JotCast | Energy & Income Advisor February 2020 Live Chat

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Energy & Income Advisor February 2020 Live Chat

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Frank

3:01

Thoughts on TRGP and, off the way a bit, CPXWF Thanx

Roger Conrad

3:01

We haven't been especially bullish on either Targa or Capital Power for a while. But I don't see anything happening with either that isn't attributable to the carnage in the overall market. When the dust clears here, we're going to reevaluate both of them though.

Hans

3:02

Any update on DKL

Elliott Gue

3:02

Thanks for the question...Just posted a more detailed response above. In short, we haven't recommended DKL in some time because of our concerns about parent, DK. I think the company's earnings release this week backs up some of our concerns about DK. We aren't ready to recommend DKL despite the dip just yet.

Jerry F.

3:03

What to do about RMD? Sell? Move to a brokerage acct?

Roger Conrad

3:03

ResMed Inc isn't one we track in EIA Jerry, unless you mean another stock?

Arnold S

3:09

Regarding the big oil companies such as Total, Chevron, Exxon, Shell and others;
which of these do you think would be the best bets? And do you see much danger of dividend cuts in this group?

Elliott Gue

3:09

We like the supermajors. In fact, it's a group we'll be writing more about in the next upcoming issue due, in part, to the fact that when investors want to "dip a toe" in energy they often start by buying the big, steady supermajors. In our discussion format issue last week I mentioned Exxon Mobil (XOM), a stock which today near $51 yields almost 7%! I do think XOM's dividend is safe. The company is spending on several new projects in places like Guyana, which is consuming a lot of their cash flow right now but as these projects come onstream over the next few years, XOM's capital spending will fall dramatically AND they'll enjoy a dramatic uptick in cash flow from operations. That's how the supermajors work -- they spending counter-cyclically when prices are low and then reap the rewards in the next upcycle.

Mack

3:16

What is your big picture view on how corona virus' economic impact will play into the price of oil and ultimately impact the midstream MLPs and C-corps most frequently discussed in these chats, i.e. CEQP, MPLX, PAA, EPD, HESM, MMP etc. It's hard for me to put together all the factors that could affect the business/financial health of midstream companies. Are there any with payouts more at risk from the virus iimpac than orhers?

Elliott Gue

3:16

The main impact of coronavirus is on oil demand and, within that bucket, there are basically two components. First, you have the drop in demand from China due to the near shutdown of their economy for a few weeks amid the quarantine of millions of people. Then, you have the potential for a wider spread in the virus that would tip the global economy into recession. There's a lot of uncertainty and that's why you're seeing stocks and oil fall based on every whiff of a headline about COVID-19. In my experience, markets overreact to news headlines if for no other reason than the media's tendency to "go sensational" to attract attention. I strongly suspect that's the case this time around and, 6 months from now, the impact on global growth and oil demand will be far lower than some of the headlines we're seeing right now seem to imply. Meanwhile, my view remains that OPEC will cut production significantly to offset lower demand and keep prices over $50/bbl.

Elliott Gue

3:19

....So, let me move from oil to the virus' impact on midstream. There are two major impacts in my view. 1. The potential for a real impact on midtream volumes -- if the US economy enters recession, volumes of oil transported fall and that has an impact on cash flows. 2. Falling stock prices and panicking bond markets impact the costr of capital for all energy companies, including MLPs. Again, however, we believe the large, well-capitalized MLPs that we recommend have limited need for access to capital markets and enough business diversification/long-term contracts in place with high quality counterparties to weather any storms.

Sohel

3:19

Between ET and PAGP ... which one is lower risk and a better buy at recent prices?

Roger Conrad

3:19

Both of them match up pretty well as big, financially strong and well diversified midstream companies. I think Energy Transfer of the two is a bit more complex as a business, though Plains has a more complex structure with the PAA/PAGP relationship. They're both largely self financing CAPEX--which is probably the most critical actor now with share prices coming under so much pressure. PAA has 2X distribution coverage, which means PAGP does as well. I think it's more likely than ET to raise its payout again in 2020 (April boost). But my honest advice to anyone considering an investment in one or the other is to split the difference and take a half position in both.

Guest

3:25

Genesis (GEL), has been on your sell for quite a while. Here, once owning more than 500 shares and selling on your advice. I still own 200 shares in hope of a turnaround. Past year has seen insider Buying. Seems like wall street is pricing in a dist. cut. Your opinion on Genesis? Thanks for all your honest advice and knowledge.

