JotCast | Energy & Income Advisor Live Chat April 2019

Return to

Energy & Income Advisor Live Chat April 2019

Prev Page View Full Chat Next Page

Elliott Gue

3:11

The oil market is still tight. While today's inventory number brought a bigger-than-expected build, it's not totally out of line with what we should be seeing this time of year -- the US is normally adding inventories until the end of April as refiners prepare for summer driving season. If you think about it, basically what happened was that oil collapse in Q4 and then the recovery this year has basically just take us back up to the range where we were trading last summer. So, I think oil basically overreacted to headline risks and followed stocks lower late last year and that panic selling has now been reversed. I'd look for oil to remain in the range over the 3 to 6 month period -- mid-60s on the low end to mid 70s (for WTI) on the high end.

As we've been writing in recent issues, I think the real opportunity in the short run is in energy stocks (particularly upstream) as they are NOT yet even pricing in where oil is trading now. I think you could see a broad 20% plus rally in many larger energy producers

Frank

3:13

Roger Conrad

3:13

As I noted answering a question earlier on Energy Transfer, we believe this MLP has turned the corner. That's in large part thanks to the the series of internal mergers that resulted in sharply lower shareholder distributions. But it's also been able to bring several new projects into operation in a very tough regulatory environment for pipelines in many states. We rate it buy.

Roger Conrad

3:25

Q. Dear Elliot and Roger. Why do you still have a recommendation for Crestwood Equity (NYSE: CEQP). Six months ago they announced they would increase their distributions 15% a year, but for the last two quarters they have kept their distributions flat?—Henry T.

A. We’ll get a better read on how things are going at Crestwood when they announce calendar first quarter results on April 30. As you point out, they did hold their payout at the quarterly rate of 60 cents per unit this month. But it’s far from clear whether this is a deviation from indications they had given for a return to regular distribution growth.

To clarify though, during its third quarter earnings call, management talked about achieving annual EBITDA and distributable cash flow growth of 15 percent, not actual distribution growth. Given their capital spending plans and MLPs’ desire to self-fund growth, I would actually expect to see payout increases lag well behind those target rates, at least until distribution coverage gets to management’s target of 1.7 times (was 1.3 times in Q4) and debt to EBITDA gets down to the target 3.5 to 4 times.

Why we continue to recommend Crestwood is new assets are coming on stream and cash flows are rising to plan. We may change our opinion at the end of this month. But so long as the operating numbers are backing up guidance, we believe shares are undervalued yielding around 6.5%.

Buddy

3:25

I am getting really tired of the recovery being just around the corner for SLB (and HAL). Every quarter, it's the same old story regarding conditions just about to improve. One really has to question the competence of SLB's management when they bought deep sea driller Cameron at the top of the market while everyone knew shale was the future growth area. These two dogs are not cheap either. For example, SLB's earnings estimates for 2020 are now reduced to about $2.00 while this year they will make only $1.20. Their earnings don't even cover their dividend. Someday these two make work out but investors don't live forever! Your comments please.

Elliott Gue

3:25

I don't think you can value cyclical stocks at the bottom of a cycle (when earnings are depressed) based on P/E. I'd argue both names are dirt cheap trading at 30 year lows (or close to it) on a price-to-book basis.

I'm not worried too much about dividends either. If you look at Free cash flow, which excludes a lot of non-cash charges for both companies SLB will earn north of $2.10 this year and that will cover their dividend.

I do totally agree with you on frustrations regarding waiting for the cycle to turn.

In North America, where HAL is dominant, I think you're already seeing signs of bottoming and a turn up in pricing. Basically, fracturing activity is set to turn up as many producers get around to fracturing their DUCs (Drilled Uncompleted wells) as new pipeline capacity comes onstream in the Permian.

Structurally, the current business model for the industry is unsustainable -- in recent years demand for US services has gone from outright boom to outright bust on several occasions due to swings

Buddy

3:27

What is your latest opinion on OXY? This is another E&P company that never makes any progress.

Elliott Gue

3:27

We covered OXY in response to an earlier question and in today's flash alert. To summarize, the company has been down of late over concerns surrounding their bid for APC. I think they'll ultimately be outbid by CVX. We remain positive on the stock.

Elliott Gue

3:29

More broadly, the upstream names historically follow oil closely but have not done so in 2019 (they're up less than oil). In the past when that's happened they usually play "catch up"...we believe that's what we've been seeing lately.

Roger Conrad

3:38

Q. I would appreciate it if you can add BP Midstream Partners (NYSE: BPMP) to your coverage and give us a buy target if you decide it is a buy.--Lyndon W.

