JotCast | August 2023 Capitalist Times Live Chat | 8/29/2023

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August 2023 Capitalist Times Live Chat

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Victor

5:56

Hello Elliott, J Powel seems to indicate that the Fed will continue their quest to reduce inflation but the markets seem to ignore it and averages are moving up. Is there a disconnect there? Is the concern of a recession over?

Elliott Gue

5:56

I look at the monthly Bank of America Fund Manager's Survey and there some two-thirds of respondents now expect a soft landing with an additional 9% or so thinking "no landing." So the consensus has shifted away from recession since last fall.

(I tend to regard widely held consensus as a contrary indicator, so this actually makes me think the market is ill-prepared for a recession).

Historically rising rates are actually not bad for the stock market; generally the market performs worst when rates are falling, because the Fed cuts rates when the economy falls into recession.

I continue to believe the Fed is overestimating how long it can maintain rates at current levels (this is normal) and that the economic data will worsen, and the fed will shift to cutting rates, sooner than is widely expected.

Victor

6:01

Hi Elliott, Warren Buffett continues to add OXY to his position but the stock has been trading in a range for months. When you compare it with other producers, what is your opinion on this one? What do you see as a catalyst for this one to eventually move out of this range?

Elliott Gue

6:01

We like OXY, but think there are more catalysts behind some of the other producers in our coverage universe. I think the most obvious catalyst for the group as a while would be continued strength in oil prices. Fundamentally, if I do a discounted cash flow valuation on an oil producer, it makes a huge difference to the output if I use a flat $75 to $80/bbl valuation as compared to a $90/bbl valuation. If the market starts to embrace the latter over the former, you could see a significant upside valuation rerating for all high quality producers, including OXY. One reason we like HES here, and recently recommended adding to it is that we think the rapid production and cash flow growth from Guyana is an additional stock-specific catalyst for HES above and beyond a commodity rerating.

Victor

6:03

Guys I remember at some point you mentioned that MRO could be added to the model portfolio. Is that being considered and what is your opinion on MRO?

Elliott Gue

6:03

Yes, back in the April 20th issue we covered two stocks -- MRO and HES -- as possible additions to the model portfolio. We ended up adding HES, because we thought (and still think) it has more immediate positive upside catalysts.

MRO is still on my radar screen. One thing I am watching closely is the disposition of that Equatorial Guinea gas contract; right now their gas sales there are priced off US Henry Hub (low prices) and the new contract should see upside repriced to international LNG gas prices.

Victor

6:11

Elliott, SHEL has been in an uptrend for a while. Do you see more upside in the next 6 to 9 months?

Elliott Gue

6:11

I think SHEL is a good long-term holding. They're making some good moves and I like their natural gas exposure. I do think the US names -- particularly XOM -- are better placed right now. My concern is that apart from XOM, a lot of the majors just didn't invest enough in traditional fossil fuel developments. While XOM was building Guyana -- maybe the most impressive conventional oil and gas project in 20 years -- they were returning capital to shareholders, shifting a large chunk of their CAPEX to alternative energy businesses, etc. I have no problem with investing some capital into alternative energy or new energy technologies, but the beauty of supermajors is that they have bulletproof balance sheets and can invest in the downcycles to bring new production on in the inevitable upcycle. Any global energy transition away from fossil fuels will take time (a long time) and the world will definitely need more oil and gas in coming years. So, SHEL will still benefit, I just think XOM has done a better job

Elliott Gue

6:11

through the current cycle.

Phil B.

6:20

Many thanks, Roger & Elliott, for all your good advice over the years. What are the implications, if any, for our investments of the current downturn in the Chinese economy?

Elliott Gue

6:20

Thanks for the kind words. For oil/commodities China is of course very important. The second-largest oil consumer in the world. While the economy there has slowed, oil demand is still pretty buoyant and, looking at the current demand projections from OPEC, IEA and others, they're not particularly aggressive re: Chinese oil demand growth. So, I think some of the weakness you saw in oil earlier this year was down to concerns about demand and concerns about demand growth from China. What we're seeing now is that the supply situation is so tight, oil prices can remain supported even if demand is weaker than expected. More broadly, given how negative the crowd is on China right now, I wonder if there's significant risk the economy outperforms low expectations and/or the Chinese government continues to apply stimulus to stabilize growth. At this time, the way I see it weaker Chinese demand is already factored into oil prices, so I think there's limited downside risk from that.

