JotCast | Energy & Income Advisor February 2020 Live Chat | 2/27/2020

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Energy & Income Advisor February 2020 Live Chat

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Roger Conrad

1:59

Hello everyone and welcome to the February Energy and Income Advisor live chat.

2:00

As always, there is no audio. Just type in your questions and Elliott and I will answer them as soon as we can. There will be a published transcript of the entire Q&A available shortly after the conclusion of the chat, which will be after we've answered all questions in the queue as well as from emails received prior to the chat.

2:01

We will be posting answers to the emailed questions throughout the chat.

Alan R

2:09

The latest news is that now ET is under a federal investigation over the explosion at their pipeline in Beaver County in 2018. What are your thoughts? With a number of investigations is this management team now becoming suspect? Thanks guys.

Roger Conrad

2:09

I don't see this case as make or break. And I don't believe there are an inordinate number of investigations against Energy Transfer relative to the size of their operations. They have in fact completed a large number of projects over the past year very efficiently and in an increasingly difficult legal and financial environment. I'm also very encouraged by the way they've been able to renegotiate expiring contracts while providing upside to cash flows. I will have more on ET in the upcoming issue of EIA. But Q4 numbers were solid and guidance is both conservative and promising.

David LaRiccia

2:09

what do you think are the chances of the Saudis giving a large cut? 1 mbpd

Elliott Gue

2:09

I think the Saudis and their allies in OPEC are more willing to cut than most seem to suppose. The reason is that US shale production is on autopilot -- I doubt shale producers would increase CAPEX even at $70/bbl WT -- so they can manipulate prices with impunity. Russia's willingness to agree gets a lot of attention but it's not actually very relevant -- Russia hasn't really followed through on previously agreed cuts and they can't really change production in the winter due to the fact they have a lot of wells in Siberia that tend to freeze solid if you reduce flow rates. So, I think there's a very good chance you'll see Saudi lead an OPEC supply response that totals 1 million bbl/day especially if oil remains below $50/bbl for any significant length of time.

Eric

2:13

I’m sure you’re going to have 1000 questions today, so forgive me if these have already been asked. Do you still look positively on LMRK? I made money on it two years ago, but many articles talk about it having too much debt, but looking back it seems to still trade in a range. Also do you feel that OMP and MRO will make it through the low oil price, corona thing?

Roger Conrad

2:13

I think Landmark has been doing some things to improve its long-term sustainability. I still believe there are challenges with a high level of debt, continued lagging distribution coverage and a reduction in business resulting from the T-Mobile/Sprint merger that make a distribution cut the wisest course this year. And until management either makes that decision or the numbers turn up, I consider the dividend at severe risk. We were very encouraged by Q4 results at both Oasis and Marathon, which we've reported on in EIA and indicate they're weathering the sector stress test. That doesn't mean they can't go lower near term. But it does make us confident continuing to recommend them.

Brian B.

2:19

The following exchange is taken from the Q&A of the Enable quarterly earnings call. It sounds like there is a dividend cut coming up...is that how you see it?

Jeremy Tonet: "Got it. And just last one, if I could. With regards to kind of target leverage there. Just wondering if there's any consideration to kind of bring that number lower, maybe closer to something -- closer to low 3s or 3, just given kind of where market sentiment is and just kind of the concern in the market, bringing -- targeting a bit of a lower level there? And would it ever make sense to kind of reduce the distribution to achieve that ends? Or anything that you could talk about on that side would be helpful."

Rodney Sailor: "Yes. No, I'll address that one. First and foremost, as I said in my closing remarks, a key priority for us in 2020 is leverage. We've always prided ourselves on a strong balance sheet. So we need to continue to work on our leverage levels, specifically in times like these. We'll

Roger Conrad

2:19

I think you can interpret that one a lot of ways so it's probably best not to try. For one thing, the CEO did express support for the dividend several times during the call. They are obviously at some risk to the level of activity in Oklahoma. Q4 results indicated they're still not seeing the steep drop off that for example EnLink has so far. And they provided guidance that they don't expect to. But obviously conditions can change and management has to be flexible. One additional factor that may come into play here is that Centerpoint Energy and OG&E Energy collectively own about 80% of common shares--they ultimately have the control and cutting the payout will hurt them the most. Again they may have no choice if conditions should deteriorate that much. But to this point, at least Enable has been weathering the midstream stress test. And in any case, it's hard to argue the shares (as well as those of many energy companies) are already pricing in a big distribution cut.

Victor

2:19

Hello Guys,
On the most recent EIA issue you had a positive outlook on MRO but the company’s P/E is over 15 while the stock already lost like 40% of its value since 1/1/20. This one lost a lot of value compared with CLR or CXO. Do you still feel positive about it?

Elliott Gue

2:19

In "panicky," fear-driven markets like the current one investors tend to sell risk across the board regardless of underlying fundamentals. Thus, you see oil, copper, stocks and high yield bonds all sell off. MRO and CLR are down 40% and 49% year-to-date while OXY and CXO are down 21% and 24%. The main reason for the difference in performance is likely the size of the company -- investors tend to circle their wagons around the bigger names during periods of market turmoil. In our view, oil prices under $50/bbl represents a disconnect with the underlying supply/demand fundamentals and won't persist for long and we believe the group will recover with the commodity. Our two favorites among the producers right now are OXY and CXO as we outlined in the issue -- both are larger names so the stocks will offer a smoother ride during amid near-term volatility.

