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

5:22

I don't really have a lot to add to what I said earlier in the chat about Genesis. I think management will try to maintain the distribution. But there's really no part of this MLP that has sufficient scale and only very limited synergies at best between the pieces of it. I think the distribution should hold this year despite rising risks. But there are just so many other energy stocks that are nearly equally cheap and don't carry these risks.

We did like this company a decade ago. But after some very big gains, we became disillusioned 3-4 years later when management seemed to be buying assets just to keep up its growth rate, almost without regard to how the pieces fit together. We sold then--and we've never regretted the decision.

Harlan H

5:31

Your positions you recommend seem to follow a strategy of "buy and hold" under any conditions. With the recent market sell off especially in oil, I would think selling some or 50% of a position would be a more prudent strategy. Three weeks ago when the coronavirus issue started to impact oil stocks, I sold positions that so far have saved me $75,000 in losses. I took this strategy as until the virus is contained, I do not anticipate much of a rally. What am I missing?

Roger Conrad

5:31

I'm very happy you were able make some sales before the COVID-19 selloff entered its most recent phase. But with respect, I do take issue with the idea that Elliott and I are somehow permabulls on the energy sector.

In fact, we've been consistently aggressive over the past several years advising investors to sell companies when they've weakened as businesses. What we have not done is sell companies that are weathering the environment as businesses. And we are now recommending investors take positions in stocks of very high quality companies that have fallen to what we consider to be great entry points.

As I've indicated throughout this chat, I would agree with you that it's unlikely we'll see a lot of upside until the COVID-19 appears to be contained. And until that happens, share prices are at risk to falling further. On the other hand, I don't think anyone can predict with any accuracy (at least not if they're truthful) just when authorities will get a handle on this thing.

Roger Conrad

5:32

I certainly hope it's soon. But the best way I know of to make sure I'll be in the game to take advantage of a rebound is to buy good stocks when they're down and plan to stick around.

5:33

I would like to see a legend for how your recommendations are taxed. Could you put an asterisk or something for those taxed as MLP vs C Corps? Or is that information easily assessible all ready and I am not noticing? Thanks

Roger Conrad

5:33

Being a bit more explicit on this is a good suggestion. Thank you. But basically, anything with "Partners" as part of its name is going to be taxed as an MLP. Everything else you see is a corporation.

Peter

5:35

Thoughts on ENLC?

Roger Conrad

5:35

Not really beyond what I've already said in this chat. The results and guidance appear to be supportive of the current dividend and there is some leverage to a recovery in the share price, particularly from action in Oklahoma if the Devon Energy/Dow Inc venture pans out. But there are a lot of other stocks just as cheap with less risk, as we've also indicated in this chat and in issues of EIA.

Arnold S

5:39

Any chance you could publish some "dream buy" prices on your picks in the High Yield Energy Target List and the Actively Managed Portfolio?

Roger Conrad

5:39

Thanks for that suggestion. We will work on something. But for the time being, basically pretty much every oil and gas stock we currently recommend is at that level. That's every company in the High Yield Energy List and every stock in the Actively Managed Portfolio, with the exceptions of Brookfield Renewable Partners and Northland Power, as well as Kinder Morgan, Pembina Pipeline and TC Energy (formerly TransCanada). All of these except BEP, however, are trading below our highest recommended entry point and so are buys.

DRG

5:48

While buying anything in the current environment would be catching a falling life, it may provide opportunity to reduce cost basis of stocks we have already invested in based on your past recommendations. Which handful of Majors and E&P in your view would be compelling enough to nibble on now?

Elliott Gue

5:48

Actually the very next issue of EIA will detail a handful of our top picks coming out of this earnings season. You are quite right that all energy stocks will move lower when oil is down sharply and when the S&P 500 is down 12% in a week. However, we also firmly believe that the strong names will be the first to recover and will see the strongest gains coming pout of this. I think we've highlighted a handful of majors and E&Ps that top our list including CXO/OXY on the producer side and XOM on the super oil front.

Michael P

5:49

Any thoughts on CAPL's recent report ?

