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Capitalist Times October 2021 Live Chat
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AvatarRoger Conrad
2:02
Hi everyone and welcome to our first ever all-in Capitalist Times live chat. The ground rules are the same as in our previous chats. There is no audio. Just type in your question and we'll answer as soon as we can concisely and comprehensively. We will send you a complete transcript of the entire Q&A following this event, which will also be posted on our websites. And we will continue this chat so long as we have questions in the queue, as well as what we received prior to this event by email. Thanks again for being a member of our investment community.
2:09
Here’s one from the email queue.
 
Q. In June 2021, European papers reported that Mr. Galan, the CEO of Iberdrola SA (Spain: IBE, OTC: IBDRY), and several other executives were principals in a criminal investigation that includes among other things fraud and industrial espionage. That seems like a big deal and potentially a story that could really tank the stock. What impact do you believe this story has had on the stock price and what is the resolution of this mess? I can find no useful information. Thanks.—Doug W. 
 
A. Hi Doug. You’re right to pay attention when utility company executives are targeted in criminal cases. The takedown of FirstEnergy executives following the bribery case in Ohio, for example, worked out for us because we had a good opportunity to buy the stock cheaply early this year. But it did create pain for that company’s existing shareholders. And of course, in the case of Enron a couple decades back, executives’ criminal activity indicated a rot that eventually resulted in a total
2:10
investor wipeout.
 
The record with European utilities is governments have focused on punishing the people involved, rather than take actions against companies that could result in layoffs. And based on the publicly available information, that appears to be the worst case here. I don’t see that as ultimately a problem for the company, given its deep bench.
 
The primary regulatory matter affecting the company itself is the Spanish government’s attempt to cap electricity prices, by “clawing back” the so-called “windfall profit” realized by wind and solar producers during the country’s recent electricity crisis. The good news is that effort appears to have moderated. And the company’s 11% lift in Q3 EBITDA reaffirms the underlying strength of the Iberdrola business model.
The key driver is renewable energy deployment, which the company is doing effectively on a global scale. That’s particularly true in the US, where Iberdrola’s 81.52% owned unit Avangrid Inc (NYSE: AGR) is building offshore wind and is closing in on a merger with PNM Resources (NYSE: PNM). They also just announced a solid result for Q3. Bottom line is I continue to rate Iberdrola a buy up to 55 and consider its 5% dividend yield solid. The stock has also had a nice run up this month after falling as low as 40.
 
Jack A
2:11
Hi Guys
I guess I've given up on expecting the midstream companies, which are mostly volume dependent, to return to their pre-pandemic price levels given the present administration in control in Washington.... In retrospect, I think I should have focused more of my investment dollars on the upstream players.... The question is, going forward, which segment of the oil market do you see giving us the best returns?............ You said once before that the later stages of the return to oil would cause a rise in the services companies, such as Schlumberger.......... Do you feel going forward we should be focusing more on the service sector?.............  In general, given today's prices, if you had to name one energy related stock that would give us the best return over the next 12 months, which would it be?

By the way, I want to thank you very much for your communication to us after the release of KMI's earnings, and its price hit....... It's times like that that we very much need and appreciate your insight...
AvatarElliott Gue
2:11
Thanks for the question and the kind comments about the service. Looking outside the midstream space, I think we still have some gas in the tank for the upstream names. For the independent shale-focused names, investors still are not pricing in long-term, sustainable oil prices above $50/bbl in my view; our "house" view is higher for longer, basically the mirror image of the 2014-20 period. Given the level of free cash flow these companies are likely to show and their focus on paying variable divs linked to cash flow, I think the independent upstream players are likely to emerge as one of the market's premiere income groups. Supermajors are also interesting and, in particular, I believe it's clear Exxon's focus on investing in new upstream projects amid the downturn is paying off. Finally, right now SLB is our top services recommendation but we may look to broaden that exposure a bit into early 2022 as I believe that cycle has turned. In some ways, as you alluded to, it's right on schedule with services
AvatarElliott Gue
2:12
turning a few quarters after upstream.
Ben F.
2:16
Good morning.

Any thoughts on AQN purchase from AEP yesterday?

