JotCast | Energy & Income Advisor Live Chat December 2019

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Energy & Income Advisor Live Chat December 2019

Roger Conrad

1:59

Seasons greeting and Happy New Year everyone!

2:01

Welcome to our end-year subscribers only Energy and Income Advisor web chat. As always, we welcome all of your questions. Please type them into the box and Elliott and I will answer them in the order received as soon as we can. There is no audio. There will be transcript of all questions and answers available shortly after the chat, posted to the EIA website and with an emailed link to all subscribers.

2:02

Let's start out with some questions and comments we received via email prior to the chat.

Q. Do you have any recommendations for bonds? What about a place to stash my cash while waiting for a great stock pick? Thanks--Larry W.

A. Larry. We've recommended Vanguard Intermediate-Term Tax-Exempt Fund as a parking place for cash in the current environment. The fund carries for all practical purposes no real credit risk, with 9,388 bond holdings at last count--virtually all of which rate at least A and are backed by taxing power of municipalities. Interest rate risk is minimized by the focus on mostly short-term maturities. Worst performance for the fund over the past 10 years was -1.56% in 2013. That was a year when the 10-year Treasury note yield rose by 72.3%--an extreme year for interest rates when the overall bond market lost a lot of ground.

We have recommended individual bonds in recent years when we've thought a company was gaining credit strength. At this point, however, yields are very low--good for issuing companies, bad for investors--and the risk to principal is relatively high

should economic growth pick up next year and push up interest rates, or should it fall and put pressure on weaker credit companies. Overall, it's a bad risk/reward balance and we prefer to keep our parking places as conservative as we can.

2:03

Q. If Chesapeake Energy (NYSE: CHK) were to go bankrupt, will it have much of an impact on either Enterprise Products Partners (NYSE: EPD) or Kinder Morgan (NYSE: KMI)? Do either of them have much exposure to Chesapeake? Thanks.--Alan R.

A. Alan, Enterprise is pretty tied in with the super majors these days, so bankruptcy of a single customer is not really a major concern for investors. They’re also focused for the most part away from the wellhead and on infrastructure that’s tied into global exports of US energy, especially natural gas liquids. That also limits their exposure to producers in general, and they’re finding new ways to grow. The company also provides some pretty detailed credit analysis of counterparties in financials. But the bottom line is they don’t have significant exposure to

Chesapeake.

The same is true of Kinder. That company doesn’t provide the same degree of granularity. But its business is also mostly focused away from the wellhead, which limits exposure to weakened producers like Chesapeake. Kinder also does a lot of business directly with utilities, including a partnership with Southern Company (NYSE: SO) on a major southeastern pipeline system.

As for Chesapeake itself, one good gauge of its potential for filing Chapter 11 is bond prices. At this point, the November 2020 bonds trade at a slight discount to par value after a strong rally this month. That’s a reaction to steps taken to shore up credit lines and to reduce debt by selling assets.

Obviously, this is still a highly leveraged company struggling with a low price environment for its primary product—natural gas—and it’s still possible that things unravel later this year. Bonds further out are priced at significant discounts to par with the January 2025 bonds yielding an elevated 21% to maturity and not rallying as much as closer in debt.

Elliott Gue

2:03

Good afternoon everyone and Happy New Year's Eve.

Roger Conrad

2:03

Bottom line is this is not a name we’re focused on now. And it is wise to question exposure to it for midstream companies. Fortunately, its problems have been well known for some time. So even companies with historically extensive business relationships like Crestwood Equity Partners (NYSE: CEQP) and Williams Companies (NYSE: WMB) have long since taken steps that have strictly limited their risk.

2:04

Q. Gentlemen. Retired...need secure income with prospect for growth. Was thinking of swapping out my Williams Companies (NYSE: WMB) for Enbridge Inc (TSX: ENB, NYSE: ENB). Would think most of the Enbridge merger/restructuring fiasco is behind it. Income is the same. Would give ENB the nod for size and diversity (safety)...perhaps for dividend growth as well. Do I have your blessing for the swap or just stay put? Thanks--David O.

A. We don’t hold either in the Actively Managed Portfolio but we do currently rate Enbridge a buy up to 35 and Williams up to 28. At this point, Enbridge is above that point after a solid end-year rally, while Williams has mostly run in place since August.

Enbridge is larger and somewhat more diversified, operating in the US and Canada and with oil and power assets as well as natural gas. Also, its home market is Canada, so the exchange rate affects the value of its shares as well as its dividend—which is paid in Canadian dollars and then converted to US.

I’ve said before that I believe the Canadian dollar will strengthen the next few years versus the US, in part because its been trading at a depressed value of less than 75 cents. And at least a part of ENB’s gains this month are due to a surge in the loony to over 76 US cents. But this is a factor that will affect returns in ENB shares long-term.

For disclosure purposes, I do personally own ENB, which I held onto following the Spectra Energy merger. I had held Spectra since its spinoff from Duke Energy (NYSE: DUK). My view is the merger of Spectra itself with Enbridge has worked out very well for shareholders of both. The merging in of the partnership units Enbridge Energy Partners, Spectra Energy Partners etc was clearly on terms in favor of Enbridge itself as we said at the time. But that does appear now to be fully absorbed.

2:05

The big issue for Enbridge now is can it get those oil pipelines running into the US built—most importantly the Line 3 project that despite some setbacks still appears to be on track for startup in the next couple years. That’s one reason we haven’t raised the buy target and may not until Q4 earnings come out in mid-February. But I do view ENB as a high quality midstream company.

As for Williams, it too has pipeline projects where the permitting process has stalled. I believe there are fewer real issues here and fewer obstacles to 10 to 15 percent annual dividend growth going forward. And it does trade under our buy target.

