New Jersey Resources and South Jersey Industries are natural gas distribution utilities, and we track them in Conrad's Utility Investor. But in brief, neither company has been booking its investment in Penn East to earnings for some time, so the cancellation of the project is not a surprise and the immediate financial hit to both will be modest. I do think, however, that cancelling this project will greatly increase the value of the existing pipeline infrastructure in the state--since it will not have this new competition. It means less gas comes out of Appalachia, which will likely pressure prices lower there eventually. And it means higher natural gas prices for customers in New Jersey as well--though use of renewable natural gas may get a lift.

Darl

4:55

I would love your opinion on the recent spike in propane and ways to play this in the coming months. Thanks!

Roger Conrad

4:55

Hi Darl. I think it's good news for any company that produces natural gas, especially wet gas. It's also good news for midstream companies with extensive processing assets, as it's a major incentive for producers to use their assets. One to watch is ONEOK Inc, which announces Q3 results in late October and whose shares already appear to be getting some traction. MPLX and Hess Midstream should also see improved throughputs on that basis, as should Enterprise Products Partners and Altagas (mentioned above). It's not likely to be good news for fuels distributors like Suburban Propane, which I answered a question on a bit earlier.

Guest

5:00

Gents, any comments on the impact of the recent election on Canadian oil and gas companies? Also, VET and the European crisis?

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