You are viewing the chat in desktop mode. Click here to switch to mobile view.
X
Return toCapitalist Times
August 2023 Capitalist Times Live Chat
powered byJotCast
Prev Page View Full Chat Next Page
AvatarRoger Conrad
2:00
is backing up what it said during the Q2 earnings call—which is they’re still seeing a record number of opportunities to invest in renewable energy/efficiency projects with worthwhile returns even after higher financing costs.
 
It’s pretty clear to me that the current market narrative is expansion with debt financing especially is risky—and companies that announce debt financing essentially are getting punished. And of course momentum is trumping value in a big way—few care about how cheap a stock is, just if it’s going up. That means if we’re going to own HASI, we’re going to need to be prepared for momentum to be against us, probably until the Fed stops raising rates. I’m prepared to be, especially from current low prices.
 
 
Q. Hi Roger. I just finished reading your August CUI newsletter on the lead issue impacting telecom operators. For your next live chat I have the following questions: Do you know if a similar issue is looming for the water companies. Did they used lead pipe in the past to distribute
water or still do? Thanks for your feed back. Much appreciated. Pete H.
 
A. Hi Pete. As it turns out, that story about lead encased telephone cables is looking more and more like a non-issue, even for companies with supposedly the largest exposure like AT&T Inc (NYSE: T). The Wall Street Journal “report” appears to have grossly over-estimated how many supposedly “toxic” cables there are, not surprising since telecoms stopped installing them in the 1950s when the dangers of lead became better known. And to the extent there are lead-lined cables, they appear to be in places where there’s little or no health risk to the public. That’s also not really a surprise, since regulators have known about their existence for decades.
 
Bottom line is this is looking more and more like a story where the paper sensationalized the risk—and investors, analysts etc who took WSJ at its word now have egg on their face. There are still the usual trial lawyers sniffing around—Levi & Krosinsky etc—as big telecoms are a pretty big
2:01
money tree to shake. But barring some (increasingly unlikely) new revelation, this story appears to be heading down the memory hole.
 
But in any case, lead-lined pipes have not been a part of water utilities’ networks. There is a risk to some systems from lead and other metals toxic to humans in large doses. But by and large, regulators are working with companies to force cleanup by polluters. And companies like Essential Utilities and American Water Works have robust pipe and main replacement programs in place that are cutting waste and driving rate base growth.
 
 
Q. Greetings. Recapping your portfolio sell advice from summer of 2020:
My reasons for selling Suburban Propane Partners (NYSE: SPH) to make room are highlighted in detail in the Portfolio.
 
·      The underlying business has weakened under the pressure of COVID-19 fallout, with the propane and fuels distributor entering the time of year where cash is at a premium. During the earnings call last month, management warned of a potentially big hit to revenue from weaker demand at commercial and industrial customers, to the extent it was forced to “re-examine” its dividend policy on balance sheet concerns.
·      Odds have diminished for a high premium, near-term takeover this year. Likely suitor Superior Plus (TSX: SPB, OTC: SUUIF) has attracted investment from a unit of Brookfield Asset Management (TSX: BAM/A, NYSE: BAM). But while that means it will be able to resume acquiring propane distributors, there are numerous smaller and cheaper potential targets. And Superior is eventually interested in Suburban it’s likely to wait to see if an eventual distribution cut brings the price lower before making an offer.
·      Suburban shares have nearly doubled off their late March lows. That means
2:02
·      potential downside in advance of the early August release of FYQ3 numbers, as with guidance pulled there’s no real way of knowing where the business bottom is, how much of the payout is really at risk, and therefore the downside for the shares.
It’s hard not to notice the S&P 500’s recovery since late March has taken on a “V” shape, rather than an “L” as many once feared. If the economy can track that, it’s likely Suburban will be able to hold its distribution, and shares will likely move higher. On the other hand, so would any number of high yielding fare that don’t carry the risk is does.
 
Your Current Utility Report Card says:
No change in dividend since August 2021. FYQ3 (end June 30) EBITDA is up 13.2%, results get boost from customer retention initiatives, added scale of business and cooler weather in service territory to boost retail volumes sold by 3.9%.
Propane system acquisition, renewable natural gas platform development, $21 mil debt reduction should boost results rest of calendar year. Average propane prices reduced -45.9% on wholesale level, gross margin rises 6.7%. Debt to EBITDA improves to 4.36 times from 4.43 times for the trailing 12 months period. Operating expenses up 6.9% on business expansion, debt interest expense up 24.9%. Continues to generate cash flow in excess of all CAPEX, dividends and debt service, with payout ratio of a little over 50% of free cash flow after CAPEX. Quality Grade C (No Change).
 