I guess the bottom line is both companies appear to be in good shape and we believe their stocks should perform well in 2020—in addition to robust dividend increases.

Q. With its latest acquisition, it appears Brookfield Renewable Partners (TSX: BEP-U, NYSE: BEP) is getting into anything they can buy. In your opinion, has BEP lost its focus? Appears they are becoming a conglomerate with little or know synergies.--Jim N

A. Jim. I think that’s a very valid concern about Brookfield Asset Management (TSX: BAM/A, NYSE: BAM), the general partner of Brookfield Renewable. At this point, BEP appears to be ring-fenced with separate management, as well as debt and ownership structure. But how the parent/GP’s aggressive acquisition policy could affect BEP is always something I look at.

Fortunately, I don’t see any evidence to date that Brookfield Renewable itself is going outside its zone of expertise, as its acquisitions and construction projects to date have remained contracted wind, hydro and solar assets. Any movement outside that would of course be a cause for concern. But my main reason for caution now is simply price—which I think has risen too far too fast. And the shares are effectively a hold at this point.

I would also be cautious on Brookfield Infrastructure Partners (NYSE: BIP), which is the entity in the Brookfield family that announced the acquisition of Cincinnati Bell earlier this month for $2.6 billion. Its operations now range from midstream energy assets, railroads and utilities to communications infrastructure on four continents. And it lacks scale in any of them—not a combination I want to own long-term.

2:06

Q. You have discontinued your Comments feature. This additionally makes it more difficult to access the most recent information you have posted. There needs to be an index of references to individual companies much like you see with a textbook. Keep up the good work. Thanks—John.

A. Thanks for your suggestion. Elliott and I decided any comments we had on individual companies would be better addressed—and noticed—in the text of regular issues of EIA rather than the website tables. There’s still a great deal of information there, though due to website construction issues we’re still having some technical difficulties presenting it. Please bear with us. We will work this out early in the New Year.

Q. Gentlemen: Kindly share my comments with the rest of the participants in today’s web chat.

I am very disappointed with your presentation of your chosen companies on the “High Yield Energy Target List.” None of us readers expects you to have a crystal ball in your stock picks. However, your acknowledged mea culpa on page 15 of your 12/26/19 EIA Issue stating you “could definitely have stood to emphasize the value of reach and asset diversification more to readers…” is underwhelming. You then advise in the next paragraph and previously on page 7 in this issue that Antero Midstream (NYSE: AM), EnLink Midstream LLC (NYSE: ENLC) and Oasis Midstream Partners (NYSE: OMP) “are largely dependent on a single customer in all three cases” and “are most vulnerable.”

I have perused the 6 issues starting with the initial May 20 issue introducing your “High Yield Energy Target List” to the August 9 “Emotions are High” issue. There was no express statement whether such companies on the High Yield Energy Target List were “Conservative”, “Aggressive”, or “Speculative”.
Your May 20 issue emphasized to us readers that your High Yield Energy Target List Companies had “cash flow (that) is better insulated than ever…”; they are “less dependent on hostile capital markets as well”; and “as a result, this is the ideal time to introduce” these companies to us.

2:07

The apparent first reference to risk occurred in your June 19 issue. You advised that we “have an opportunity to buy the vast majority…below target prices…”; “there’s lots of value in this sector but also risk”; and ”not to get spooked out of positions that are currently technically weak but have strong fundamentals. This includes AM and ENLC.”
For those of us who purchased below your target prices on or about May 20 in reliance upon your “ideal time to introduce” AM, ENLC, ENBL and 3 other stocks to us, those purchases have lost 30% at best and 45% at worst.

You’ve said you changed your risk ratings to indicate whether companies in your coverage universes are best suited for “conservative”, “aggressive”, or “speculative” investors, buy I’m not seeing them. Thank you.—Barry J.

A.Thanks Barry. There’s definitely a lot of food for thought here. So the other readers are on the same page, I have corresponded with you at least half a dozen times this year and continue to appreciate your suggestions.

Obviously, we didn’t launch the High Yield Energy Target List with the idea of losing money. And as you point out, two of the 10 selections—Antero and EnLink—are underwater by a bit more than 40 percent, which is a pretty big hit. Also, the average return of the 10 is underwater by around 12 percent.

That is almost exactly the return for the Alerian MLP Index over that time. But again, clearly this is not the result we were expecting.

One of the risks of this business is everything you say is immortalized. That means inevitably, you’re going to go back and read something you wrote that’s truly cringe worthy. You might be surprised, however, that I do stand by everything you’re quoting in your message.

First, I absolutely agree that investors should not get “spooked” out of these positions. About a month ago, for example, we were considering an end-year sale of the two weakest performers, which as you’ve pointed out are Antero and EnLink. We did not make that move and both companies have since announced new arrangements that should help performance greatly in 2020, which in turn has triggered a pretty significant bounce in share prices.

There are still losses. But what we’ve seen also shows there’s substantial leverage as well to a recovery. The key is still that these companies have to prove their resiliency to what we’ve called a major stress test for midstream—and many of their peers (Endangered Dividends List) may not make it.

But what I said about these 10 companies being better insulated from capital markets and in fact meeting all the criteria we post has remained true—as we’ve seen in their numbers and management’s continued guidance. And those are numbers we do present in the High Yield Energy List table in every issue.

I’m not certain why the “MLPs and Midstream” table on the EIA website does not currently show “Risk Ratings” as the “Producers and Drillers” and “International Coverage Universe” now do. The ratings are in the file and I will go into the site and try to fix this after the chat.

I apologize for the confusion. But I do also want to thank you for your suggestion about adding clarity to EIA advice.