Roger Conrad

3:25

Our view for a while has been that Genesis has been overly diversified. That's the legacy of what become in the previous decade a quest for growth whether new operations meshed with existing business or not. The distribution cut back in 2017 did help with leverage at the time. But you still have an MLP that combines a soda ash mine with pipelines and water craft--not much synergy there that I can see. And worse, they really lack the scale to compete with larger players for new projects and contract renewals when old ones expire. I think at the current price a distribution cut is priced in, and management may be able to avoid one this year with Q4 coverage at 1.3X. But the real question is whether or not there's a stock of higher quality with better growth prospects that's practically just as cheap--and we believe the answer is yes.

Tom

3:25

I've heard "experts" talking about the negative impact of the ESG investing trend on fossil fuel stocks. Aside from the obvious demand and supply impact, I can't make it make sense over the long run due to cash flows, dividends, and the obvious need for fossil fuels in the world far into the future. Am I missing something?

Elliott Gue

3:25

There are two potential impacts the way I see it. 1. Demand for oil and gas would fall if there were a major shift to alternative renewable sources of energy and/or electric vehicles. For many reasons that's unlikely in my view -- electric cars are barely making a dent in global energy demand at this time and just haven't proved popular with consumers. Even in Norway, whetre EVs account for more than half of all car sales due to tax and incentives, oil demand has been hitting record highs. 2. If investor shun buying fossil fuel stocks this could mean the stocks fail to perform even if their business prospects are solid. I also don't but that argument -- after all, just remember some of the talk about tobacco companies 20 years ago....supposedly they were being shunned by mutual funds, etc; yet, they produced a ton of free cash flow, paid huge dividends, bought back stock and the stocks absolutely trounced the market with below-average volatility.

Guest

3:28

I own a bunch of ET now. I am perplexed you don't have them in your Model Portfolio considering their size, their financial strength, their super safe 11% dividend yield, their recent merger which strengthens them, their extreme over sold condition, etc. I would think them to be near the league of EPD, which is naturally a buy and hold forever stock?

Roger Conrad

3:28

If anything in US midstream energy is buy and hold forever it would be Enterprise Products Partners. As for Energy Transfer, I'm not going to give away what we're going to do in the model Portfolio, but it has been on our High Yield Energy List since we launched it in May and continues to perform very well as a business--as we've indicated in discussion of the company in this chat. It's a strong recommendation.

Roger Conrad

3:29

Q. What happened and is happening at Delek Logistics Partners (NYSE: DKL). I see it just hit a new 52-week low today. Thanks—Bud E.

A. Delek announced its Q4 results this week and updated 2020 guidance. The highlight was a 1.08 times coverage ratio for the quarter (1.04 times a year ago), coupled with a forecast for 5 percent distribution growth this year. The partnership’s business remains stable, with Q4 distributable cash flow increasing 19.6% from a year ago. The key drivers were “equity” investments in assets not run by the company and improved performance at the Paline Pipeline and Gathering Assets, partly offset by lower margins in West Texas. The company also kept its modest CAPEX plans on track and reduced debt to EBITDA to 4.43 times from 4.6 times at the end of Q3.

3:30

Those were solid results. Unfortunately, Delek has a problem right now that’s shared by pretty much all energy stocks. That is, investors are wholly focused on the macro environment to the extent no one is paying attention to companies’ business health. Management, for example, didn’t entertain a single question during the Q4 earnings call earlier this week.

The two big questions for any energy company now are (1) How will an environment of low prices and diminished production activity affect the core business, and (2) Will recent share price declines prevent management from accessing capital needed to fund CAPEX?

Those are the questions we’ve been asking of every company we track during what we’ve called a “stress test” in recent months. And they’re arguably taking on even more importance with COVID-19 roiling the markets. But at this point, Delek appears to be weathering what’s happening, and much better than other small MLPs. That’s a point made by the company’s bonds of May 2025, which yield just 6.24

241% to maturity and are actually higher since the earnings announcement.

We’ve actually been quite cautious for some time on Delek—which occupies a fairly stable niche in crude oil logistics services closely tied to refinery action—for valuation reasons. Now it’s well below the long-standing highest recommended entry point we’ve had at 28 and looks attractive for aggressive investors, though so long as the market is this unsettled there’s the potential for more downside.

Jeffrey H

3:37

Hi Folks, Feeling a bit battered right now. Thoughts on the crash in DLK? Will simplification lead to stealth cut? Also I am a longterm holder of VET, which is getting absolutely slaughtered. I know they report tomorrow. They are on your endangered dividends list. Do you expect that the cut is inevitable? So far I have resisted buying any dips in the market. Do you feel that is wise?