JP

6:37

I have a question about APAJF. Recently the stock is going down since the earnings results came out. Will they benefit from the need for LNG in this cycle? Thanks JP

Roger Conrad

6:37

Some of the weakness is due to the slide in the Australian dollar over the past month. But most of the decline actually came before the earnings came out for FY2023 (end June 30) when there was little or no real company news for a while. I thought the results were decent as was the dividend increase. And the company also reported progress with its major construction plans. One factor that I think did bring the stock down is the perception they paid a lot for Alinta Pilbara's power assets, which they bid against Morgan Stanley Infrastructure Partners for. At the end of the day, the private placement to pay for it appears to be minimally dilutive to FY2024 earnings--and substantially accretive beyond that. But negative market reaction is typical for acquiring companies. Answering your question about LNG, this company is well positioned in all areas of Australian natural gas infrastructure. I think they will benefit from LNG growth, though probably not as much as a producer like Woodside (WDS).

Eric

6:40

Between NEP and NEE, which is more attractive from the perspective of 3-5 year total return?

Roger Conrad

6:40

I would look at it more from the perspective of current income. NextEra Energy Partners pays about 6.7% now while NextEra Energy pays 2.8%. It's also slated to grow its payout a bit faster (12-15%) versus 10% or so for NEE. It's growth, however, depends entirely on NEE's ability to add renewable energy assets and drop them down to NEP profitably. That means NEE is likely to grow faster, so is the better capital gains play.

Eric

6:45

Great recommendation at the beginning of the year for ET! Now that ET has performed so well YTD whereas KMI has declined, is it time to take profits on ET and move those funds into KMI?

Roger Conrad

6:45

Thank you! I know I've been saying this for a while. But Kinder Morgan is an extremely solid midstream franchise that's only going to keep adding scale in the natural gas business. Dividend growth is very conservative at this point. But from a safe yield of 6.5%, you don't need a lot to have a strong value proposition. KMI also has upward earnings leverage to energy prices through its CO2 unit. I do see ET having a lot more upside this energy price cycle. But the same is true of KMI, which traded as high as $44.71 at the peak of the previous cycle. This year was a disappointment earnings wise, largely because KMI had such a large portion of floating rate debt at the outset. But I still think this is a solid value in the midstream space.

Guest

6:49

Roger, I have owned WTRG for some time and would like to add another water investment of equal too or better grade. Am looking for income with some growth potential.

Roger Conrad

6:49

American Water Works is the other high quality US water utility of scale. And I think it's now a solid value below my highest recommended entry point of 150. The yield is a bit less than Essential Utilities. But they are increasing it at a slightly higher rate as well. It's also a pure water utility. And as I pointed out answering an earlier question, Essential operating a gas utility as well is very likely causing it to trade at a discount to pure play water utilities. The all-time high for AWK was at the end of 2021 around $190--the current price is about $50 off of that. And it follows strong Q2 results and affirmed guidance, including the announcement of several successful acquisitions.

G Maynard

6:51

What are your 3 favorite MLPs (taking into account consistency of dividends, and possible share price appreciation)? Thanks

Roger Conrad

6:51

I assume you're interested in midstream, since you mention dividends. My top three right now would be Energy Transfer (NYSE: ET)--also my top pick to start the year--Plains GP Holdings (NYSE: PAGP) as a top takeover target and MPLX LP (NYSE: MPLX), for which we just raised the buy target to 35 and yields nearly 9%, with another increase ahead for November.

Dan

6:55

Gentlemen- What are your impressions re: the Energy Transfer acquisition of Crestwood? Quality of assets acquired? Complementarity with existing ET operations? Value? A few analyst comments I've seen amounted to a collective 'meh..'

