JotCast | Capitalist Times October 2021 Live Chat

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Capitalist Times October 2021 Live Chat

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5:07

Any thoughts on undervalued companies ripe for acquisition at a decent premium?

Roger Conrad

5:07

Hi Ed. We're always on the lookout for opportunities and have made numerous M&A based recommendations across our range of advisories. Our main rule with targets, however, is to never buy a company we wouldn't want to own if there was no deal. That means we sometimes miss out on takeovers. But we also don't get caught holding the bag if a company fails to get an offer and instead continues to decline. One company I've highlighted in Conrad's Utility Investor for takeover possibilities is Centerpoint Energy (NYSE: CNP), with offers likely to appear once it sells its ownership stake in Enable Midstream and natural gas utilities in Arkansas and Oklahoma and becomes more or less a pure play electric.

Michael

5:12

Elliott, Thanks for all of your timely analysis over the years. I've especially enjoyed reading your macro economic analysis. Between EOG and PXD, which do you think has the most updide potential? Also, I've forgotten, but does EOG now offer a variable dividend as well as PXD? Thanks!

Elliott Gue

5:12

Thanks for the kind comments. EOG doesn't have a variable distribution per se as management seems to prefer raising the regular dividend. That said, they did pay a special cash dividend of $1.00 per share back in July and I suspect they might do that in future alongside growing the regular payout. It's hard to decide between EOG and PXD as they're two of my favorites -- I'd maybe give the slight edge to PXD right now as the link between their dividends and cash flows is clearer and EOG has outperformer PXD since August due, I suspect, to its greater natgas exposure. (I don't see current gas prices as sustainable and a sharp decline in natgas to $3.50 to $4.00 would be more of a headwind for EOG than PXD.

Dave

5:15

Would you have any thoughts on Vermillion Energy Inc. (VET)? The share price has rebounded a bit from under $5. They haven't paid a distribution since early 2020. Thanks!

Roger Conrad

5:15

Vermilion like other oil and gas producers over the past couple years got lambasted by lower selling prices and was forced to eliminate dividends in March 2020. It's since benefitted from rising energy prices, especially in Europe. I expect management to report significant free cash flow generation for Q3 when it releases results and updates guidance on November 9. And I expect it to devote at least a fair chunk of that to cutting debt, which probably limits what they'll do regards a dividend. I do think this company (which we track in our Canada and Australia coverage universe) has turned the corner financially--currently rating it a buy up to USD12.

Guest

5:22

I am curious to hear your take on the gaming sector in general, and VICI PROPERTIES (VICI) in particular as a relatively low risk play on the coming revival of travel and leisure activity. VICI is organized as a REIT and is well into the process of becoming a major player as landlord of major casino properties in Las Vegas and elsewhere. Since gaming licenses are awarded to the venue rather than to the casino operator, the REIT may provide a degree of insulation from the shorter-term financial fortunes of the casino operations themselves.

Roger Conrad

5:22

I have actually picked Vici up for our REIT Sheet coverage universe, per some recent member feedback. Could that have been you? Anyway, I like the business model as well as the traction it seems to be getting from Americans getting out again. I don't think the reduction in its 2021 adjusted FFO guidance is a big deal--actual Q3 AFFO was up 12.9%. Rather, the "miss" appears entirely due to the timing of equity finance--Q3 AFFO per share was up just 5.9%. But there's plenty to indicate business momentum, which is why the shares didn't move much on the news. I still like Gaming and Leisure Properties (NSDQ: GLPI) a bit more--and they did have an outwardly better result at least when it came to "beating" guidance. But I like this business and would not be surprised if GLPI and VICI ultimately merged. Look for more in the next REIT Sheet.

Guest

5:31

Tell us in great detail your thoughts and recommendations re AQN. I thought long ago you may have intimated that AQN was like a "poor man's NEE" - a lower PE and more affordable per share than NEE. Is my recollection correct? And are you still very bullish on it?

Roger Conrad

5:31

I doubt Algonquin management would want to hear it put that way. But they have a very similar business model to NextEra--combining regulated utility with contracted renewable energy, along with sponsorship of fast growing yieldcos (Atlantica for Algonquin, NEP for NEE). The primary differences are Algonquin is much smaller and therefore less followed. It's also much more geographically diversified as a utility (NEE is 100% Florida) and it has international operations--including a water utility in Chile--whereas NEE is all in the US.

