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August 2023 Capitalist Times Live Chat

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Elliott Gue

3:28

Through the first 7 months of this year (through July) HES was up 7.7% vs. a decline for XOM and a 1.43% gain for the S&P 500 Energy Index. I think the performance in August is more a function of some of these other names playing catch up to HES than based on any company-specific fundamentals. That's particularly true for XOM/HES, since Guyana is the core fundamental driver for both names.

Daniel N.

3:43

Hi Roger - you've made a few comments in recent months about the importance of scale in building a competitive renewables business. It's a curious time for companies (AEP and DUK, for recent examples) to exit the renewables devo business when there are new tax incentives, strong demand from customers for projects, expanding opportunities with improving technology (esp. batteries), and lots of capital still looking for climate-responsible places to invest. Also, several companies exiting renewables are doing so after putting a lot of effort in there and building what looked to be pretty big portfolios...

1. How big is big enough in renewables to be sufficient scale? Apparently a couple or a few GW is not necessarily enough to stay in the game... Are there companies in the coverage universe that are pursuing renewables that you think are clearly struggling behind insufficient scale?

Roger Conrad

3:43

Thanks for that great question. First off, I don't think there is a minimum size for regulated utilities' renewable generation--whatever regulators approve will be in rate base and so earning a pretty much set rate of return with no competition. For unregulated generation in contrast, I think the number is rising pretty quickly. You now have three pretty large players in the US--NextEra Energy, RWE and Brookfield once the Duke purchase closes. Enel SpA and Iberdrola SA are large players that already have global scale, as is super oil TotalEnergies. i think everyone else is a potential seller. The main reason is utilities that own most of the rest have massive rate base growth opportunities to finance--where they can take advantage of new technology with a sure rate of return. I think some of the prices have disappointed because of rules on ending tax credits when facilities are sold. But every deal we've seen so far has benefitted both buyers and sellers.

Daniel N.

3:50

2. Are there different concerns for scale depending on whether it's renewables developers vs. yieldcos (owner-operators, little devo activity)?

3. Is this question of sufficient scale related to the sometimes blended regulated and unregulated structure of a business? For regulated utilities, are they typically required to operate rate-base and unregulated divisions totally separately? ...in which case the utility company would have zero scale benefit from having a much bigger regulated power generation portfolio, because they would need to maintain separate (i.e. redundant) maintenance and management for the unregulated portfolio?

Thanks!

Roger Conrad

3:50

Yieldcos are best understood as funding vehicles for their sponsors' growth, as NextEra Energy Partners is for NEE. They do that better in some market environments than others. But a large, utility franchise-backed company like NEE can afford to be patient. And the greater the scale of the yieldco--NEP for example--the better it can raise money. Of the remaining yieldcos, Atlantica Yield (NSDQ: AY) is the only one that looks set for an ownership change, with Algonquin Power (NYSE: AQN) almost sure to sell at some point. But I think it, NEP and CWEN have reached a point where they're large enough to keep growing.

To answer your question about companies owning both regulated and unregulated renewables, they do have to maintain separation. But there are other potential advantages--as NEE has demonstrated by gaining experience and scale in the unregulated business it's now applying rolling out solar at FP&L.

Mack

3:55

If the MMP-OKE deal goes through, will OKE become a “Buy” ??
Thanks.

Roger Conrad

3:55

Hi Mack. I think so, depending on its price. The combined company will have what neither MMP nor OKE does on its own--that's sufficient scale and operational/geographic diversification. The assets are largely complementary, being in different basins mostly with OKE focused on natural gas and Magellan oil and refined products--which is why the deal was not challenged on anti-trust grounds. And because of that, this company has revenue streams on par with other best in class midstream companies. There are cost synergies as well contributing to the projected 3-7% annual free cash flow growth rate post-merger close. As I've said, I would have preferred a merger of MLPs for Magellan, so long-term shareholders wouldn't take a tax hit. But this deal has solid industrial logic in an industry that will increasingly reward scale as this energy price upcycle unfolds.

Mary

3:59

Hi guys. I was wondering about MRO. Why can't I find it? Did you quit coverage?