On your advice in 2020 I sold half my position but still hold the rest. Some recent article from others say dividend could be at risk.
What is your current view of their dividend stability? Thanks—Gary J.
 
Hi Gary. Thanks for that recap on Suburban Propane
(NYSE: SPH). I guess the common thread in my view for the fuels distribution business over the years has been that gaining scale is critical to controlling costs and dealing with volatility in weather and wholesale propane markets. To the extent, SPH has been able to add new business with acquisitions, it’s improved profitability.
 
The dividend cut in August 2021 also allowed Suburban to use cash to sharply reduce debt leverage. So doing, it took the pressure off dividends, despite the rising cost of debt still on the company’s books. I don’t view the dividend right now as being at particular risk. But the company will come under increased pressure to the extent its not able to keep adding scale. And I still believe the best case would be a takeover by a larger player, which in the current environment would be either UGI Corp (NYSE: UGI the owner of Amerigas or Superior Plus Corp (TSX: SPB, OTC: SUUIF) of Canada. Either is still possible. And I rate Suburban a buy at 16 or less for more aggressive income see
2:03
seekers.
 
 
 
 
2:04
That's it for the pre chat questions. Now let's get to some live ones.
Ben F.
2:10
Good morning - Thoughts on UGI?
AvatarRoger Conrad
2:10
Hi Ben. UGI has been scuffling a bit recently. The regulated utility operations are doing well, with the Pennsylvania natural gas utility recently securing a solid rate increase as well as a "weather normalization" provision that will smooth out future weather related volatility on earnings. The challenges are coming from the fuels distribution business, particularly the portion in Europe management is trying to exit. That was the reason for the cut in FY2023 (end Sept 30) guidance to the "low end" of the range. I don't see the dividend at risk. But until the sale is completed, there is balance sheet risk and the stock could go lower. I rate it hold in the most recent Utility Report Card.
Mike C.
2:22
Good morning, gentlemen and Sherry –

I hope the summer is treating all of you well. A handful of questions….

CEQP: in the last EIA, I was struck by your comment that you expect at least a double in the stock in the next 12-18 months. This leaves me thinking it’s time to harvest some of my considerable profits in E&P names and move them to CEQP. Appreciating that individual investment advices is beyond scope, I’d love your updated thoughts on what areas you see the greatest upsides you see in this current energy cycle. For instance, I’m guessing that you don’t expect XOM to double in the next 12 – 18 months?
AvatarRoger Conrad
2:22
Hi Mike. Midstream is typically the last energy sector to rally in an up cycle. The main compensation for waiting is dividends, which at this point are very high and well protected with free cash flow for the best in class. As you've noticed in EIA, we've recommended some moves to take advantage of where we are in the cycle. Our midstream recommendations have been more a constant because of yield primarily--as we're not to the point yet where volumes pick up. But Crestwood in the previous cycle hit a split-adjusted high of $210, so there's a lot of upside to get even part of the way back there. Energy Transfer, which is acquiring CEQP for stock, had a high about 3X the current price.
Barry B.
2:23
Is it true that the Majors like Exxon, Chevron, etc. are leasing up large tracts in some of the old, unpopular shale plays like the Barnett to apply the latest technology to make them viable again? Also do you have any information on Exxon’s lithium play in Arkansas and its potential to be meaningful for their profits and also for this country?
AvatarElliott Gue
2:23
Exxon sold a large tract of its remaining Barnett acreage to a privately held company in 2022. I am not aware of  the majors making any major land deals in that region of Texas and, quite frankly, it seems unlikely to me. The Barnett was primarily a gas field and several large producers were active in that region long after some of the more modern shale extraction technologies and well designs were widely used, so I just don't see how one could bring the Barnett far enough down the cost curve to make it competitive with other shale fields in the US. In my view, the Haynesville Shale of Louisiana/E. TX is the most likely gas play to see accelerated development and, perhaps, more interest from the majors given its proximity to the Guld Coast. XOM is exploring using a technique called "direct lithium extraction," which has never been used commercially to extract lithium from a deposit in Arkansas. I don't think that this will be meaningful for XOM in the next several years.
AvatarElliott Gue
2:23
Like most big companies, majors like Exxon and Chevron will often make investments or pursue the development of new technologies even if they're unlikely to be major profit drivers near term. That makes sense in my view in that  these companies have a low cost of capital and plenty of expertise -- perhaps, in coming years, some of these technologies or investments will pan out and become meaningful profit/revenue drivers. However, the nature of early stage technologies is that many come to nothing. So, I think it's usually a mistake to read too much into every move a company like Exxon makes. The reality is the drivers of XOM's business and valuations for years to come will be shale and Guyana.
Mike C.
2:25
MMP merger action date: do you know when the merger would likely hit our accounts after the September 21 vote, assuming a positive vote and no US government anti-trust issues?