Roger Conrad

5:49

As you know, this is not one we're holding in our model Portfolio at this time. But I thought that results were generally solid despite the slightly lower Q4 EBITDA and DCF. Distribution coverage improved for the full year to 1.11 times, up from 1.03X a year ago though it was 1.04 for Q4 versus 1.19 a year ago. The elimination of IDRs is a continuing positive, as are recent asset acquisitions and there's more potential for cost cutting this year. This is a margin business where the difference between profit and loss is often narrow. But overall performance is solid and should support the dividend. We still rate it a buy up to 18 in our MLP and Midstream coverage universe.

herm

5:54

Many of our stocks look like solid buys at current prices but my gut tells me that this is going to last longer then then expected. I know you don't have a crystal ball but are there any technicA that you follow that

Roger Conrad

5:54

Yeah the group looks horrible on a technical basis. We have been encouraged by what appears to be some outperformance--meaning mainly the better names aren't going down as much as the overall market. But from at least a conventional look at charts, we can only guess where the bottom is. One guidepost that I think will be useful is where stocks that performed well on Q4 numbers and 2020 guidance stand relative to their lows in early 2016. That was a time when oil per barrel was $20 less than it is today. The fact that so many stocks are actually near that level now is I think a pretty good sign we're close to a bottom. But as I answered to Harlan's question earlier in the chat, what we want to do now is identify and take positions in high quality stocks at prices where in a cooler moment we thought they would be deep value. If we can do that and hold on as this settles, we think we're going to get some very nice returns as well as lock in some almost obscenely high yields.

herm

5:54

Forget what I just sent in error

Roger Conrad

5:54

No problem. We answer all of them.

richard

6:03

Recently you suggested GLOG was a sell. I have the preferred GLOGA with 8.75% coupon. Had it since 2015 and was probably one of your recomendations. Do you also suggest this be sold or is it OK to hold and get the nice coupon ?? please

Roger Conrad

6:03

Both Gaslog and Gaslog Partners have come down a very long way since early November. And it's tempting to call a bottom for their shares, given how high the yields still are even after the deep distribution cuts--which will free up cash for debt reduction and also provide a cushion against reduced revenue as charters expire. But it's also true that there are still some major issues with tankers--even LNG tankers and GasLog has $3.159 bil in debt versus market cap of just $461 million. With GLOP no longer a potential financing option it's very vulnerable in what's a very competitive industry, and I can't rule out more dividend cuts or even eventually Chapter 11. In any case, my rule with fixed income is never to hold or buy anything I wouldn't want to own the common shares of--a floundering business will sink both unless it steadies. Why take a chance with so many other low priced/high yield energy investments around.

Ken in Phx

6:05

I was surprised to see you suggesting a dividend cut for LMRK? I didn't think you covered cell towers in this publication. LMRK is not on your endangered dividend list.

Roger Conrad

6:05

Landmark is not tracked in EIA. It is covered in Conrad's Utility Investor and is on the EDL in that advisory. I answered the question because it was asked.

Ken in Phx

6:11

I hold a portfolio of high class O&G stocks (EPD, KMI, OXY) and other energy related stocks (BEP, EVA), all of which trade below your suggested buy prices, having taken a terrific beating YTD. Together they make up 20% of my portfolio

Do you recommend holding on through the current crisis if you need the dividends but don't need to sell the shares? My concern is sustainability of dividends during this difficult period which is likely to get worse before it gets better.

Roger Conrad

6:11

Brookfield does not trade below my suggested highest recommended entry point. In fact, even after the past few days selling, it's still above the point where I've recommended investors take at least a partial profit ($50).

We believe all of these companies, however, will be able to hold and even increase their distributions this year. We've commented on Q4 results and 2020 guidance for each of them during this chat except for EVA. Enviva this week also reaffirmed guidance for 2020, with distributions between $2.87 and $2.97 per share total. Q4 EBITDA was the highest in company history and management stuck to a forecast of "doubling EBITDA in the next few years" as it adds facilities and contracts. Q4 coverage was 1.59X.

Again, as you've probably gathered from answers to questions in this chat, there's the risk of more downside for share prices. But the businesses inside are solid. And so long as that's the case, we expect share prices to recover.

Mack

6:17

Any updates on OMP since your recent report in EIA?

Roger Conrad

6:17

Oasis Midstream has now reported its full numbers for Q4. We'll have a full analysis in the upcoming issue of EIA. But there were some pretty clear highlights, including Q4 distribution coverage of 2.2 times and volumes that topped the high end of management's previous guidance across the range of commodities that run through the company's system. The primary concern for investors is the company's dependence on its parent and primary customer Oasis Petroleum--which like all producers is the target of worries about being able to execute on CAPEX/production targets in such a weak pricing environment. And Oasis' bonds reflect those worries as well with May 2026 bonds yielding over 16% to maturity. Our view is these are valuable assets in the Bakken and that Oasis will continue to meet targets. But this is one of our more aggressive bets in the High Yield Energy List.

salvatore

6:22

Afternoon Roger can you explain how a purchase of say epd at current prices would lock in the dividend rate

Roger Conrad

6:22

The dividend gets paid so long as the underlying business can support it and management is willing to maintain it. Buying Enterprise now--which as we've indicated does comfortably support its payout as well as low single digit increases--would lock in about a 7.8% yield based on your initial purchase price, which would rise over time with each dividend increase.