Elliott Gue

3:59

We definitely haven't dropped coverage; in fact, I went through their earnings call just a few days ago. It's not a portfolio recommendation, but the last time we wrote up the stock was back in the April 20th issue "Best Bets on the Oil UpCycle." Back then, we highlighted two stocks positively as potential additions to the portfolio -- HES and MRO -- and we ended up adding HES. The main reason for this is that we felt the start-up of the Payara project in its Guyana Play was a more powerful near-term catalyst for the stock than what we saw for MRO. So, we still like MRO and it's a name we'll continue to monitor for addition to the model portfolio. One thing I am watching is what sort of a deal they are able to negotiate for their Eq. Guinea gas project once their current gas contract tied to US gas prices expires.

Phil B.

4:03

Many thanks, as usual, for all your good advice over the years.
What do you see as the implications for our investments of the current problems in the Chinese economy?

Roger Conrad

4:03

Thank you Phil. The most immediate consequence has been weakness in commodity producers like BHP, since China is the leading consumer of copper, iron ore, etc. But I view that as a temporary impact. Rather, the greater risk is the higher inflation we're seeing here and the slower growth in China that's already resulting from politically motivated and mutually destructive economic decoupling.

We've been concerned about a potential recession and corresponding market slide all year. So we've focused our recommendations on companies strong enough to weather that. And should near-term Chinese weakness kick the global economy into recession, I think we'll hold up well. But the real concern here is what happens after--and that means being prepared for inflation staying higher for longer.

Sohel

4:06

Hello Roger, Thanks for holding these chats. Following up on the question answered earlier re. NEP - could you explain how the dividend/distribution of NEP is characterized for tax purposes? Is it tax advantaged?

Roger Conrad

4:06

HI Sohel. Thanks for participating today! NextEra Energy Partners--despite the name--functions as a partnership for tax purposes only for its parent NextEra Energy. For the rest of the shareholder base, NEP basically functions as a C-Corp for tax purposes. You get a 1099 rather than a K-1. And the dividends are taxed at the "qualified" rate. There are also no tax consequences for holding in an IRA--i.e. no accumulated UBTI to be taxed etc.

Sandy

4:16

I bought FAX eons ago. Is the share price ever going to go up as far as it went down. I've held MACSX for a long time too. Any updates on Asian investments?

Roger Conrad

4:16

Hi Sandy. As goes China, so goes Asia to a large extent--given the importance of intra-regional trade. FAX (Aberdeen Asia-Pacific Income Fund) for those unfamiliar is a closed end fund focused on paying dividends that holds primarily corporate bonds of Asia Pacific companies including Australians. It's actually considerably more diversified than in previous years, when it was heavily Australia. It's paid the same 2.75 cents per share monthly dividend since April 2019--when the payout was cut from 3.5 cents. The fund can buy US dollar debt but in the past it's done best when the Australian dollar has been strong, which is more likely when China is strong. The AUD is currently at 64.82 US cents, much closer to an all-time low (47.8 cents) than its high ($1.49). I think it will go higher the next few years, which should help FAX' price and dividend. The Mathews Fund has also been swimming upstream recently, due to Chinese weakness. Long-term record is solid. But I think both will take patience to own this year.

Sohel

4:19

Hello Roger, You still rate ET as aggressive ... what do you need to see before you mark it conservative.

Roger Conrad

4:19

I'd like to see a bit more debt reduction, and a successful close of Crestwood Equity Partners (NYSE: CEQP). But the risk on Energy Transfer has dropped a lot the past couple years, as it's made 5 major acquisitions, restored its dividend and made great progress deleveraging. Aggressive or Conservative, it was my top pick for 2023 in North American midstream and remains so even with a solid 22% year to date return.

Sohel

4:23

Thanks Elliot for that detailed response. Given the uncertainty of the timing and that it "might" be a relatively mild downturn, is it better to ride through it or should one raise cash? Raising cash has it's own tax implications and the potential to lose out several months of dividends payments and the risk of not being able to time it just right. What are your thoughts on the % of dry powder for a retired investor living on the dividends. MM dividends are subject to higher tax rates vs qualified dividends or partnership distributions etc.

Elliott Gue

4:23

In EIA we have about a 30% cash position and in Creating Wealth (a sister publication to EIA) I also have recommended a similar-sized cash position. That's motivated in part by concerns about the cycle but also a desire to free up some cash to deploy as the cycle matures. It also depends on portfolio composition. For example, a lot of the more income-oriented stocks like MLPs or many of the income stocks I know Roger recommends in his Conrad's Utility Investor publication have historically held up well in recessions. They might dip, but those dips tend to be relatively mild, short-lived and great buying opportunities. Inflationary recession cycles, like 1973-75 also tend to be good for energy stocks and my view is that many energy stocks have limited downside in recession because they've already seen their pullbacks. Much of the inflated current stock market valuation is down to a handful of large-cap growth/Nasdaq heavyweights and that's where I see the most downside risk.