Oil prices: I saw a post a few days ago noting that Goldman Sachs has suspended its real-time oil inventory tracker due to surprisingly sharp inventory draws, with draws of 5-8 mmbpd mentioned. This seems…insane. Curious about your thoughts, and if you think we’re coming to one of those moments when oil moves up rapidly.
AvatarRoger Conrad
2:25
The merger has already cleared anti-trust, so the shareholder vote is the major remaining hurdle. There is a lawsuit from a major shareholder who is trying to block the deal. But considering they've taken that route, it seems likely the votes are there for approval. And assuming the vote is yes, the deal should close either in late September or early October.

I expect Elliott will be answering more about oil prices in this chat. But the first issue of this month has some pretty exhaustive commentary. And yes we are bullish.
Mike C.
2:27
Uranium: Do you think we’re seeing something fundamental change in the uranium markets? CCJ seems like it’s definitively broken out of its trading range of the last few years. Is this increased demand with limited supply? A new cycle? Or a ‘buy the rumor, sell the news’ situation?

As always, your weekly updates and insights across all of your services are very much appreciated in this odd market.

Many thanks
AvatarElliott Gue
2:27
We think it's a fundamental shift that's been underway for a while now, which is one reason we added Cameco (CCJ) to the model portfolio a couple of months ago. What we've been seeing is that companies are looking to lock up supply under long-term contracts at favorable prices, price levels which allow companies like CCJ to justify putting some of their idled capacity back to work. Nuclear restarts in Japan also have helped change sentiment.
Daniel N.
2:39
Hi Roger- I see MPW finally caved in to pressure (or financial reality?) and cut the dividend by almost half. What's your take? Is this likely to right the business and get MPW set to meet its debt obligations in coming years? Or does management still need to pull 'rabbits from hats?' Good time to call the bottom and re-enter?
AvatarRoger Conrad
2:39
Hi Daniel. At the new quarterly rate of 15 cents a share, management is anticipating an initial payout ratio based on adjusted FFO per share of "less than 60%." That would seem to put it out of danger at least for now. The REIT has been getting squeezed by rising interest rates, which have made acquisitions difficult. it's seen revenue hit by several large lease buyouts from its strongest tenants. And some of its weaker tenants are showing signs of buckling. Those pressures remain and will continue to pressure FFO and the balance sheet--which makes me hesitant to call a bottom and mark this as the start of a recovery. I think we're all better off avoiding MPW for now and concentrating on other beaten down REITs with less risk.
Mike C.
2:43
Nat gas: Another post, by a natural resources investment house, suggested that increased US LNG export capacity over the next 18 months, coupled with decreases in US rig counts, will likely lead to a convergence of US prices with international prices. The suggest was that the US prices (near $2.5 mmBTU) would be likely to move closer to the international $12 mmBTU. Very curious about your thoughts on this, and if you see the next annual nat gas cycle as significantly different from the current year’s cycle price targets.
AvatarElliott Gue
2:43
We broadly agree. In fact, that's the kernel of the "theme" we have had for much of this year to favor gas-levered names like EQT and CHK to oil-levered names. We continue to like the natgas theme though we also have turned incrementally more bullish on oil, a shift in our outlook which we highlighted in the last issue.

