JotCast | Energy & Income Advisor Live Chat December 2019

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Energy & Income Advisor Live Chat December 2019

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Elliott Gue

2:42

I don't think XOM's dividend is at risk. The reason that cash flows don't cover the dividend has to do with XOM's capital expenditures on new megaprojects in places like Guyana. Generally, supermajors like XOM go through periods of CAPEX, generally on big projects that require a huge upfront spend and take years to develop but, once complete, can generate steady flows of oil/gas for many years and reliable cash flows with relatively low operating expenses. These projects often have low breakevens (sub $40 or better in many cases). So those CAPEX-intensive phases are followed by a prolonged period of cash flow harvesting. Right now, CVX is more in a "harvesting" phase while XOM is in a period of intense development. It's been a headwind for the stock in recent years but I do think long-term XOM is making the right move as there just aren't enough large-scale projects out there due to come onstream in the next few years to make up for base decline rates on existing projects -- probably not a 2020 or even a 2021

Ben F.

2:47

Good morning again.

Thoughts on CLB and the news today? Dividend and guidance cut.

Does this news change your views on other energy service stocks? SLB?

Elliott Gue

2:47

I covered my take on CLB in response to an earlier question. Generally, I think it's a high quality company facing some stiff industry headwinds right now. They chose to cut their dividend to pay down debt amid this weak industry backdrop. I don't think there's a negative read-through for SLB because SLB's exposure has more international leverage. Also, I suspect that SLB's will remain committed to its dividend payout.

Michael L

2:47

Do you guys have any sense of the extent of the impact the Devon - Dow deal will have on ENLC going forward, or will we have to wait until their January presser. Thanks for the good work for what is now decades for me. Also, thanks for printing and addressing Barry's comments. I don't know Barry, but I get a renewed feeling of confidence in your forthright approach to us, the readers, when you share the inevitable negative comments which will reoccur in this business. Confidence in your collective integrity is paramount for us. Happy New year!

Roger Conrad

2:47

Thanks Michael. We really appreciate the comments, and I promise you it's how we'll always do business.

Regards EnLink/Devon/Dow, the one thing we do know is they'll be developing new acreage with money from a company with deep pockets. That's a pretty good indication that experienced people believe/know there's low cost resource there and that it will add to throughputs. But I think we're going to have to wait for the mid-January call to get meaningful numbers. That's one reason we're still rating EnLink a hold despite this obviously very good news.

Ken in Phoenix

2:53

Roger, a stock you mentioned a long time a go (Cdn Edge days) was INGXF. I made some money, then got out and forgot about it. Looking at the chart, it seems to have broken out. Do you have any opinion on it going forward?

Roger Conrad

2:53

Innergex is basically doing what it has since I used to cover it as an income trust. That is building and occasionally acquiring fully contracted wind, hydropower and solar assets, and steadily increasing its dividend. The company's relatively high level of leverage and focus on expansion caused S&P this month to put its BBB- credit rating on watch for downgrade. But I don't see that as a major threat to growth or cost of capital--and in the meantime it's having no problem finding new power purchase agreements. The only problem with the stock is it trades above my buy target of USD12. But this is still a solid company that's executing.

Victor

2:57

Hello Guys and Happy New Year. Elliott
1) The Commitments of Traders Report of the last two weeks show a rather high long/short ratio. WTI is trading at more than $60, do you see a short term retracement in oil prices?

2) ENLC had a good run in December, do you see more upside potential?

3) I read your 2020 outlook on oil and it was very good and very detailed, thank you. Will PDCE benefit the same way as other producers from higher oil prices?

4) DVN is trading above its 200 day MA. How do you like this one and what is the upside potential from this level?

5) MRO is getting a lot positive media attention, as the company continues to increase their cash flow and the market continues to reward this, where do you see MRO’s next resistance level?

Thank you again and have a wonderful and healthy New Year!

Victor

Elliott Gue

2:57

Thanks Victor and Happy New Year to you as well. The Commitment of Traders' (COT) report has experienced a big swing since early October -- back then the net position in WTI fell below 100,000 contracts and the longs/shorts ratio for managed money traders yielded a huge buy signal for oil. The COT signals are less reliable for calling peaks in oil than they are for troughs in crude; however, when the net position in WTI gets to around 300,000 contracts long and the longs/shorts ratio spikes to 10 to 12 or higher I do think that's a warning sign that oil could be in for a correction. We're not quite there yet but getting closer to that level. From a short-term technical perspective, I think WTI could easily challenge the $63 to $65/bbl level early in 2020. In our Pig vs. Bear trading service we recommended buying oil on October 3rd (oil was in the low $50s) using an ETF and we took half the profits off the table in November. We're looking for a little push higher and will likely recommend taking the rest of th

Elliott Gue

3:00

Looks like part of my answer was cut off there. Basically, what I said is that over the long haul oil and energy stocks are highly correlated; however, over the past 6 to 12 months oil has handily outperformed energy stocks. That's due, in my opinion, to the fact that physical supply and demand move oil prices but sentiment is the big driver in the stock market. Historically however, oil and energy stocks usually become more correlated after divergences like this -- Thus, i think energy stocks could rally even if oil does see a modest correction in the New Year. Most of the producers we cover, for example, appear to be pricing in oil prices closer to $50/bbl and certainyl not $60/bbl+.