Alex M

4:24

Hi Roger. Some of your A-rated utilities are looking pretty attractive at their recent valuations. Specifically, I am looking at ES, BKH, and EVRG. Do you have a favorite in this cohort for conservative income investors? Thank you.

Roger Conrad

4:24

Hi Alex. I think any of those three is attractive at current prices--and so are the vast majority of my Conservative Holdings in Conrad's Utility Investor. The essential service sectors are decidedly out of favor right now at a time when many investors are still pouring into technology stocks at extreme valuations. So are dividend paying stocks overall with money market funds and short term CDs yielding 5% plus again. And even many bargain hunters appear reluctant to buy when momentum is moving the other way. As I've said, momentum can run one way for a long time. And that's why no one should be in a big hurry to deploy funds currently. But this is a great time to start buying. And best in class utilities like ES, BKH, EVRG, DUK, SO, CNP, PPL, WEC, EXC, ETP et al are all very attractive at current prices with few risks to meeting long-term growth guidance for earnings and dividends.

Alex M

4:30

WTRG has non-water businesses in their portfolio (e.g., nat gas). Does this change the company's risk profile in your opinion? Do you expect them to continue diversifying away from regulated water? Thank you.

Roger Conrad

4:30

I like the industrial logic of Essential Utilities' owning both natural gas and water utility franchises in Pennsylvania--service territory synergies, strong regulation etc. And both divisions are highly profitable, demonstrated by WTRG's solid Q2 results, affirmation of 2023 and long-term growth guidance and 7% dividend increase. Nonetheless, it's fair to say owning a gas utility is probably why it trades at a discount to other water utilities--19.2X expected next 12 months earnings versus 29X for American Water Works its closest peer. I don't think WTRG is likely to add more gas in future. In fact, it may well sell, if there's a large enough acquisition in water. But as far as business risk, I see owning a gas utility as a pretty low one for WTRG shareholders.

Victor

4:31

Hello guys and thank you for this service. I just logged in and I'm not sure if anyone asked about your outlook on oil prices. I'm watching USO and it seems that $71.50 has been a good support level and it's moving sideways more recently. Your comments. Thanks.

Elliott Gue

4:31

We recently turned more bullish on oil. We outlined some of the reasons in the "Oil Market Balances Tilt Bullish" piece we wrote back on August 17th. But, the main reason is that supplies are so tight right now that even if there's a mild to moderate recession, I'm not sure that demand will fall enough to forestall a significant drawdown in already tight global inventories. One major reason the US inventory picture isn't even tighter is that we released so much oil from SPR last year; with SPR at early 1980's levels right now, that can't be repeated. From a trading perspective we also concur -- in my options trading service, Elliott's Income Options, we initiated a bullish spread trade on USO last month and we have a trade on in UCO for our CT Trader swing trader publication as well. There's a lot of support for WTI in the mid to upper $70s as well and we think a break over $85 would clear a rally to the low to mid $90's.

4:35

HI Elliott, what is your take on SLB stock action? It had a nice move up and is basing between 55-60 for almost 2 months. Is it topping out or just basing in preparation for the next move higher?

Elliott Gue

4:35

That was a pretty dramatic move in July -- SLB is a big company and it's usually pretty slow moving low beta compared to many other energy stocks. So, I think it's a function of very rapid gains in a short period of time as well as obvious technical resistance in the $60 range. It could easily consolidate more near-term or even dip to the low $50s on profit-taking alone. Intermediate term, we still see the stock north of $80 based on their fundamental momentum and the international investment cycle that's kicking off right now.

Eric

4:36

Thanks for holding these sessions! NEP dropped much more than other renewables in the last month and has partially rebounded a lot more the last couple of days, especially today. Any explanation for the greater volatility of NEP vs. others such as BEP or CWEN?