Here's the way I look at it. On the supply side, gas is all about the marginal cost of production. So, the cheapest gas in the US is associated gas from plays like the Permian -- this is gas that's produced as a by-product of oil production. The quantity of "zero cost" Permian gas produced is a function of oil-related drilling activity. What we're seeing here is that US producers are drilling less aggressively regardless of crude oil prices due to their focus on free cash flow rather than production growth. The next cheapest source of gas is the Marcellus Shale (names like EQT can produce profitably even with gas in the low -$2's). Next is the Haynesville where producers can probably
AvatarElliott Gue
2:43
break even a little above $3, but will actually invest enough capital to grow output only if prices rise to around $4. So, that's the key play to watch -- right now the rig count there is plummeting and production is starting to come in. However, Haynesville is a crucial basin to supply LNG export because it's located near the Gulf Coast. So, with all this new export capacity due to come onstream, I think you need gas prices to average longer term at or above $4/MMBtu to meet demand. I don't think you'll see full international prices any time soon, but I do think you can see $4 to $5 with seasonal cycles around those average and at those prices most of the better gas-focused E&Ps are worth 50% to 100% more than the current prices. I know that sounds aggressive, but the cash flow disconnect is incredible -- most of the producers were priced earlier this year as if gas prices were destined to return to the $2 to $3 range forever.
Daniel N.
2:50
Hi Roger - Northland Power (NPIFF) crashed recently, and after eyeing it for a couple years I started a stake under 17. I'm pretty sure the crash is part of the devaluation of renewable energy developers and yieldcos and the further punishment of companies developing offshore wind, so I have a few related questions:

1. While it still highlights in investor presentations that offshore wind should continue to be its major source of growth, but I also see NPIFF has been selling off its stakes in several projects, taking cash from its partners. Is NPIFF collecting good prices for these stakes (i.e. capital recycling), or are these transactions more like capitulation in a challenging wind devo environment? Where is this 7-10% annual growth going to come from if it's backing away from projects while other offshore wind projects are experiencing delays?
AvatarRoger Conrad
2:50
Good questions. I do agree that much of the selling of Northland Power is just from the negative momentum still hitting anything to do with renewable energy, dividends etc. But it's been pretty aggressive with new projects, onshore wind and solar as well as offshore wind. And new projects have been increasingly difficult to finance externally with new debt. It's fair to say management is covering the gap with asset sales, though "backing away" I think is too strong as much are through a long standing "partnership strategy" whereby it sells ownership when projects enter service. On the other hand, there has been a shortfall this year due to "unpaid curtailments" of offshore wind output in Germany because of too much resource. Asset expansion is continuing. The dividend still appears reasonably protected. And interest expense was cut YOY. I dont think 7-9% is unreasonable. There is risk to it. But the stock under USD20 reflects that in my view.
Daniel N.
2:56
2. Could NPIFF be a buyout candidate at these depressed levels? Would Brookfield, for example, look to buy low on a company with obvious BEP synergies, and bring offshore wind development capability in house? Offshore wind seems to be the only major carbon-free power area where Brookfield doesn't have development capabilities, and it's known for making contrarian bets when market sentiment sours.
AvatarRoger Conrad
2:56
That's a possible end game for Northland Power. And its market capitalization is currently less than $5 bil, which compares to $13 bil for BEP. Northland is also investment grade. I do think BEP has a lot on its plate just now, with the Duke Energy Renewables, Westinghouse and Origin Energy mergers working through. But all those should close by early next year. And BEP has shown no sign it's finished expanding. Offshore wind projects are typically massive, and therefore bring a lot more uncertainty on timing and costs than onshore wind or solar--and that may be a deterrent for BEP to make a bid for NPI. But as I said answering the previous question, NPI is a value pricing in a lot of risk at a price under USD20.
Daniel N.
3:04
3. Just how disrupted is the offshore wind development business right now? Siemens is now offering dual warnings. It's old news that their parts may have defects and it will be expensive and trouble to replace them. Now they also report that many of their supply agreements are in flux because their customers can no longer complete projects profitably. Avangrid would seem to be a specific example of a company refusing to advance development of an offshore project because development costs have changed dramatically. Are these challenges a blip, likely to resolve in a year? Or is this a 3 to 6 year challenge that is going to weigh on developers in a major way? (Perhaps NextEra was prescient in insisting onshore wind and solar were the safest ways to develop renewables.)