Cheers
AvatarRoger Conrad
2:16
Hi Ben. I really like this deal for both parties. For American Electric Power, it frees up some cash and allows the company to focus its efforts on the units where it really has scale. This is also a very small piece of the total company, so selling and refocusing assets elsewhere should boost growth going forward. For much smaller Algonquin, there's a huge opportunity to "green the fleet" with Kentucky Power as it did successfully with the former Empire District the past few years. It also increases regulated operations to about 80% of earnings, which financially supports the contract renewable energy side of the business. The price of 1.3X rate base seems fair and Algonquin appears to have financing already in place. This might mean the company's purchase of New York water assets is off--but this deal seems to convey considerably more benefit. I like AQN up to 16.
Jim C.
2:20
Dear Roger and Elliott,

Shell issued their quarterly report today that included a large earnings miss. The company is under attack by a Dutch judge demanding carbon reductions and an activist investor demanding the company be broken up. They have announced the sale of their Permian assests to Conoco Phillips and have taken a big hit to their Gulf of Mexico operations due to Hurricane Ida. All this news comes on top of the massive pandemic dividend cut which has only partially been restored. Having aquired my Shell position prior to the pandemic’s start I am currently down approximately 15%. Would I be better off selling my holdings to harvest a tax lost that I have gains to offset or would it be better to hold on in the hope of finally recovering my losses near term and getting back to at least break even before I sell?

Kind regards
AvatarElliott Gue
2:20
While we think Shell is long-term "OK," we continue to prefer supermajor Exxon Mobil (NYSE: XOM), which is in the model portfolio. Our view remains that they made the right move by investing during the downturn in new projects, which will provide years of future free cash flow. They did what a supermajor is supposed to do -- they invested when it was cheap to do so during a cyclical downturn so they could harvest the gains from the coming upcycle. While there were plenty of people talking about how they'd need to cut their payout last year, we always thought that unlikely and it's now clear that XOM's next move will be to raise their payout once they pay down some of their debt (which they took on at very low rates to pay for those projects). As it stands now, XOM has a 5.5% yield, which is greater than Shell's.
Arnold S
2:23
Hi there, a few weeks ago I heard a mutual fund manager on the radio who suggested selling VLO Valero if the price went above $80 (which it did recently).  What are your thoughts on this stock?  Will you be giving advice on when it might be a good time to sell stocks that have increased in value quite a bit?  It would be nice to book some profits. Thanks
AvatarElliott Gue
2:23
We still like VLO here. I think one of the turning points for the stock was that their 2022 earnings estimates bottomed in September and have started to rise sharply. What this suggests to me is that the market is affirming that sometime in the next 12 to 18 months, VLO's profitability is likely to reach a "mid-cycle" level, where we can easily see the stock worth $100+.
Hans
2:28
PAGP,EPD,MMP, In the active managed portfolio What is your reasoning behind the big difference in "Price and Rating" is it just previous highs?
AvatarElliott Gue
2:28
The price in the portfolio is just the current price of the stock (most recent issue is the price on Oct. 18th) and the rating or "Buy <" price is designed to offer guidance on where we'd recommend getting into the name. We look at both fundamental and technical criteria for determining our rating prices -- the idea is to help readers avoid getting in a name that's near-term extended. We revise buy under targets periodically based on incoming fundamental data and the current technical outlook. The buy < price is not a long-term target for the stock.  For example, as we've written, our intermediate term target for OXY is $50 but we have it as a buy under $32 as we'd recommend waiting for a bit of a dip before getting in.
Gip Kingry
2:28
What is your outlook for the Southern So.
AvatarRoger Conrad
2:28
I think they're still in good shape. The key issue is still getting the Vogtle nuclear project up and running. And management has just announced another expected delay in the startup date to Q3 2022 for Unit 3 and to Q2 2023 for unit 4. Some of the company's problems appear to have to do with labor shortages that are at least partly related to Covid. And the hot functional testing for Unit 3 was successful, which seems to mean the project itself is still on track despite the delays. And in fact, Unit 3 is reported to be 100% complete with construction and Unit 4 95%. The other thing that's happened to support the project is spiking natural gas prices and increased pressure on utilities to cut CO2 emissions. And importantly to date the state of Georgia remains supportive. I still like it under 65.
Alan R.
2:32
In the past two days oil prices have dropped rather dramatically, ~ 5%. Any opinion on what was behind this rapid movement?