Roger Conrad

6:55

Hi Dan. As I wrote in the latest Energy and Income Advisor, I think it's a great deal for both Crestwood and Energy Transfer. CEQP get ET shares, which currently trade at a big discount to their high of the previous cycle despite being a stronger and higher yielding MLP. Adding the CEQP assets will boost ET's scale in several key basins (including the Permian) and there will be multiple opportunities to build out systems as well as cut costs. Not sure who's saying "meh" but I can tell you Bloomberg Intelligence reports 17 of 17 analysts it says track ET rate it a buy.

Don

7:00

With competition for yield with money funds over 5%, I'm wondering what the timing is going to look like when people will start to return to dividend stocks. I'm looking at 5% plus yields based on today's price ( that used to be around 3- 3.5% when prices were higher). The following either fit or are getting close among ones that I don't own. AGR, AQN, AVA, BEP, D, ETR, UGI. Thoughts on those for fresh money or any other ideas. I have a decent stake already in the pipelines and telecom.

Roger Conrad

7:00

Hi Don. I'm in the camp that interest rates, inflation and yes money market rates are going to stay higher for longer. But the one thing about money funds is the return is the interest they pay--they're not going to make you rich. And believe it or not, there is no relationship between annualized returns for dividend paying stocks and benchmark interest rates.

I suspect dividend stocks will return to popularity when people least expect it. The stocks you've listed do have unique issues that I think they'll resolve, which should earn them higher relative valuations and boost returns further when dividends return to favor. And making sure they do is my primary concern owning them now. My advice is don't be in a hurry to do anything. But this is a good time to add selective companies with businesses that can weather a potential recession. And all buy rated companies in our portfolios qualify.

Bonnie

7:07

Hi Roger, I have had a number of health issues this summer and have not had a chance to come to your chats or even read the recent REIT sheet, or your Utility Investor. Just briefly are there any recent sell recommendations on either the REIT sheet or Utility Investor that you have made that I missed? I have not looked at anything since mid-June, and just want to make sure I am keeping up with the latest news on the Conservative Utility portfolio and REITS.. Thank you for all your excellent insights that have grown my portfolio over the years.

Roger Conrad

7:07

Sorry to hear Bonnie. Hope you're feeling better now. Thanks for participating today. Generally speaking, the various portfolios haven't changed much this summer. I did add Avista Corp (NYSE: AVA) in CUI, a utility operating in the Pacific Northwest/Rocky Mountains that had come down a long way on so far overblown concerns about wildfires in the west, despite a strong safety record. But my feeling has been we're best off deploying funds only incrementally and keeping cash handy for the probability the economy slows and market leaders decline. As for sales, I did recommend taking some profit on Constellation Energy (NYSE: CEG), which has had quite a run. But for the most part, I'm sticking with positions. That includes the big telecoms, which took a big hit on the WSJ lead cable story that increasingly looks like sensationalism rather than good journalism.

Hans

7:10

Roger In your answer of A-Rated utilities, I did not see D mentioned any reason for that?

Roger Conrad

7:10

Hi Hans. Dominion Energy (NYSE: D) is still rated a buy at 65 or lower. What separates it at this point from a best in class utility like NextEra Energy for example is the fact there's an ongoing strategic review, results of which are unknown at this point. That's the primary reason the stock is cheap. And I believe investors are far too gloomy on the likely outcomes--which are asset sales that slash debt and allow the utility to return to growth, which should be substantial the next 10 years from rate base expansion opportunities. Until the strategic review results are in, however, there's some uncertainty.

Willy

7:11

Roger, I know you love all your children equally, but are any of the midstreams particularly good buys now?

Roger Conrad

7:11

Hi Willy. Energy Transfer, Plains GP Holdings and MPLX LP would be my three best buys at this moment. But the rule of thumb is any selling for less than my highest recommended entry point are buys.

Pamela

7:17

Hello Roger and thank you and Elliot for hosting these "chats". Can you please let me know your thoughts on Pembina? In your opinion, what might the effects of the wildfires have on the company?

