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Roger Conrad

3:07

Even the Vanguard fund, however, is trading at a price where it could shed a few percentage points if there's general selling of bonds and few will be able to live off the 2.6% yield.

3:10

My best solution is in two parts. First, build a diversified and balanced Portfolio of the high quality essential services companies in our CUI model Portfolios when they trade below recommended entry points. Second, take a look at the CUI Plus Portfolio--which is comprised primarily of non-utilities and shows recommended allotments as well in a model. This strategy won't protect you from all volatility and in a full on bear market most stocks will lose ground. But these are strong companies that will weather the bad times and come out the other side in good shape. And they'll continue to pay you dividends along the way, so you won't have to eat your seed corn by selling out at a bad time to pay bills.

3:10

Roger,  Follow-up question regarding retired needing income safely/avoid recession losses.

Perhaps an ETF such as  30 year US Treasury bonds or US High Quality Corporate Bonds??
Utilities or perhaps Utilities ETF??   Again, needing income of about 6%

Thanks much!

Roger Conrad

3:14

I'd be very careful about either of those options. I've addressed long-term bond risk, and it's that much greater with US Treasurys as those only price in interest rate risk. They're also not yielding anywhere close to 6%--and if they ever do it means a huge drop in principal from here. As for a utility ETF, chances are you're going to wind up with something that owns a whole lot of NextEra Energy--great company but from this valuation it's not hard to see a decline. Again, I hear you about needing income and not wanting risk to principal. I think I've put together some good options in the CUI model portfolios and our CUI Plus portfolio, which we launched last September and held up well during the Q4 selloff. I encourage you to check them out.

3:14

Has there been any changes in EFT and mutual fund MLP landscape that would make them fair competition to individual MLP's as holding 5 to 10 MLP increases the tax prep bill.

Roger Conrad

3:17

I think certain closed end funds have become an interesting option for investors who don't want to own individual MLPs. One I recommend is a fund I've actually panned in the past for distribution cut risk--Kayne Anderson MLP MIdstream (NYSE: KYN). The yield is attractive at nearly 10%, the vast majority of which is drawn from dividends paid by holdings. But the real attraction is you effectively get double leverage to MLPs--the shares inside like Enterprise (22% of portfolio) are trading at a discount to historical valuations, and the fund itself trades at a discount of 8.7% to net asset value. A recovery in MLPs should provide a double boost.

3:20

KYN is certainly not risk free. And it does use a lot of leverage to generate returns. But in contrast to past years, there's not a lot of deadwood in the portfolio and most holdings are best in class. The official expense ratio as it shows up in screen services is absurd at 13.4%--but that's simply a function of an arcane calculation and the yield is net of that.

3:21

No K-1s with closed end funds either. That's the case with ETFs too of course but I think in a sector like this active management--or advice like we give in EIA and to a lesser extent CUI-- is critical. There are still a lot of Sanchez Midstreams out there to snare the unwary.

Lee B

3:21

Roger,
Dominion’s collaboration with Smithfield Foods to capture methane seems like a good private sector endeavor! Just wondering if there is sufficient scale to translate to meaningful financial difference! Would love your opinion!

Roger Conrad

3:25

It sounds like there's huge potential for Dominion here even by swapping out 4% of its supply, which is the near term goal. The gas is even cheaper than fracked gas, supply is almost on-site to power plants and therefore doesn't depend on constructing a major pipeline like Atlantic Coast Pipeline and it's likely to go over very well in Richmond, where Democrats look like better than even money to take over the legislature this year. If Virginia joins the regional greenhouse gas initiative, this basically resolves any concern Dominion would have. I note that Northwest Natural Holdings (NYSE: NWN) is doing the same thing now in Oregon and expects huge savings from the switch, as well as opportunities in its storage business.

3:26

I've always been impressed with how Dominion is able to adopt energy technologies early but still after others have proven the concept--another reason I like the stock in the mid-70s.

Jim C.

3:27

Dear Roger,

Can we provide your latest thoughts on ENBL noting that the dividend was recently raised? Can you foresee a potential sale by the two principal owners?

Also would you consider adding this one to the stock tracking list having lost a number of MLPs the last several months.

Kind regards

Roger Conrad

3:32

Thanks Jim. Since Enable is so integral to prospects of its main owners OG&E Energy and Centerpoint Energy, I think there's good justification for adding it to coverage, at least at some point. I'd like readers to be aware that we did add two companies to coverage in August--railroad Union Pacific (NYSE: UNP) and toll roads owner/operator TransUrban (ASX: TCL, OTC: TRAUF). Both of these are utility like businesses we have not covered to date and I'm every excited to expand to them. I've tracked TransUrban for years, since I used to write an advisory at my old publisher called Australian Edge. I continued to track it in Energy and Income Advisor and will do so going forward in CUI. It's consistently delivered on growth by building/buying new toll roads, which is an exceptionally steady source of revenue.