Thank you.
AvatarRoger Conrad
2:32
Hi Alan. Elliott may want to address this further. But briefly we don't see anything to undermine our view that we're still in relatively early stages of a new energy cycle that's moving higher. The "drop" yesterday appears to be due to a reaction to inventory data that may already be reversing--and notably WTI never threatened to go under $80.
Gary
2:33
When do we bail out of our losing QID position as the QQQ does not appear to be rolling over just yet?
AvatarElliott Gue
2:33
The Nasdaq 100 has not set a closing all-time high since September 7, 2021 while the S&P 500 and Dow Industrials have done so. The NDX may set a new closing high today, it really just depends on how it trades into the close and what earnings from AAPL/AMZN look like tonight. One reason we recommended entering this trade was that the NDX was trading just under that September peak, so we would know quickly whether out take was "right" or "wrong". If we get a significant close at a new high, we'll likely reevaluate the situation and issue a recommendation to close it for a small loss. However, we're just not there yet.
David O
2:39
Gentlemen,

Retired, need safe income. As we discussed, metals will be center focus if these environmental zealots keep it up. Per your advice have chosen BHP Billiton as the safest / most diversified miner.

I have studied but do not have the intellect to understand the difference between BHP vs BBL. Will choose BBL for my normal and retirement accounts. I believe it will have less taxes withheld with the British BBL…perhaps zero vs 30% for Australia BHP. Do I have your blessing for BBL?
AvatarRoger Conrad
2:39
Hi David. The question is largely moot at this point, since BHP is consolidating its London listing with its Australian listing to decomplicate its story. This was announced at the same time as the spinoff/merger of the company's oil and gas operations with Woodside Petroleum (ASX: WPL, OTC: WOPEY), which as I've told CUI Plus/DDI Income readers is a deal I like a lot. Bottom line is BBL and BHP are going to be consolidated as well, which should help the value of BBL as it remains discounted to BHP's price. As for BHP itself, the price action of the past few months and the FYQ1 (end Sept 30) operating results released this month demonstrate its leverage to prices of key minerals. I expect that to push the shares toward $100 the next couple years, though we should expect volatility.
Pete H
2:39
How do see PXD dividend going forward. They currently pay a regular dividend + a special dividend based on a FCF formula. Do you think that the regular could be raised while the special dividend remains tied to the FCF formula, or do you think that the total pay out will remain on the FCF formula? What are your dividend assumptions for next 22 and beyond? Thanks
AvatarElliott Gue
2:39
They may adjust the regular dividend in future but I think management's focus right now is to highlight the income power they have via the transparent special quarterly payouts tied to cash flow. In our view PXD's free cash flow yield will be close to 15% next year, so we could see a all-in dividend yield around 10%; in my view, the market really just isn't pricing in that reality or the fact that PXD will also benefit as hedges it has in place through the end of 2021 roll off.
Kerry T.
2:45
Hello Roger:

I’m a subscriper to CUI, CUI +, REIT sheet and Elliott’s Income Options.

I know what to do with the CUI+ portfolio because you tell us exactly how to allocate money in the portfolio.

I began purchasing stocks on 12/31/2020 per the CUI newsletter and later added some per the REIT Sheet. 

I’ve been wondering if I should

A - stick with the stocks I already own until you advise selling or
B – sell some of those which are the biggest winners for me so far and buy some of the stocks that you rate as BUY but are far below their maximum recommended entry points.
C – use some other method of portfolio rotation/rebalancing

You’ll notice I have quite a bit of cash. I intend to keep that much cash on hand as a buffer against a bear market.