Roger Conrad

7:17

Hi Pamela. I still like Pembina a lot as a long-term investment with a substantial and growing dividend (just increased in May). Q2 resutls reflected softer market conditions and a lower profit in the energy marketing operation--due to less volatility in energy prices from a year ago. But the company held to the guidance range midpoint for EBITDA, while tightening the range. And management reported solid progress with the conservative CAPEX plan to boost long-term growth, including an LNG partnership with the Haisla Nation in BC. I think it's a potential takeover target with a market cap of $17 bil versus $71 bil for Canada's largest midstream Enbridge. But I think it will do well on its own. Wildfires apparently caused some disruption of assets and activity of producer shipping customers. But there doesn't appear to be any lasting impact.

Guest

7:21

Hi Roger: For those of us interested in investing in renewable energy companies BEP and NEP (because they both remain under your dream prices), can you please explain the similarities and the differences between the 2 MLP's? Are they both considered "conservative" the way you have designated EPD as "conservative"? Thanks. Barry

Roger Conrad

7:21

One difference is BEP is treated as an MLP for US tax purposes and you receive a K-1. Brookfield offers a C-Corp share BEPC that also trades NYSE and sends a 1099, not a K-1. NEP as noted earlier in the chat is actually treated as a corporation for tax purposes, so you get a 1099 and dividends are considered "qualified" for tax purposes.

As for business quality, I consider both BEP and NEP to be high quality and conservative as Enterprise is. One big reason is cash flow is secured by long-term contracts with creditworthy corporations, including utilities. Both have the needed scale to expand profitably in a competitive environment where inflation/higher interest rates are causing rivals to suffer. And they have solid balance sheets, ultimately backed by strong parents.

Jon

7:27

Enjoying the commentary. Perhaps you saw the positive WSJ article on Bloom Energy. Do you follow and what are your thoughts? Also, part two: do you see green/blue hydrogen playing a real role beyond replacing existing dirty sources of hydrogen (i.e., in transportation, alternative fuel for electricity production, etc)? Thanks.

Roger Conrad

7:27

Hi Jon. Compared to say FuelCell Energy, Bloom Energy is positively a blue chip. But it's noteworthy they have yet to turn a profit, or even post positive EBITDA margins. And debt has grown faster than revenue the past few years. No one should count on seeing a dividend, though management did stick to revenue guidance earlier this month.

On the subject of economic hydrogen, blue or grey hydrogen already is. But so-called green hydrogen from electrolysis still uses more energy to create than it produces. My view is it can make sense in the same way pumped storage does, if the power plant used to make it is base load (always running). Pumped hydro basically sends water up hill and harvests the energy as hydro. It makes sense because nuclear plants always run and output isn't fully needed a night. Night hydrogen production makes sense the same way. But this energy source still needs to bring down costs.

Guest

7:32

Roger: Now that MMP is going to lose its MLP status after its merges with OKE, what large conservative high yielding alternatives remain in that mid-stream sector in which we can invest and received those tax deferred returns? I believe just ET, EPD and MLPX right? CAPL, CEQP and HESM have been designated by you in EIA as "aggressive", and they are small cap. Is there anything else of which I am unaware? I have purchased TRP, but it is not an MLP. Any other MLP recommendations? Thanks Roger. Best, Barry

Roger Conrad

7:32

Hess Midstream as Elliott noted earlier in the chat is actually treated as a corporation for tax purposes. But the rest of the names you mention are MLPs and still offer that tax treatment. We cover 51 MLPs and Midstream names in EIA--you can see the whole coverage universe under the "Portfolios" tab on the website. And at this point, about half are still organized as MLPs. I would agree that most are not what I would call conservative--as that distinction goes primarily to companies with sufficient scale. But there are a handful in the coverage universe not in the portfolio currently. And don't forget Plains GP Holdings--which is a top takeover target.

Guest

7:37

Hi Roger: Appreciate your ongoing advice these many years! 1. Any near term and long-term thoughts about AY? It continues to trade below your "Dream Price" of 25. 2. Also, can you explain to us readers the significance of the 40+% ownership interest that AQN has in AY and the relevance/impact of that ownership in AQN's hoped-for price resurrection? Thank you. Barry

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