Roger Conrad

3:37

Can't blame you for feeling battered. I would say this feels like early 2009. But the truth is for me it's more like late 2002-early 2003 in the utility sector. And the way the momentum has shifted down in the overall stock market, we could very well see further declines even in the stronger companies and MLPs. As you can see from my answer to a question on Delek that I just posted, this is a good name to own and Q4 results were actually pretty solid. You mention the possibility that Delek US Holdings (62.6% owner) may buy them in. I think that's always a possibility, though there was nothing to indicate that in the call. And I wouldn't necessarily view it as a negative from here, as any offer would have to be more than the current level.

Roger Conrad

3:40

Regards Vermilion Energy--they avoided a distribution cut in 2008, when they converted to a corporation and again when oil prices cratered in 2016. What's changed and why they're on the EDL is that prices in Europe and Australia have also come down. They're expected to announce Q4 at the end of this month. What I would say is they're definitely pricing in a cut at this time and management may elect to reallocate capital to avoid having to access capital markets. But the assets are solid and management is seasoned. Whether they cut or not, I think the stock can recover.

Mack

3:46

Could you comment on the recent earnings reports from ENLC and DKL. To me [1] ENLC had a good report and the current, post-cut payout looks "safe." Is it a buy now? [2] DKL took a huge drop after they announced a very small payout boost for the most recent qtr, and promised only 5% payout growth for 2020. But the current payout still looks 'safe.' What do you think?

Roger Conrad

3:46

I won't add to the extensive answer I just gave for Delek, other than to say it's come well off the lows of this morning--which means the impact of Wells Fargo's reiteration of its "underweight" rating on the company (sell) has run its course. This one looks pretty cheap for such a solid franchise--especially one that could actually benefit from lower crude prices. As for EnLink, the reduced distribution was well covered by Q4 results and management is guiding toward the same in 2020--from what appear to be conservative assumptions. There are enough questions about future drilling activity in Oklahoma, however, for us to stay cautious. And we will have more on this position in the next issue of EIA.

Sohel

3:53

If shale output declines .. what will that do to MLP pipeline revenues?

Elliott Gue

3:53

It varies widely by company. In general, falling production would mean less oil flowing through pipelines, which implies lower revenues. Of course, that's offset by the existence of long-term "take or pay" type contracts and business diversification; for example, EPD could see a benefit from higher exports even if production declines. In addition, declines in production are never even -- while production in Oklahoma might drop, Texas could grow since Permian is the lowest cost play in the country.

Mack

3:54

SHLX seems to keep reporting good results and boosting the payout, yet the stock price just keeps going down. Is it a screaming buy at current price? If so, why isn't it on the high yield list? Thanks.

Roger Conrad

3:54

We do continue to rate Shell Midstream Partners as a buy below 22 in our MLPs and Midstream coverage universe, though it has not been a model portfolio company for some time. I agree with you that the 3.4% sequential distribution increase is encouraging, as was distributable cash flow growth of roughly 7.2% and debt to EBITDA of 3.6 times. I'm a little concerned about the low distribution coverage of 1 times but there are reasons to expect that to rise at least by second half 2020, as producer turnarounds are completed. And in any case, the customer list (Royal Dutch for one) is very strong. I think the primary reason the stock isn't making headway is the GP still hasn't clarified long-term IDR policy and doubts remain about Shell's commitment to MLP structure. My view is when they do shares will get a big lift--but I wouldn't venture a guess at this point on timing.

Jeffrey H

4:02

I sent an email a few days ago asking about AM bonds which have plummeted. I realize that the dividend is at risk, but do you feel the company is truly at risk of bankruptcy and the bonds really will go worthless? Thanks for guidance in these troubled times.

Roger Conrad

4:02

I don't believe Antero Midstream or even Antero Resources are in imminent danger of bankruptcy. AM's January 2028 bonds are trading at an elevated yield to maturity of about 12%. But the recent drop is basically no different than what we've seen across the board for sub-investment grade energy company debt. Obviously, there's a lot of investor skepticism now about whether the generally solid Q4 results at the Anteros mean anything for the future--even though the companies did affirm guidance for 2020. And that stems from real risks relating to very low natural gas prices in Appalachia. But at this point, the worst case for AM looks like a dividend cut if AR cuts back CAPEX even more--and that's certainly priced in. That said, we rate AM common shares a hold right now and would rate these bonds the same. Simply there are other stocks and bonds available in energy that are just as cheap but don't carry the same degree of risk. My rule remains never to buy fixed income of any company I wouldn't buy the common.