Regards
AvatarRoger Conrad
2:45
Hi Kerry. Thanks for your question. We don't provide that level of tailored investment advice at Capitalist Times, which is fundamentally and information company. But I can say generically that an ideal income-focused portfolio would follow the contours of the balance and diversification we practice at CUI Plus. That means not allowing any one position to become especially overweighted. It also means keeping a careful eye on business strength--which is the sort of thing we provide at our advisories. I also think keeping some cash available is a good idea, despite the low yield currently offered. We're 13 plus years into this bull market by my reckoning and at a minimum we're going to get better entry points on a valuation basis eventually. I do periodically advise taking profits on positions when I think prices are unsustainably high based on business value.
PHIL
2:50
Following your much-valued suggestions, I currently own MMP and EPD which represent about 2% each of my portfolio. With both paying dividends above 8% and, according to your most recent Utility Report Card, scoring highly on all your measures, I am thinking of doubling my holdings of each stock. Can you think of any reasons why this I should by wary of doing this?
AvatarRoger Conrad
2:50
Hi Phil. As I just now responded to Kerry, we're limited on the level of individual investment advice we can provide in our advisories at CT. One of the principles we operate under for conservative, income portfolios we run like CUI Plus is to never to overweight a particular holding, no matter how attractive it may look. Generically, 2-4% doesn't sound like a lot. And we do believe dividends at both Enterprise and Magellan are safe and likely to grow over time. In fact, earlier this month, Magellan announced its first dividend increase in two years. They're high quality companies in an essential business that have maintained conservative financial policies--and strong recommendations for us.
Gary
2:52
KOLD is not working out.  Is natural gas being driven by something other than US natural gas inventories?
AvatarElliott Gue
2:52
When we recommended shorting natgas in the service at the end of September the front-month gas contract was at about $5.85/MMBtu and it's at $5.77/MMBtu as I'm writing this. the US Natural Gas ETF (NYSE: UNG) is down a around 4.4% over the same time frame while KOLD is down around 9%. So, the reason that KOLD -- and 2x inverse ETF -- isn't benefiting from the decline in gas prices has to do with the way inverse ETFs track commodities, not actual gas market fundamentals. Specifically KOLD tracks twice the inverse DAILY performance of gas and, what that means in practice, is that a lot of day to day volatility in gas will cause KOLD to experience tracking error relative to UNG and gas itself. I created a two-part video explaining exactly how this works some time ago -- they're available free on YouTube here: and here:
AvatarElliott Gue
2:52
The bottom line here though is that Natgas appears to be topping out to us as the commodity has failed a few times to break above long-term resistance at $6 to $6.25 and today's big gas storage build is "working" in terms of driving a significant pullback in gas prices. We're still targeting $3.50 to $4/MMBtu gas this winter and, when that happens, our view is that KOLD will be a good vehicle for trading that move.
Jim T
2:58
Roger,  When will the canadian pipeline to Pacific be completed? What will be its economic impact on major Canadian pipeline and producers?  Jim
AvatarRoger Conrad
2:58
Hi Jim. I believe the current expected startup for the Trans Mountain expansion is now mid-2023. Remember that there's already a pipeline in place that's in operation. It's also pretty reassuring that this is the Canadian government's project until its completed, at which time it looks like they sell it to the private sector. Pembina Pipeline (TSX: PPL, NYSE: PBA) is reportedly partnering with some First Nations to launch a bid. That company also appears to be close to acquiring the Inter Pipeline assets it wanted when it refused to join a bidding war with a unit of Brookfield Asset Management. Getting Enbridge's Line 3 pipeline running this year was hugely bullish for Canadian energy producers. And TransMountain will provide another big boost, especially because it will make Asia an energy customer. If PBA gets it, it will get a huge boost as well.
AvatarRoger Conrad
2:59
We do provide comprehensive coverage of Canadian oil and gas stocks--from producers and services companies to midstream and downstream--in Energy and Income Advisor for anyone without a membership who's interested.
Arnold S
3:04
Any thoughts on Genesis Energy LP  (GEL) ?
AvatarRoger Conrad
3:04
We still see Genesis as a company with widely diversified midstream operations that basically lacks real scale in any of them. This was a business model that grew out of self-imposed pressure earlier in the energy price cycle to grow the distribution 10% plus a year--a string they maintained for years but ultimately couldn't. The current dividend of 15 cents a quarter appears sustainable--though quite a bit lower than the 55 cents in Feb 2020 and 72.24 cents in Aug 2018. But ultimately, the Genesis story is best viewed as an example for why scale is so important in the midstream energy business. And while we did quite well with GEL early in the previous decade, we continue to see many better places to put your energy money.
Guest
3:10
On the last EIA report you highlighted DVN as one of the Variable Dividends on the Rise. DVN has been trading around $39 for the most part in October. Do you see this stock moving up from this level?
AvatarRoger Conrad
3:10
We believe most oil and gas producers of Devon's size will do well in the current energy price cycle. And as that EIA feature article indicates--as well as Elliott's answer on Pioneer a bit earlier in the chat--we do like the variable dividend model for this business. It's a way companies can share the wealth with investors without overly committing themselves financially. For Devon, the previous all-time high was reached in mid-2008 well north of $100. I would expect to see shares move higher as this cycle progresses. One significant near-term catalyst would be the restoration of investment grade credit ratings, as the company deploys free cash flow to cut debt. Next earnings on November 2 are another.
Tom L
3:11
There will undoubtedly be a downturn in the market at some point.  What are your thoughts on when that might occur, and in preparation for that, any equities that you would have at the top of your buy list, and sell list, when that happens?
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