As I indicated early in the chat, I am very bullish on Algonquin, particularly after the announcement yesterday that it will buy AEP's Kentucky utility operations. Credit rater Fitch has just affirmed credit ratings and stable outlook on the announcement that should benefit both companies. My advice is buy below 16.

Kevin

5:37

Gentlemen, When a company such as AES does an IPO with assets like Fluence, how do existing shareholders benefit? Thanks as always,

Roger Conrad

5:37

Hi Kevin. As you've seen with AES' rising share price this month, there has already been a near-term benefit from the partial IPO of Fluence (NSDQ: FLNC) to shareholders. But ultimately, it will be in AES' earnings growth, if the funds raised result in acceleration of growth of Fluence's energy storage business. That's somewhat speculative at this point, as Fluence had a net loss of $74.8 mil for the nine months ended June 2021--of which AES had a 50% share. But if it can demonstrate scale increases profitability, it may not be long before it becomes a major profit center for the company. That's less of a possibility for AES' partner Siemens, since it's a much larger company. But this is a very favorable development for AES, which also has multiple other avenues to grow if Fluence never really makes it. I like AES up to 28.

Peter

5:41

CLMT is converting their Montana refinery to produce renewable diesel. What are you thoughts?

Elliott Gue

5:41

CLMT has seen a flurry of speculative interest due to its renewable diesel initiative but it's still not a name we recommend. VLO also has a huge renewable fuels unit and, in my view, is in a better position to make that business "work" financially. I see CLMT as a "story" stock that's thinly traded these days and prone to large moves backed by the thinnest whiff of positive news.

Mel W.

5:45

I have significant losses on these 3 positions. Appreciate your great advice. AGLXY AGL Energy LTV, ARTIS Real Estate, and BHP Group LTD.

Roger Conrad

5:45

Hi Mel. Thanks for the kind words. I think Artis (REIT Sheet) has already turned the corner since its transformation into a real estate investor, rather than primarily a holder of individual properties. I think the Cominar deal announced this week will be strongly accretive, whether Artis holds it or ultimately flips it. And with two dividend increases this year I think we can look forward to rising income as well. BHP is down this year following the second half 2021 drop in iron ore prices. But the company is very healthy financially and shielded against commodity price volatility. And the spinoff/merger of its oil and gas operations with Woodside Petroleum as I discussed earlier in the chat promises to unlock a lot of value. As for AGL, I think we're going to be in a trading range until the division of the company gets closer. But I think business has stabilized and there's a lot of speculative appeal from this level.

Larry

5:45

Any specific reason for the decline in WEC lately?

Elliott Gue

5:45

Do you mean WEX? If so, they stock was reacting to their earnings release where they beat estimates but noted a cut to the interchange fees they charge corporate users in their travel division. I think that's an overreaction especially since management offered solid earnings guidance for 2022 and margins in the corporate and travel division are still being impacted by coronavirus related issues. It narrowly missed triggering my recommended stop on close order. I am likely to come out with additional advice on it over the next few days if it remains above the stop.

Allan

5:48

Would you hold SSEZY?

Roger Conrad

5:48

Hi Allan. It's been on my watchlist for inclusion into the Utility Report Card for Conrad's Utility Investor for some time. The yield looks solid and the business model is pretty stable. Again, I haven't officially added this UK energy distribution utility to coverage yet. But I'm leaning that way following next earnings on November 17--and for now I would rate it a hold.

Hans

5:53

What does it take for PAGP now at around 11 to come to your Rating of 26.50 as well as MMP now at around 50 to come to the rating of 75. Thanks

Roger Conrad

5:53

Hi Hans. I think we're basically going to have to reach another stage of the energy price cycle--in which oil and gas producers at last commit to production CAPEX in a meaningful way. That's how we'll see a volumes recovery, which in turn will boost midstream cash flows. Based on the earnings we've seen so far, it did not happen in Q3. And it may not for a while, as producers appear likely to use their windfall from higher oil and gas prices to pay down debt, buy back stock, pay dividends and make acquisitions for the time being. But the important thing here is operating results are showing once again that best in class midstream companies have now adapted fully to the lower volumes environment. That means dividends are safe--again Magellan just raised its payout--and when volumes do recover, these stocks will head up in a hurry. Plains in particular has shown itself to be very volumes sensitive--not so great now but eventually it will be.

Dave

5:58

Would you be able to provide any thoughts on Enerplus (ERF)? This is another one that has made a nice advance in share price with the rise in oil prices. Is the outlook going forward favorable for them in your opinion? Thanks again for your help.