Roger Conrad

4:36

Hi Eric. I think one reason is NextEra Energy Partners is more widely held by funds and accounts that trade. NEP was also holding up a lot better than BEP or CWEN until recently. As far as company specific issues go, I've highlighted NEP's challenges earlier in this chat. And I think concerns about what it will sell the Texas pipelines for has weighed on the share price recently. Maybe what we're seeing now is a little more confidence they'll get good value. But in any case, I think all three of these stocks are in a good place right now--their cash flow is very stable backed by long term contracts, balance sheets are strong, they have good backing from supportive parents and they're meeting and affirming guidance for growth--with plenty of more opportunities to do more.

Guest

4:44

Many analysts are calling for a recovery in the REIT sector. Have you considered adding a REIT to the CUI+Plus portfolio? Also, what is your advice on W P Carey? Thank you.

Roger Conrad

4:44

I have intended to add a REIT to the CUI Plus/CT Income for most of 2023. As it's turned out, it certainly hasn't hurt to have held off. But I would expect to see an addition in the next few months.

I have been making recommendations for incremental investments by patient investors in The REIT Sheet. One of them is actually WP Carey (NYSE: WPC), which I think is attractive at its current price. If you're interested in checking out my work there, please let Sherry know at 1-877-302-0749.

Kerry

4:45

Hi Elliott:

Any updates on TLTW?

Elliott Gue

4:45

I am bullish Treasury bonds both from a trading perspective and also over the intermediate term through this stage of the market and economic cycle. For traders, I recommended a trade on TLT options in my Income Options service and we also recommended a trade in Treasury Bonds for CT Trader on a different ETF as funds retested the support from last autumn.

For investors I like TLTW because it offers exposure to longer duration bonds (basically 20+ year Treasuries), the income from those bonds and the covered call option overlay strategy that generates even more income each month. This helps cushion downside when bonds sell-off or in choppy markets; for example, TLT is down about 1.5% this year but, thanks to the bigger monthly distributions, TLTW is actually up 4.5% this year. My view remains that, consistent with every recession since at least the 70's, Treasury bonds will act as a safe haven. Also, I suspect the Fed won't be able to keep rates at current levels for as long as some believe due to more

Elliott Gue

4:45

obvious signs of economic weakness. Also, the US Treasury is issuing debt at an alarming pace --$1 trillion in new debt this quarter alone and probably $800 to $900 billion more in Q4. They're borrowing so much, so fast that at current interest rates the amount needed just to pay interest on that debt is rising to uncomfortable levels.

4:47

I have a question about WDS. Now that they have released the earnings report and dividend information, what is the overall dividend and what do you expect them to benefit during the the energy upcycle? Thanks for your advice. JP

Roger Conrad

4:47

Hi JP. I think Woodside will definitely benefit greatly in the energy upcycle, as Australia's leading energy producer and LNG exporter. The merger of its assets with the oil and gas production of BHP looks like a major success. And while the dividend declared for payment next month is lower than the year ago level, that's wholly to be expected given the drop in energy prices. Resolution of labor disputes is a plus. I see the NYSE listed ADRs as a buy at 25 or lower.

Arnold S

4:54

Hi there, my brokerage firm recently downgraded Brookfield BEPC to a Sell. What do you think about BEP and BEPC? Thanks

Roger Conrad

4:54

Hi Arnold. Of the 16 research houses Bloomberg Intelligence tracks, 12 rate BEP/BEPC a buy, 4 hold and none sells. I would be interested in knowing the reasoning for the sell though.

In any case, I think BEP/BEPC is coming off a solid Q2 in which they demonstrated the benefits of scale in unregulated renewable energy generation. They affirmed their guidance as well as progress with their acquisitions strategy, and confirmed their ability to finance it affordably--including with asset "recycling" or sales at good prices. The stock has poor momentum, as it has the past couple years. But with a 5% plus yield growing very safely at 5-8% a year, BEP and its C-Corp shares BEPC are investments I intend to stay with--especially with a trio of acquisitions set to boost profitability over the next couple years.

Hans

5:51

Elliott Is HESM going to eliminate the K-1 form and if so, when will that happen and will that change their Indicated Yield. Thanks

Elliott Gue

5:51

HESM is treated as a corporation for federal and state tax purposes. Indicated yield is just the most recent payout annualized and divided by the price of the stock, so tax considerations have no impact on the yield calculation. Of course, whether a company is taxed as an MLP or a corporation can impact your after-tax yield, but that really depends entirely on your personal tax situation, the state in which you reside and other factors.

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