3:34

Anyway, sorry for the digression. Turning to Enable, I really liked the Q2 earnings and the distribution increase--which proves once again that when a good MLP gets its house in order the business model will be conducive to paying distributions. Management also stated the intent to make these a regular thing, which they can certainly afford to do given the strength of their business. I think one reason they're doing this is neither owner now wants to sell and instead consider their Enable stakes a long-term investment. That's in fact when Centerpoint's CEO said during his Q2 earnings call--flatly, they're not interested in selling.

3:35

I expect that to ultimately be reflected in a higher share price, since the threat of CNP selling has hung like a dark cloud over Enable shares for the better part of four years now. In the meantime, this is a great MLP to buy under 17--it's just 12 and change now.

Mr. G

3:36

I've got plenty of winners but I've accumulated some real stinkers

Hold, sell or buy more?

ARLP @ $14.85
ATGFF @ $14.05
APU @ $32.08
AM @ $14.28
ENBL @$12.66
ENLC @$8.09
EQM @ $31.88
SLB @$33.94
WES @$29.76

Roger Conrad

3:39

A good many of those we've recommended over the years, mostly in Energy and Income Advisor but some in CUI as well. All of them are tracked in EIA now, several on our High Yield Energy List that I mentioned earlier in the chat. My general comment on all of them is they appeared to be in recovery up until oil and gas prices started to soften up this spring. Many investors at that point took it as the last straw and most have been weaker every since. I've addressed Amerigas (sell), Antero Midstream (Buy for aggressive investors) and Enable (buy) earlier in this chat, so I'll restrict my comments here to the rest.

3:41

Altagas, which we do cover in CUI as well, is definitely on the road back, streamlining its revenue stream and paying off debt with asset sales. The propane export facility is now open for business and generating revenue and I think we'll see a return to dividend growth next year as coverage improves and leverage drops.

3:43

We have not recommended ARLP for many years. The MLP is seeing some life from coal sales overseas and has been good raising dividends since absorbing its general partner. But overseas sales are not as profitable as those old utility contracts that are going by the boards as companies phase out coal as the easiest way to cut costs and emissions. This is not one to hold onto for the long haul despite the attractive yield.

3:45

EnLink has sold off as badly as Antero but the Q2 results and guidance continue to support the distribution--as does a diversified asset mix. The primary challenge is that former GP Devon Energy is largely pulling out of contracts with the company in certain basins but there's still plenty of growth in places like central Oklahoma and the Permian Basin of west Texas. There's risk but value for aggressive investors here. Again this one is tracked in EIA.

3:49

EQM we've had a sell on for some time for a couple reasons. First, it has spent a lot of money on the Mountain Valley Pipeline that it may have to write off a big chunk of if Atlantic Coast Pipeline doesn't win its appeal at the US Supreme Court to be able to cross the Appalachian Trail. The takeover by the Rice Brothers of EQT has also put volumes at risk to cut backs in production, as EQT is still the largest customer. And finally, distribution coverage is weak. We'd prefer to stay out of the way at least until EQT's strategy becomes more clear, and what sort of revenue haircut EQT will have to take.

3:50

Schlumberger is the blue chip in energy services and very cheap, an EIA recommendation. WES is a solid MLP with upside from its payout though it's likely to remain soft until new general partner Occidental Petroleum (bought Anadarko) decides what it's going to do about drilling (midstream customer) and its ownership stake, which it's strongly hinted at selling.

Dwayne

3:51

TEF is down 15% plus since you recommended it. Why the continued decline and do you still support buying it here?

Roger Conrad

3:55

Dwayne, as I answered to an earlier question in the chat, my view is there's a great deal of investor concern about an contagion from Argentina spreading to other South American countries like Brazil and taking down currency values and economic growth. That stems from recent election results that greatly increase the odds of Peronists regaining power in Argentina. I think that's more than priced in to TEF at 8.45X expected 2019 earnings, which reflect already reduced guidance. I do think it's a solid buy at these levels for those who don't already own it. For those that do, the best approach is to stick and ride out the volatility, which is currently also being stirred by generalized concern about a global recession. I like what this company is doing to spur revenue, improve network and cut debt and intend to stay with it as long as that's the case.

George C

3:55

Roger - how would you recommend starting an essential services portfolio in this market - I and 64, semi-retired, don’t want a lot of risk to principal but would like some reliable income.

Thanks!

Roger Conrad

3:59

George, I would suggest following the three part strategy I highlight in Portfolio Update every month. So far as buying goes, that means investing in stocks in our Portfolios that trade below designated recommended entry points. One approach would be to buy one or both of the two Focus stocks I highlight every issue until you own a dozen or so in reasonably balanced amounts. That would take 6 months assuming one bought both Focus stocks--which are the top recs every month. It's also possible more stocks would come into bargain range between now and then, which would allow buyers to speed up the process. The goal, though, is to own a balanced portfolio of stocks that are growing earnings and therefore dividends long-term and will therefore generate income and long-term capital gains.