A. This midstream MLP is definitely on our list to add to coverage. It’s basically in the same group as Shell Midstream (NYSE: SHLX), a partnership created so a cash needing super oil can monetize the value of its midstream assets. That’s a model many have become afraid of in light of the number of roll up mergers in the sector over the past year. But we don’t see any sign general partner BP Plc (London: BP/, NYSE: BP) has any intention of doing that as it tackles a huge debt load that’s the legacy of its Gulf of Mexico well accident earlier in the decade.

3:39

Meanwhile, BPMP has a high and still growing distribution that’s backed by strong assets. I believe distribution growth is eventually going to slow, in part because cost of equity capital is high. But as of now, management is sticking to its “mid-teens” payout growth target for 2019, with the promise of the same in 2020. We’ll see if they change their tune on May 9, when first quarter results are announced and guidance updated. But at this point, we’re leaning toward recommending BPMP as a buy in the mid-teens when we do add it to coverage.

Dragomir

3:40

Hello Elliott & Roger

I know you haven't been a fan of downstream tickers for quite some time. Any change of heart about VLO, PSX, MPC and LYB? Thanks.

Elliott Gue

3:40

Certainly the refiners there -- VLO, PSX, MPC -- will benefit from a few trends this year including tighter gasoline and diesel inventories than was the case late last year, strong demand and possibly new IMO rules governing bunker fuels (IMO 2020). However, typically the best time to own refiners is when oil prices are flat to down, which keeps their feedstock costs under control. Basically, that means I think some of them will do OK but will underperform the upstream space, which has superior leverage to rising oil prices. I have actually recently been looking at some of the chemicals stocks -- particularly LYB and CE -- which I believe may have bottomed and the acetyls don't have as much of a supply/capacity issue as some of the other petchems.

Also, the US players benefit from much, much lower feedstock costs because they can use cheap US natural gas -- this advantage only becomes more start when Brent oil prices rise, driving up costs in other markets.

So, to make a long story short, I do have an eye

Peter W

3:43

What is your view of Altus Midstream?

Roger Conrad

3:43

It's not one that we currently cover. The focus on serving Apache Corp's Alpine High play in the Delaware Basin is to us less than attractive, given the high level of natural gas in that much hyped play and Apache's recent cutbacks. There's also the fact that no distribution has been declared or paid since the March 29, 2017 IPO. We will be keeping our eye on this name, which is in fact a spin off of Apache. But there are many other midstream names we prefer.

Howard F

3:50

I OWN andx WHAT IS YOUR TAKE

Roger Conrad

3:50

We rate Andeavor a hold at current prices. It's arguably cheap at its current high yield of over 12%. But distribution coverage has also been quite thin in recent quarters, meaning little if any self funding of CAPEX and instead dependence on a hostile equity market. We'll see if they do any better with the Q1 numbers to be released May 8. But investors should take note that after 27 consecutive quarterly distribution increases, management has elected to freeze the payout for the last three. That's often a sign of trouble for MLPs, particularly if they have a large amount of debt coming due as ANDX does ($1.745 bil by end 2021). Bottom line is we like other midstreams.

Frank

3:55

Thoughts, pls, on TK, its MLP's, and Brookfield involvement.

Roger Conrad

3:55

We track TOO and TGP in our MLP/Midstream coverage universe on the EIA website. TOO we've rated sell for sometime and TGP a hold. We believe the Brookfield involvement will be good for Brookfield, which has made a habit of funding companies with good assets and weak balance sheets. But it's involvement is a pretty clear sign of what we've pointed out in our coverage universe table--mainly there's too much capacity in the LNG transport space right now and a lot of other opportunities in the MLP space that are safer and pay bigger yields.

Hans

3:55

Any update on ATGFF

Phil B.

3:56

How do you factor into your stock analyses, if at all, the increasing pressures for divestiture of energy stocks as a result of rising concern regarding climate change?

Elliott Gue

3:56

I don't factor it in much at all. I think a lot of these announcements are more hype than substance -- for example, the Norwegian sovereign wealth fund announces an exit from energy but if you dig a little deeper, you find that it's actually only some sub-sectors (they conveniently reclassified some of their other holdings to avoid selling).

I just don't think this is a large enough source of selling pressure to impact the stocks over the long haul.

More broadly, let's assume that an oil producer falls because a lot of big investors decide to go green and sell their shares. That's not going to stop people from buying oil so the fundamentals remain solid, free cash flow remains intact and the stock falls. I suspect you'd see that addressed through buybacks at low prices.

And, if energy companies can't raise capital because people want to avoid buying the group over social concerns, you'd have less investment in supply and you'd be looking at a major spike in oil prices that would make it pretty tempting

Elliott Gue

3:57

for someone (who doesn't care about these issues enough to pass up cash on the table) to step up and buy.