Roger Conrad

2:20

Enable's current price is actually right about where it was in early 2016--before it made a number of adjustments to improve sustainability to tough market conditions and when oil was selling for $26 and change!

Lee O.

2:21

you see possible dividend cut at oxy

Elliott Gue

2:21

OXY has hedged a lot of their production for the first half of 2020 to protect cash flow. As long as oil prices recover above $50 to $53/bbl relatively quickly as we expect, I believe the probability is high management will retain the dividend. The only risk is that they decide to cut the payout and deploy the excess cash flow to pay down debt but I think the probability of that is less than 1 in 3 near term.

Brian B.

2:27

There are some majors that are falling to prices not seen in 15 years or more. OXY and XOM are two that I started buying at what I thought were low prices and now it appears there is an assumption that low to mid $40's will tear them apart. The /CL chart looks like the next support is at $42 and change. Could you comment on these two in the context of low $40's oil? And maybe a short list of who would not be hanging from a cliff by their fingertips in the low 40's?

Roger Conrad

2:27

We had oil prices at $26 and change back in early 2016 and ExxonMobil not only stayed in business but kept its Aaa credit rating from Moody's. XOM was also a big winner in the 1990s when oil at one time fell under $10 a barrel. I think what you have to question here is what's pushed these still very high quality energy stocks to levels actually below where they sold when oil was $20 a barrel or so lower? How sustainable are these low prices if oil doesn't fall that far? What we have here in our view is pretty classic capitulation. It's not fun to be part of if you're invested in energy stocks now. And there's even room for more downside, depending on what happens in the broad market. But the best in class companies we've been pointing out to you in EIA are in the meantime certainly capable of weathering what's happening now--they have far worse.

Jim N

2:33

Do you have any recommendation using USO in this market?

Elliott Gue

2:33

Not at this time. As we've outlined over the past few issues we remain bullish oil over the intermediate to long term. However, in panicky "risk-off" markets oil (and the stock market) can sell off well below defensible values from a fundamental standpoint. You have probably all heard the old saying that you want to "buy when there's blood in the streets." So, from a trading standpoint, in markets like this you generally want to buy stocks and oil during the period of maximum panic -- we're getting some signs that we're close to that point. We do recommend trades in USO and UCO (a leveraged oil ETF) in EIA's sister publication, Pig vs. Bear, however we exited a small long position in oil on the recent break below technical support and haven't yet re-entered any trade in crude.

JMonday

2:33

Roger, What do you think of ENBL & ET IN THIS MARKET.

Roger Conrad

2:33

I think Energy Transfer is a very good buy at these levels even for conservative investors. That starts with distribution coverage of almost 2-1 and greatly reduced debt leverage. I think what the market isn't yet appreciating is how the painful steps management took in the past few years have greatly increased its long-run resiliency. The previous dividend cuts not only freed up cash to cut debt but allowed the company to self finance CAPEX. There are still underperforming assets, but they're now more than offset by newer ones in stronger places with better customers. The result was Q4's strong numbers and solid guidance for 2020. Look for more in the upcoming issue of EIA. Enable as I noted above is higher risk but very low priced now--we expect a strong rebound for both though there's risk of more downside near term as we've noted due to macro issues.

Guest

2:38

Will shale producers and all US producers ever cut back production following the lead of OPEC to create higher oil natural gas prices? If so, what impact would this have on midstream? Thanks

Elliott Gue

2:38

Shale producers don't act in cooperative fashion to fix prices like OPEC does -- in fact, under US and EU law that would be illegal. Shale producers respond to economics -- if prices rise, it makes it more profitable for them to produce and there's an incentive to boost output. At this time, shale producers are basically on auto-pilot -- I doubt they would increase activity even if oil prices jumped to $70/bbl. Shale production growth will slow dramatically in 2020 and be flat to down in 2021 due to the producers' focus on free cash flow over growth. The impact on midstream of slower volume growth varies widely -- the higher quality MLPs we've outlined in recent issues have enough diversification and long-term contracts in place to weather a slowdown in midstream volumes. The weak will, in contrast, get weaker.

David O.

2:38

Gentlemen,

While I truly believe oil will be with us and needed as long as civilization exists, I wouldn’t mind hedging my position with the Likes of NÉE. The problem...it pays no income...I need 4%. I’ve waited 4 years for a pull back...keeps going higher and higher. Even this virus doesn’t seem to effect it much. Give up on NÉE? Buy it and wait the 10 years to get that 4% on my purchase price?

Roger Conrad

2:38

NextEra Energy was a great buy below 100 a few years ago when we added it to Conrad's Utility Investor. But recently at 30X expected 2020 earnings, it's more of a candidate for profit taking now, despite what still appears to be a solid business plan both for the south Florida utility and the contract renewables business. They also have hedged their bets with gas pipelines. I doubt it will be 10 years before the stock trades at a decent price again, especially as they're raising the dividend 12-15% a year. But equally I think it's important not to chase a stock that has come loose of its moorings in terms of valuation. If you're looking for something to do with renewables, check out Actively Managed Portfolio member Northland Power, which we will be featuring in the next issue of EIA.