Roger Conrad

5:58

I think Enerplus has a lot left in the tank as this energy price cycle unfolds. Q3 earnings are due out November 4. And with the company raising dividends two consecutive quarters, I expect to see solid results and guidance. This company has proven once again its ability to survive a tough environment, in parts by keeping financial policy conservative and being opportunistic with operations--I think the sale of non-core assets in the Williston Basin announced last month is a great example, as it basically financed the purchase of properties where the company saw more upside. I currently rate the stock a buy up to 10.

Dave

6:23

Would you have any thoughts on Canoe (ENDTF)? Is this one okay to hold onto going forward? Thanks very much for your help.

Roger Conrad

6:23

We currently rate this closed end fund as a hold in our Canada and Australia coverage universe. They've maintained that same monthly dividend of 10 cents Canadian since August 2009--when they reset it from 15 cents following the demise of high yielding income trusts. And other than a steep drop in early 2020, they've been able to maintain net asset value roughly around the current level. In my view, it's very hard to tell what management is doing at any given time--and they have at times employed a mix of new share issues and buybacks that I believe their US counterparts would have a hard time doing. For this reason, I don't think anyone should 100% count on the current dividend rate continuing despite its longevity. But the holdings are pretty solid--at least as of the most recent publicly available information. And we do cover it so you can follow it in EIA.

Roger Conrad

6:34

Another from pre-chat emails:

Q. Since Knot Offshore Partners LP (NYSE: KNOP) issued their intensely detailed 26-page Investor Presentation on October 6, it seems highly unlikely that Knutsen and his associates would do anything unfavorable to KNOP unit-holders, at least for the next 2-3 years. You imply in your current assessment of KNOP that this is a particular risk of investing in KNOP. As a retired person, I particularly like KNOP because of its 10.3% yield, which has been very steady for several years. And even though we don’t get a K-1, we do get a tax credit. How do you evaluate KNOP now?—Henry T.

A. I’m looking forward to Knot’s Q3 operating results and updated guidance to be released on November 18. The elimination of IDRs announced back in September was basically an equity swap, which left Knutsen NYK with 29.2% of the partnership. I view that as a positive long-term. And I would agree from the comments made at Investor Day that there doesn’t appear to be an immediate agenda for a buy in.

But that said, Q2 distribution coverage—and in fact previous levels of coverage—doesn’t leave a lot of surplus even with relatively full utilization rates. And there doesn’t appear to be a lot of room for growth either, at least at this stage of the cycle. The original partners of Knot have now received cumulative cash dividends close to equal with the initial IPO price. I don’t know if that’s significant. But I do know that similar entities have been bought in at this stage of their development, once the GPs stopped being interested in growing them. And issuing shares of Knot yielding 10-11% is pretty costly outside capital.

Bottom line is I think there are energy companies yielding nearly as much that don’t have these questions. And that’s what we prefer to recommend to you in Energy and Income Advisor.

6:45

And another email:

Q. Roger. Teekay LNG Partners (NYSE: TGP) has done well recently. Do you feel it will continue to participate in the oil and gas bull market, or are there better choices?--Dennis H.

A. Hi Dennis. Teekay LNG is actually being acquired by private capital firm Stonepeak at a price of $17 per share in cash. The shares are currently trading a few cents above that. But I think that’s more the result of dividend declared for shareholders of record November 5 rather than the expectation of a higher offer coming in. Your choice now is to hold on and collect that dividend less the difference in the price to $17—or else sell now and avoid the risk of a drop to $14 or so in the event of deal failure.

I don’t see a lot of risk this deal fails. And the company looks capable of supporting its dividend in the meantime, with the next results expected November 12. But it is a fact that the US Justice Department has really stretched out the approval process for some energy deals. And again, downside if

they flunk this one is probably low to mid-teens for TGP

6:50

Q. Please comment on happenings of Enviva Partners LP (NYSE: EVA) and its coming conversion to a corporation. Also your thoughts about the operation.--Jim N

A. We like the conversion, which will actually be painless for investors under the planned new structure. We have not raised the highest recommended entry point above our long-standing 50. And I think shares have become a bit rich at this level. But the business results we’ll see updated again on November 3 after the close should be once again strong.

The market for wood waste is solid in the company’s many markets. Supply is still extremely cheap. And management has a sharp eye on costs—recently announcing an offtake agreement for the methane emitted at its facilities. Again, I’m a little concerned about valuation at this point, and am looking for something in the Q3 results to convince me shares can hold those astronomical gains. But Enviva is at least a solid hold here.