Doing so would not lock in any sort of total return, as that will depend on what happens to EPD shares. Our contention is the shares should command a much higher price in the next 12 to 18 months once the COVID-19 selloff recedes. That's based on our analysis of its growth prospects as well as where the shares have traded historically in relation to metrics like earnings and dividends. But again, actual returns will depend on what the markets do--though we are able to lock in the actual dividend income. Hope this answers your question.

Ken in Phx

6:25

I sent in a question in advance, repeated it several hours ago, plus added another question. None have been answered. Are you swamped?

Roger Conrad

6:25

We have had quite a few questions yes and I appreciate everyone's patience. But I have answered several of your questions in the last half hour I believe. Again, we will send a link to a published transcript of the entire Q&A shortly following the conclusion of the chat.

Jim N

6:33

Do you have anything new to report on OXY --- from todays report?

Roger Conrad

6:33

We will have a full analysis in the upcoming issue of EIA, which I expect will go to post in the next few days. We're still in the process of digesting what was reported. But there doesn't appear to be much in the way of real surprises--32% of Anadarko merger debt repaid, 33% improvement in Permian E&P capital intensity, $900 mil synergies captured a year ahead of target all demonstrate the company is making progress against its guidance, which is really the key to turning around the stock. There's been some chatter about where earnings and revenues for Q4 wound up. But at least at this point, it looks like the selling leading up to this announcement is quite overdone.

Victor

6:34

Elliott, what do you see on the latest Commitments of Traders Report that can give us some input on oil prices in the near future. If the shorts are very high a short coverage could start a rally in oil. How do you feel about it?

Elliott Gue

6:34

The Commitment of Traders report is released Friday, covering positioning through the prior Tuesday's settlement. So, the data we got last week summarized data through the 18th. What we see is WTI net commitments at 95.54 million barrels long, near the lows from last October (86.5 million). Similarly, Short gross shorts at 119 million barrels is the highest since last October. My guess, based on sentiment this past week, is that we'll see even more extreme readings when the data is released tomorrow night. This sets us up for a big rally once the risk-off market move recedes. The good news in that regard is that as scary as it is in the moment, waterfall sell-offs of this nature don't usually last very long.

Andrew

6:35

Thank you as always for these chats. In turbulent times like these, it's really helpful to read your comments that point to all the reasons that support a buy recommendation. It keeps me grounded and reminds me why I invested in these companies. Thank you again.

Roger Conrad

6:35

Thanks Andrew. We feel the same way on this end fielding your questions--keeps us grounded as well. It's by no means an easy time to be an investor, in or out of energy. But we will continue to keep you all posted on what we believe is important to weathering this downturn and riding the recover--which while its sometimes hard to believe always happens if companies stay strong as businesses.

Elliott Gue

6:37

Also, a couple of questions regarding OXY. I am going through their release right now and still need to go through their call. Initial read: Positive and the stock is up ever so slghtly after hours (which is good when S&P futures are down 0.9% since the close).

6:41

And re: market as a whole. I know it's scary out there and these waterfall sell-offs seem endless. However, 5-day sell-offs of this magnitude are typically followed by significant market rallies EXCEPT in the late stages of a bear market. Obviously, since the market hit a fresh all-time hjigh last week, we're not in a late-stage bear market. Market history suggests the probability is very high (in excess of 90%) the market will be higher a month from now as cooler heads prevail.

Roger Conrad

6:43

Hi Guys: Please help me to understand how I reconcile Enable Midstream Partners Headlines “Q4 EPS $0.02 Does Not Compare To $0.25 Estimate, Sales $731M Miss $845.91M Estimate” with your 2/20/20 EIA Alert’s positive statement that “Enable’s Q4 DCF increased 2 percent and covered the payout by a solid 1.23 times, as the company set records for gathering, processing and transportation volumes. And management has issued guidance for 1.3 times coverage next year with debt to EBITDA of 4 times, based on conservative assumptions for drilling in Oklahoma.” Thanks--Barry J.

A. First of all, earnings per share aren’t the same thing as distributable cash flow, which we still believe is a much better metric for gauging MLPs’ profitability. Second, more than just volumes affect Enable’s revenue. That is the most important factor so far as cash flow is concerned. But the amount of revenue for any given quarter is also going to reflect the prices of commodities passing through the pipes. That means if prices for NGLs,

natural gas and oil are lower than they were a year ago, they will negatively impact revenue. Again, the impact is largely passed through so it doesn’t impact Enable’s ability to pay dividends but it will affect the revenue number. Hope that answers your questions.

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