Roger Conrad

3:58

Their next earnings are May 2. But I think there have been several signs this year that recovery is on track. The one issue I can see impeding recovery would be the Mountain Valley Pipeline delays--which partner NextEra Energy has indicated are likely to extend into next year. But the asset sales have gone well so far, the propane export facility appears on track and existing assets are running well from all indications. We rate Altagas a buy up to USD14 for patient investors.

Charles

4:06

CVE was sold back in 2015. Do you still follow it and have any opinions?

Roger Conrad

4:06

We rate Cenovus a hold currently. We believe the oil sands properties are valuable and that the company is prudently developing them, demonstrated by the fact it expects to be able to fully offset a 7% reduction from initial 2019 output guidance with cost controls and the impact of higher prices. The reduction is the result of Alberta's curtailment policy to reduce a huge crude oil glut resulting from a lack of pipeline capacity out of Canada and a big uplift in oil sands production from site expansions. Unfortunately, it looks like those transportation constraints are going to last well into the next decade. We will continue to track this stock and other Canadian energy producers. But until these transportation constraints become less acute (WCS currently sells for $12 per barrel less than WTI Cushing), we prefer oil producers on this side of the border for the most part.

peter

4:07

What is your view of Altus Midstream?

Roger Conrad

4:07

As I indicated in an earlier answer, we're not fans of Apache Corp or Altus, which basically holds its spun out midstream assets. There's also no dividend at Altus.

Eric

4:09

Thanks for holding these sessions! MMP and MPLX seem to have lagged other high quality midstream stocks since the bottom in late December 2018 and over the past year. Any explanation? For fresh midstream investments, would you add to these two over the others in your focus list? Thanks!

Elliott Gue

4:09

Sure. It's true that both stocks have underperformed year-to-date -- they're both yup around 10% and the Alerian is up 15 to 16%. Over the past year they've also lagged a bit; however, if I go back to the oil market top you get a different picture entirely -- MMP in particular is one of the only MLPs that's generated a positive return since over the past 5 years. So, I think that one reason they've underperformed lately is that they outperformed during the bear market years (in effect since they didn't fall as far, they haven't been able to see as dramatic a recovery as the industry gets up off the mat). We like both names here and consider them among our more conservative picks. However, I'd also keep an eye on some of our favorites that have been big outperformers for us this year -- like CEQP and PAGP -- as we still think there's a bit more gas in the tank.

Mack

4:12

Do you have any thoughts on Altus Midstream (ALTM)? A subsidiary of Apache.

Roger Conrad

4:12

Wow. A lot of questions about Altus today. Just to add a little color to why we don't like it, Apache--which is basically their only source of revenue--announced this week that it's "deferring" 250 mil cubic feet per day from its gross production at Alpine High. That's not good for Altus or for Apache's prospects of landing a high premium takeover offer as Anadarko has and some speculate it will.

Michael L

4:17

Roger, when you made the sell APU call, you suggest moving to Suburban propane, but I'm not clear on how strongly you feel about this new " aggressive" pick. Specifically, how risky is the dividend? How strong is the company (i.e. your general thoughts) Thanks

Roger Conrad

4:17

We'll see how Suburban did in its Fiscal Q2 on or about May 9. But its distribution coverage for the 12 months ended Dec 31 was a very strong 1.34 times, so it's been able to self fund CAPEX and take a bite out of debt, pushing debt to EBITDA to less than 4 times. That was in a quarter where weather was volatile and the company had to manage numerous supply challenges. Propane distributors always have to deal with weather of course. But SPH has had a much better cushion than even APU since its distribution cut in November 2017. It's also a takeover target in this consolidating industry.

Herm

4:18

You have discussed both HAL and SLB. Is there anything new or different for FTI

Elliott Gue

4:18

They've done well with recent subsea order awards -- in fact order intake this year will be near a record. There are some concerns about margins and near term cash flow but historically order intake is the key to performance in the stock (FTI is up more than the market YTD).

Mack

4:19

What are your top three picks right now for both dividend payout growth and price appreciation? Thanks.

Roger Conrad

4:19

I would suggest going down the list of the Actively Managed Portfolio, which we publish in every issue. A couple that stand out to me are Antero Midstream Corp (NYSE: AM) and EnLink Midstream (NYSE: ENLC), both of which yield in the neighborhood of 9%. We also intend to launch a high yield list for EIA in the near future.

Martin

4:22

Do you have any comments on TRP & PBA? While this question is not related to oil, are you able to provide any advice on retail REITs such as SPG and SKT?

Connecting…

Your current subscriptions

None

E-mail Address	Chat Owner	Status	Remove

Enter your email address to be notified when Sherry Roberts hosts a chat