JotCast | Energy & Income Advisor February 2020 Live Chat

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Energy & Income Advisor February 2020 Live Chat

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Roger Conrad

4:04

Mainly, the world is still using more oil and especially natural gas, which is increasingly replacing coal as a source of generation globally. In the very long-term (2040 and beyond most likely), you can argue that some form of affordable carbon capture technology will be needed to keep gas competitive. But that fact has been recognized by the super majors, who are now devoting resources to seriously develop it for the first time.

By far the most important factor driving down energy stocks right now is the worry that COVID-19 is going to trigger a collapse in oil prices. But with oil stocks actually trading lower than they were in early 2016—when oil was $26 and change—they’re actually at this point pricing in that kind of drop and perhaps even more.

4:05

That to us is a classic sign of capitulation. And whether ESG related issues continue to act as a drag on energy stocks or not, it means that any good news on the energy price front will swamp it as a factor pushing up shares. The key is for companies to prove their resiliency in this “stress test” for their industry. So far, the best in class midstreams and super majors are doing the job. And in our view, that makes their recovery all but inevitable.

Q. Hi Roger. A year or so back you and Elliott hosted a chat for all folks and one of the big pushes was Occidental Petroleum (NYSE: OXY). I didn’t buy at the time and it went to the $80’s from $60’s. I did buy a decent amount around $50 and it’s been a struggle so far. I’ve never been too crazy about energy stocks. Burned a couple times with some suggestions. I know OXY gets mentioned here and there in your Utility chats and given all that’s going on with Bernie stuff, the virus and their big purchase of Anadarko how are you sizing this one up at this stage? Could the whole year be a washout? I’m glad I waited to make my purchase but still. Thanks—Ray S.

A. Occidental will announce its Q4 results after the market closes today. I’m fairly certain Elliott and I will still be on this chat at that time and will be asked (probably numerous times) to comment on the company. At this point as we wait for results, our expectations for this stock from this level—which right now is actually low 30s—are still positive

looking out over the next 12 to 18 months. The assets are still solid and we continue to believe they paid a reasonable price for Anadarko, or at least one that will eventually be viewed as a bargain.

The key for them is going to be executing on absorbing the Anadarko assets in what’s become a very challenged environment for energy stocks. And for one thing, it’s become a lot more difficult to sell assets at prices anything close to what they’re worth. We’re encouraged by Warren Buffett’s decision to step up to the plate to buy, which potentially heads off the risk of short-term wealth destruction prompted by Icahn. But again, we want to wait until the earnings before really expanding on this answer.

4:06

Q. Hi Elliott. Having high regard for you knowledge of the energy sector would appreciate if you could respond to the following questions during the live chat session of 27 February. For several months oil has been in trading range from $50 to $60 a barrel. Do you believe that the coronavirus could cause the price go crude to drop into the $30s? If so would it be prudent now to purchase SCO and then if it does drop into the mid-$30s purchase UCO? Also is the dividend for XOM safe or do believe it could be cut? Are Energy Transfer and Enterprise Products Partners screaming buys at their current price. Do you anticipate that they will go lower with the rest of the market if the spread of the coronavirus increases? Thank you--Charles H.

A. Charles. Elliott has fielded macro questions today on oil and the impact of COVID-19. But in brief, our view is oil will not revisit those low levels and in fact that the favorable sector fundamentals asserting themselves earlier this year will return as COVID-19 is brought

under control. There’s a tremendous amount of fear out there and prices could well get a bit crazier near term. But we don’t at this time see a trade in SCO, the ProShares ETF that rises 2 percentage points for every one point decline in benchmark oil prices.

I won’t add to what I said about Enterprise and Energy Transfer LP in the earlier answer. We do view both as table pounding buys, though there’s the possibility they could do lower. As for ExxonMobil, we believe any reasonable read of this company shows it can easily afford to continue paying and even increasing its dividend—with another boost ahead for May. It’s still rated Aaa by Moody’s and the bonds of August 2049 yield less than 2.9% to maturity. That’s a much better borrowing rate than most sovereign governments. Look for more from us on this company in the upcoming EIA.

4:07

Q. For live chat would like to hear about outlook for MLPs in general. I’m also interested to hear your outlook for bonds, especially for companies such as Antero Midstream, Suburban Propane and Amerigas. Thanks—John C.

A. Our outlook for MLPs is simply this. The ones that prove their resiliency as businesses during this sector stress test will continue to pay huge and rising dividends and have potential for explosive capital gains over the next 12 to 18 months. The ones that falter as businesses are potential candidates for Chapter 11 bankruptcy and possible liquidation, and we want to be as far away from them as possible.

If you take a look at our “MLPs and Midstream” table on the EIA website, you’ll see that despite some very big hits to share prices and outwardly attractive yields, many if not most covered MLPs and companies actually rate sells right now. That’s in fact been true for several years. Our consistent view really since the MLP IPO-boom of 2013-14 has been there are just too many MLPs and o

wners of US midstream infrastructure overall to be sustainable.

The business model of the large and diversified midstream MLP or corporation continues to prove itself in both the US and Canada. And there are some niche outfits that are doing the same—I mentioned USAC above. But the vast majority of smaller fare well represented on the Endangered Dividends List still appears to be basically doomed, with their demise accelerated by the current crisis.

As for bonds, there are plenty of outwardly attractive yields available now, just as with energy stocks. But it’s critical to apply the same discipline we have picking stocks. That is don’t buy the bonds of any company you wouldn’t want to buy shares of now. As we’ve seen time and again the past five years, a failing company will take down its bonds just as surely as its common shares.

Of the three you mention, I’m very confident Suburban and Amerigas (now part of UGI Corp) are in solid shape, again despite action in share prices. Both had solid Q4 results and are funding CAPEX with internally generated cash flow after dividends. I also think SPH is still a takeover target, very likely by a stronger entity that would push up prices of its bonds.

I’m not as confident in Antero, though the common is still on our High Yield Energy List. I thought Q4 was reassuring for them as well as parent and major customer Antero Resources. But it’s not as clear cut as the other two. And with prices this low (yields high), you can and should be very picky.

This is a good suggestion on the bonds. Look for some options in an upcoming issue of EIA. I also intend to update the list I track in Conrad’s Utility Investor. Thanks.