Roger Conrad

4:02

Q. Hi Roger, hope all is well with you and your team. Do you have any advice on USA Compression Partners (NYSE: USAC)? I've had it for a while and it remains down.--MGW

A. Not much has been spared in the energy sector during this selloff. USAC reported Q4 results a little over a week ago that were basically in line with management guidance. DCF was higher by 2.8% on a 5.7% lift in EBITDA. Coverage was solid at 1.14 times, though slightly lower than the 1.19 times of a year ago. The CEO stated he expects “some moderation in overall industry activity” this year, which for USAC is natural gas compression service across the country. And the company has reduced CAPEX in anticipation, with large horsepower on order for delivery this year less than half what it was in 2019. Utilization rates, however, have been remarkably steady, with Q4’s 93.9% flat with Q3 and slightly ahead of the year ago 93.8%. That’s largely the result of the company’s positioning in places where demand for transporting associated gas has

4:03

surged (west Texas), and less in more traditional markets (Appalachia).

By any measure, these were solid results at a difficult time. And there’s reason to believe from them that USAC will be able to take advantage of rivals’ weakness to further improve its position when the cycle turns up again. There were a few more questions during its call than Delek’s (see above), several of which concerned with this.

Of course, you can look at USAC’s price chart since the announcement and rightly conclude the market didn’t care one whit about the numbers or management’s guidance. And I’ll wager it’s the same story with basically every energy company Elliott and I are going to get asked about today. But USAC is clearly weathering the midstream stress test so far. And keep in mind that general partner Energy Transfer LP (NYSE: ET) owns almost half the company at this point, which means we could still see a takeover. Both of those are good reasons to keep holding onto USAC, which is the best in class for compression co

mpanies. We’ve had it a hold for a while but at this price and after these numbers, I think aggressive investors can reasonably take a position under 14.

Q. I have been a client since 1998 and bought many of your recommendations to good advantage. However, I’ve recently taken a bloodbath on three that are down more that the others. They are Crestwood Equity Partners (NYSE: CEQP), Energy Transfer LP (NYSE: ET) and my largest holding Enterprise Products Partners (NYSE: EPD). Why are these hit so hard? Thanks for your help.—Frank J.

A. The short answer is their shares have been bitten by the same bug that’s taken down the rest of the energy sector. Crestwood I think has the added burden of still doing substantial business with Chesapeake Energy (NYSE: CHK), which has suffered from mounting speculation of a bankruptcy filing. But all three of these companies have now reported their Q4 numbers and updated us on guidance. And as businesses they are at least so far clearly weathering the energy midstream sector stress test. That means while there’s weakness in some areas, it’s more than offset by places where there’s strength. And it means despite lower share price

4:04

prices, they’re still accessing the capital they need on reasonable terms to execute asset expansion.

That’s the result of aggressive actions taken by management over the last five years or so to improve sustainability in a lower for longer energy price environment. For Crestwood and Energy Transfer, that meant the painful step of distribution cuts to free up cash for debt reduction. For Enterprise, it was the less painful steps of refocusing CAPEX and cutting distribution growth in half. I believe investors haven’t fully recognized these aren’t the same companies they were in 2014. But the longer they prove their resiliency in these tough conditions, the sooner they will get credit, and the sooner share prices will recover.

We have an in depth write up of earnings for Crestwood and Energy Transfer in the upcoming issue of EIA. Enterprise’s results were highlighted in the current issue. But just one figure for all three: Q4 distribution coverage is 2X for Crestwood, 1.7X for Enterprise and 1.88X for Energy Transfer. That’s a lot of excess cash to self-fund growth, paying off debt and buying back shares.

Q. I can't attend the chat live. As I listen to all of the ESG investing noise relative to fossil fuels and the impact on MLP and Majors' prices, I'd like Elliott and Roger's views on that issue on prices. Cash flow and dividends won't change because pension plans aren't investing, right? Thanks.—Tom L.

A. Correct. ESG as an investment style/criterion for rating companies is not going away any time soon. For one thing, all three major credit raters have now introduced it in some form into their rating systems, including climate change factors and forecasts. And the “divest” movement has clearly had an impact on many institutions.

That said, we don’t view this as a grave threat to either midstream companies/MLPs or super majors. Nor do we believe ESG is a primary driver of lower energy stock prices at this time.

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