6:57

Q. Hi. I certainly find your presentations interesting and profitable. I’m curious about your views on Orange SA (Paris: ORA, NYSE: ORAN) and Global Partners (NYSE: GLP). Thank you--Quint D.

A. Thanks Quint. We’re currently rating Global Partners a hold. Distribution coverage is thin despite recent dividend increases. I’m looking for improvement in Q3 numbers due out November 5. But at this point, I think there are far more attractive energy stocks yielding almost as much that are increasing payouts.

Orange SA is like many telecoms a cheap stock in my view, selling for little more than 12 times expected next 12 months earnings and yielding over 10% based on the most recent semi-annual dividends. Operationally I think they’re holding their own with management affirming 2021 guidance after announcing Q3 results. And absent lower co-financing received from other operators using its fiber network in France, business was quite solid—with retail services revenue up 3.7% and the company continuing to make gains

7:03

Q. Gentlemen. I have just finished reading Stephanie Kelton's “THE DEFICIT MYTH,” which is a spirited defense of Modern Monetary Theory (MMT). Candidly, I did not buy into it. Do you have an opinion on MMT and do you think it will cause serious inflation if more politicians embrace it and ramp up spending both in the US and abroad? Sincerely--Don C.

A. Hi Don. I can’t say I’m a big believer in MMT either. But I think at least at this point, central banks are more governed by pragmatism than this variety of grand concept. And at this point, the US Federal Reserve—which still sets the tone for everyone—is more or less battling it out about how permanent or transient the inflation we’re seeing now is. You do have some who are perfectly willing to allow inflation to run higher if they think it will increase employment appreciably. But it’s also clear that there are jobs out there to be had, and I think that’s given the inflation hawks a bit more leverage. There is an election coming up next year, so it’s

7:04

possible we’ll see pressure on the Fed to keep things loose. But if they do, it will be about pragmatism—dealing with White House pressure—rather than believing MMT.

Hans

7:05

W HAT SECTOR IS NOW THE BEST TO INVEST IN UPSTREAM, MIDSTREAM OR DOWNSTREAM

Roger Conrad

7:05

Hi Hans. That answer really depends on what kind of investor you are. Right now in the energy price cycle, upstream is seeing the most upside. Midstream and Downstream, however, have the best yields by far. And as we've said in this chat, their day in this cycle will come.

Hans

7:09

I don't think you have BSM in any of your portfolios, is this a good one to invest in for future gains. Thanks

Roger Conrad

7:09

As we wrote in the current Energy and Income Advisor feature article, Black Stone Minerals (NYSE: BSM) is royalty company and pays a dividend that matches up to its cash flow--which in turn is determined by how much energy is produced on its lands and what the selling price of that energy is. When oil and gas prices are rising, it's going to pay more. When they're headed the other way as they were last year, it pays less. We think we're in the early stages of an upcycle for energy--so we think BSM's dividend and share price are likely to go higher going forward. But if an investor were more concerned about steadiness and income, they might want to stick with something safer like one of the midstream companies.

Roger Conrad

7:19

Q. Roger and Elliot. I have heard that the power consumed by "crypto miners" is huge. One estimate is 110 Terawatts/year and I imagine rising. China has recently curbed its use. What are your thoughts regarding the effect on energy, power generation and utilities in the U.S. and globally? Is this a good thing? One article postulated that some miners are moving to the U.S. in places with cheap power.

Here is an article addressing the power consumed by Bitcoin mining. I don’t know how accurate/ reliable the research is.

https://digiconomist.net/bitcoin-energy-consumption

John C.

A.Thanks for sending the link John. Bitcoin has been a topic of conversation regarding electricity demand for some years. I think China’s action to curtail it probably has more to do with the party wanting to assert control rather than to reduce its usage of electricity. But that country does have an energy problem now, with demand greatly outstripping supply of fossil fuels in particular. So if any government were going to impose restrictions for reasons of electricity demand, it would be China.

The bigger source of new electricity demand in coming years, however, is simply going to be the electrification of the world’s major countries—through the steady proliferation of electric vehicles and ultimately replacement of fossil fuels in various industrial processes like steel and cement manufacture. And that’s going to occur at the same time power systems are decarbonizing, by phasing out fossil fuels and replacing them largely with wind, solar and energy storage systems.

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