Bern

2:40

What is your outlook for PBA? Is this time to hold or buy?

Roger Conrad

2:40

They announce earnings later today. We will probably still have the chat open then and I'll be happy to give my opinion in detail. At this point, I'm expecting another solid round of numbers and the stock has retreated back under our max recommended entry point again of 38.

Victor

2:45

ENBL reported earnings and they missed the consensus. What is your outlook on this one?

Roger Conrad

2:45

First off, I dispute the idea Enable missed any consensus expectation that actually mattered. As we've pointed out, standard GAAP earnings per share aren't a useful measure of profitability for MLPs, whose accounting advantages allow them to minimize taxable EPS. As for revenue, these are affected by pass through items as well as volumes--volumes are important and did actually rise in Q4 in the aggregate as we pointed out in the Alert last week. Pass throughs just reflect changes in prices for what goes through the system--actually if those prices fall, it can be bullish for volumes. To add to what I've already said on Enable during this chat, the key items are leverage and distribution coverage, both of which were solid in Q4. It's up to management's discretion how to use its capital. But in any case, the stock is trading around where it did in early 2016 when the company was weaker and oil was $26 and change--hard to argue a worst case isn't priced in already.

Ralph Bowlin

2:49

What are your thoughts about RDSB, OXY and XOM? Are there any better major petroleums to invest in during this great purchasing opportunity?

Roger Conrad

2:49

We've answered questions on OXY and XOM already in the chat. Suffice to say, we think they're deeply undervalued at these levels and you can look for more on them in the next EIA. As for Royal Dutch, I didn't see anything affecting Q4 numbers and guidance that wasn't explainable by lower realized selling prices for oil and gas. LNG is the most important product for this super major. Prices have been depressed and clearly COVID-19 is disrupting global markets at this time. But this company is in it for the long haul with a balance sheet stronger than most major nations. Looks like a great stock paying a big yield with a lot of upside--backed by a company that's proven its ability to thrive in the past even at sub-$10 oil--which again we don't expect.

Arnold S

2:52

Schlumberger and Halliburton... Is there any hope for these companies in the next few years? Is SLB's dividend likely to be cut?

Elliott Gue

2:52

We continue to think both SLB and HAL are solid long-term stocks to own with two caveats. First, when the oil cycle turns higher services firms tend to turn only after the producers. Second, we prefer SLB to HAL here because of its exposure to international markets over North America shale and its technological leadership, which allows SLB to keep profit margins up in squishy markets. SLB has repeatedly stated it considers the dividend a priority -- if our outlook for a recovery in oil prices back over 450/bbl proves correct, I see low probability that SLB cuts this year. If oil prices stay below $50/bbl for a quarter or so, the odds start to rise.

Ralph Bowlin

2:54

Whaat are your thoughts about EPD, MMP and MPLX at these prices? Should we be loading up at these great divy rates?

Roger Conrad

2:54

I've addressed Enterprise earlier in the chat and we highlighted our analysis of its Q4 results and 2020 guidance update--as well as for Magellan Midstream and MPLX--in the issue of EIA that's currently posted on the website. The only one of the three to report significant developments since is MPLX, which basically amounts to speculation about the ongoing strategic review being conducted by general partner Marathon Petroleum. Concerns include a possible asset swap of assets "within the refinery walls" for pipelines and presumably cash. Such a move would increase G&P to 50% of cash flow from around 45% or so now. My view is selling in response to that speculation is an overreaction. In any case, MPLX showed from its results it's weathering the midstream stress test and we believe it's a strong buy now, along with EPD and MMP.

Sohel

2:57

Where do you stand on the oil majors like Exxon, RDS, CVX?

Roger Conrad

2:57

We like them a lot, particularly at these levels, which seem to be more pricing in 20s oil prices than 40s. The most important thing with these is their balance sheets are stronger than those of most countries. That not only means they're able to weather price downturns in a way rivals can't--allowing them to take advantage. But it means they have the power to dominate future energy, regardless of what form it takes. That includes renewable energy as well. Bottom line we think this is a great opportunity to load up on super majors and we intend to feature the group again in an upcoming issue of EIA.

Bud Edmondson

3:00

What is going on w DKL with dramatic price drop>

Elliott Gue

3:00

In last month's chat we were asked about DKL and we noted that the MLP had been pretty steady in recent years but we had some concerns about the parent, Delek (DK). The reason is that DK is an inland refiner that's been benefiting from strong profit margins because they've been able to acquire discounted crude produced in places like the Permian basin of TX/NM. That advantage is now disappearing as new pipelines built and put into service over the past 18 months have closed the price discounts for inland crude oils. I think the company's earnings report this week shed some light on this risk and that's why you see DKL down dramatically. It looks more interesting as a buy now than it did last month but we still prefer other names to DKL, especially in this market where investors tend to circle the wagons around larger, higher quality names.

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