Thanks!
AvatarRoger Conrad
3:04
Offshore wind economics have worsened considerably over the past few years. Basically, projects that were sited, permitted and financed prior to that--and were able to lock in enough costs--are still able to make money at negotiated prices. Those that were not have effectively been put on hold, in lieu of new agreements with higher selling prices for output. Avangrid's Vineyard 1 is the only US offshore wind facility that's managed to get built before inflation and especially higher inflation drove up costs--and it will be profitable when it enters service in early 2024. Dominion Energy's facility in Virginia also now looks likely to be built, with 90% plus of costs locked in, regulators behind it and the utility empowered to find a financial partner. Elsewhere, developers are going to sit on leases until either costs come down or rates go up enough. And yes NextEra Energy looks pretty good here for not getting caught up in the hype.
Eric
3:12
Roger - Do you think MPW looks good now that the div has been cut and some of the other issues are clearing?
AvatarRoger Conrad
3:12
Hi Eric. I think we're still better off looking elsewhere for bargain REITs. I kind of take with a large grain of salt the Wall Street Journal's article alleging the Prospect Medical deal is "on hold"--following the sensationalistic and wholly incomplete articles recently proclaiming the end of telecom due to lead encased cables and the end of utilities due to wildfires. But the three headwinds behind my sell recommendation at the end of last year are strong as ever--high interest rates that have made most acquisitions prohibitive, good tenants cutting costs by buying out leases and weaker tenants becoming less able to pay rents. I've recommended a large number of REITs carrying far less risks that are also cheap in the most recent REIT Sheet--let's stick with them for now.
Sohel
3:16
Hello Elliot, What is your latest view on the economy & expected recession/downturn? When do you think it might hit? Finally, how deep do you think it will be?
AvatarElliott Gue
3:16
I think there's a popular myth or misconception  out there that the current economic cycle is somehow very unusual or unprecedented relative to prior cycles. Of course, every cycle is a bit different, but I don't think this cycle is as unique as some believe. This is something I've written about a few times over on my Substack.  For example, the yield curve (10yr less 3 month)  first inverted in early November 2022 and it is the most inverted its been since the early 1980s. So, I have read countless articles this year about how the yield curve is wrong this cycle. The fact is is that yield curve does NOT signal imminent recession, it simply means that the market sees Fed policy as tight. There's often a long lag between first inversion and recession. For example, the yield curve first inverted continuously in July 2006 and the recession didn't start until 17 months later in December 2007. Also, I've been though the recession cycles of 2000-02 and 2007-09 in a professional capacity and I can tell you
AvatarElliott Gue
3:16
I heard a lot of people say things like "there can't be a recession with the labor market this strong" and "the consumer is strong" just before each of those downturns as well. The truth is the labor market and retail sales are lagging indicators -- using them as recession "tells" is a bit like cruising down the highway at 95 miles per hour, staring intently in the rearview mirror. I started warning of a likely recession last year and I originally felt it might start by the middle of this year; that was based on the poor performance of the stock market, which is usually a good leading indicator. I still think recession is likely and we're already seeing some signs in the data to suggest the economy is slowing; however I think we'll see more obvious signs in the next few months. We'll know the recession is about to start when the market starts pricing in imminent Fed cuts and the yield curve resteepens.
In terms of severity, I think it’s a bit early to say with any degree of certainty. I am actually working on a piece covering this question in a bit more depth with more hard data and charts. However, simply put, I think we’re in for a prolonged period of market stress in coming years.  There’s some sort of “crisis” at the heart of every recession. In this case my view is that the trends of booming developed market sovereign (government) debt, inflation, economic growth and interest rates are related and entering a sort of vicious cycle. It's a bit like the stop-go “stagflation” era of the 1970s and I don’t think there’s an easy or quick solution. So, I think the recession might actually be rather mild but I think inflation/government debt/growth will remain hostile to market valuations for a prolonged period.
Hans
3:24
Elliott    Is MTDR an investment to look at.
AvatarElliott Gue
3:24
Yes, MTDR is an interesting name in my view and that's mainly because of their acquisition of Advance Energy Partners completed back in April. The problem with them was I've thought they just didn't have enough scale in the DE Basin to compete but the Advance deal changes that. Also, I like their midstream assets, particularly their ownership of water and disposal pipelines via the San Mateo JV. They're a little riskier than the bigger oil-heavy names  because of their growth profile and inflated near term production/CAPEX costs due to the Advance deal.  We prefer other names near-term -- we recently recommended adding to HES for example -- however, it's not tough to come to a discounted cash flow valuation north of $80 for that stock assuming longer-term oil prices in the $90/bbl range. So, it's definitely on our radar screen in light of that Advance deal.
G Maynard
3:28
Hello, I’ve been thinking about getting some shares of Hess Corp (HES) as you've recommended in the newsletter.  Over the last one year period, Hess has had good price appreciation, but during the last month, XOM and XLE have pulled ahead.   Did the stock price just get ahead of itself, or is there some other reason for the pullback?
Connecting…