4:01

I would also mention the Quality Grade system we follow--with the rule that an A (highest rated) company is a buy when its well protected yield plus sustainable annual growth rate is 10% or higher. That's not likely to be a floor price in a full blown market correction. But it is a price from which the average annual return (yield plus growth) should be 10% from purchase price, provided you hold through the cycle and the underlying company stays strong.

Steve Maloney

4:01

I'm 85 and would like to invest 50T in the best investments that my children will inherent. Should I put 10T in $5 stocks or $5T in 10 stocks?

Roger Conrad

4:05

My experience has been 10 stocks is a better bet than 5 if you're planning on buying and holding for many years--preferably using dividend reinvestment plans. That's in fact the focus of CUI's "Top 10 DRIPs" portfolio. My best have literally multiplied my money 20-fold from doing nothing more than reinvesting dividends. My worst was, well, Enron--which Forbes credited me with a recommended sale in my advisory at $13. That was riding it up from teens to $100 and back again--not my finest hour, but you get the point. No matter how well you think you've picked them, some may not work out. Those that do will more than make up for them, but only if you've spread your bets enough.

Barry J

4:06

Roger:

Please let us know what substantial risks you foresee could occur with AM and ENLC. For example, notwithstanding their last positive financial reports a few weeks ago, are their yields so high that they would cut dividends? Could their lenders require that because of certain covenants in their loan documents if their share price dropped below a certain value? What are the issues of which we should be aware?

Thanks.

Roger Conrad

4:11

I don't think the fact their yields are so high alone will trigger dividend cuts at either AM or ENLC. Antero, for example, is accomplishing much the same savings as an outright dividend cut by buying back shares, and in a far ore shareholder friendly way obviously. As for lenders, what they require is companies maintain certain metrics such as debt/EBITDA and EBITDA/interest expense. So long as those are good, they don't particularly care. The problem could come in if either AM or ENLC was paying out so much they needed to raise significant outside capital. Then lenders might require a greater share of operating cash flow be used for CAPEX, which could mean a distribution cut. But I think the real thing to watch for both of these companies is what happens to actual cash flow. It was generally solid in Q2. We'll see how things shake out in late Oct/early Nov when they announce Q3.

I will add that I don't track either of these in CUI but we will be doing so on a constant basis in Energy and Income Advisor.

John G

4:11

Roger, What is your favorite value in the utility space?

Roger Conrad

4:15

The two Focus stocks are the best place to look in every issue of CUI. If you're asking only about electrics, I think two stand out as values now: Dominion Energy, which I've talked about throughout this chat and PPL Corp (NYSE: PPL), which I'm strongly leaning toward adding to the Aggressive Holdings. It's weak because of concerns about the UK where it gets half revenue roughly. But it's well hedged against currency shocks on a Brexit and even a Labour victory/nationalization of utilities is likely to be a positive as it would be at an arbitrated price and create a cash windfall that would either be distributed, used to pay off debt or finance an acquisition. PPL would itself be a prime target with solid regulated utilities in Pennsylvania and Kentucky. The only problem is that it's likely to take a while for all this to get sorted out and in the meantime the stock is going to trade at a discount to the group. But the yield is solid and still growing.

Steve

4:16

Any additional thoughts on Royal Dutch Shell after its recent price decline?

Roger Conrad

4:20

I still think it's solid, on the basis of its position in global LNG markets alone. These super oils really do have enormous staying power with their diversified operations and balance sheets that are stronger than most countries. Historically, it's really paid to buy them whenever they've been sold off. I can't speak to why a short-term investor would want to own a super oil in the first place. But in as much as anything is a one decision stock, it's been these energy companies, which have a luxury not rivals do--of being able to think in decades and therefore dominate. Shell is rolling out EV charging stations in Singapore, for example.

Pete

4:20

what are your current thoughts on NEP? thanks

Roger Conrad

4:23

Valuation has been my only concern for some time with NextEra Energy Partners (NYSE: NEP). Even when PG&E briefly threatened to walk away from power sales contracts, parent NextEra Energy (NYSE: NEE) basically eliminated any threat to dividend growth guidance of 12-15% a year (now extended through 2024) with a drop down that was financed to avoid having to immediately access fickle equity markets by issuing shares. I think NEP is certainly a buy at a price of 48 or lower. It's above that now, so would be buyers need to be patient. But this yieldco is best in class with an exceptionally steady road to growth and high yield.

4:26

By the way, PG&E has released some details for a bankruptcy plan it will file next month, one of which is no change to purchase power contracts for renewables. That I believe is bowing to the inevitable--California will not stomach any plan that undermines the economics of decarbonization in the state, which breaking contracts with NextEra and others would have done. Even though the bankruptcy judge indicated he'd allow that action, the company has apparently decided whatever possible savings it would gain are far outweighed by hostility from the state, including the governor who has been very supportive of utilities this year.

4:27

That PG&E action on contracts is also very positive for other yieldcos we recommend like Atlantica Yield (NSDQ: AY), Pattern Energy (NSDQ: PEGI) and Clearway Energy (NYSE: CWEN).

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