3:04

Regarding PDCE: I like their acquisition of SRC Energy due to close in Q1 2020. The company's guidanmce calls for generating $275 million in free cash flow next year at $55 WTI, which is considerable when you consider the market cap of PDCE is $1.6 billion and SRCI is $1 billion. SO, I do like them. I guess the only reason we haven't been more positive is that Colorado is still a puzzling sitiuation for producers.

Sohel

3:04

Hello, Please comment on BP's prospects and dividend safety over the next 2-3 years. Happy New Year.

Roger Conrad

3:04

I think BP's last 10 years are a pretty good example of how resilient the super majors are--it took basically a decade to put the Macondo blowout behind it but the company expects to generate $14 bil plus in free cash flow after CAPEX next year at modest expectations for oil prices, which is enough to cover its dividend by about 1.8 times. I think we'll see the company raise its payout modestly the next 2-3 years while it invests modestly. That said, I like other super majors more including CVX, TOT and RDS. And I think delisting from NYSE is another good reason to look elsewhere.

Elliott Gue

3:07

Regarding Devon: I think the sale of their Barnett play (North Texas gas) is a positive as it skews their oil mix higher and the proceeds have helped them step up their buybacks. Their gas exposure was one reason we haven't been more positive on the stock but I think this deal helps put them back on the radar screen.

jim

3:09

Roger, I want to be comfortable with my portfolio aimed at 6% yield.  I have been stung by great names like BPL, ETP that flipped from recommended to dis-favor.  I recognize that we are battling dis-favor with a sector, and the pendulum is coming our way.  I trust you to know the value inflection points to adjust going forward.

I am currently holding MPLX which you rate buy to 37, which is a lot of room to grow with a yield over 10%.  Are you confident that the dividend and coverage ratio is safe for the next 12 months?  It is one of your most attractive prospects based on yield, and your valuation of buy to 35.

I also hold EPD which you rate A, and say buy at 35, but is trading 15% above your line at 39, and BEP which you were bullish on up to 45, but now is a hold at 46.50.  I particularly like the story of both, but they are trading above the line.  By contrast ET has a higher yield of 9.3%, and is trading 12% under your $15 buy target.  I also have ENB, which has moved 14% above your buy level.  Would

Roger Conrad

3:09

It's been a tough five years certainly. The big issue hanging over MPLX, however, really has nothing to do with performance or business prospects. it's the battle going on at its general partner Marathon Petroleum, where Elliott Management has been pushing management to spinoff the MLP and convert it to corporation. The spinoff looks like bad strategy for Marathon. And neither action is necessarily a negative for MPLX, which has many levers for growth now and superior 1.4X distribution coverage with little leverage pressure. But until there is some resolution of the Marathon situation, the uncertainty is going to hang over the share price--though it will keep paying that yield.

Roger Conrad

3:14

Addressing the other part of your question Jim, Enterprise is actually trading a bit under 28, so is still an excellent buy yielding north of 6%. BEP I think has run too far too fast but is still a very solid company--able to access Brookfield Asset Management resources but ring fenced from it as well. I do think Energy Transfer Partners is a solid buy--I like the acquisition of Semgroup as well and distributions are comfortably covered by nearly 1.9 times, so that 9% plus you see should be safe. There is some uncertainty about a potential strategic review so I count it Aggressive in our rating system. And again midstream is undergoing a stress test now. But I think it and MPLX are excellent choices at these prices.

Elliott Gue

3:15

Regarding MRO: We really like this one. Solid free cash flow prospects even at moderate oil prices and I also like their diversified exposure to plays like the Bakken and Eagleford. Technically speaking, MRO's next resistance level is that 200-day moving average areound $13.50 to $14. Longer term, I'd keep an eye on the April 2019 highs just shy of $19. The beauty of MRO, and the other producers we recomnmend, is that you do NOT need to see $75/bbl oil for them to work -- all they need is for oil to remain in the upper $50s to low $60's generally and to continue executing on their free cash flow strategies. If they can do that many of these names could easily rise 50 to 100% in the next 12 to 18 months.

James

3:16

Apologies if it's been asked...but what is your reaction to the Core Labs guidance and action today?

Elliott Gue

3:16

Hi James, I covered CLB in response to a couple of prior questions. Generally speaking we're holding on to it for now as the sell-off today represents an overreaction to a North America-focused miss.

Sohel

3:18

Do i recall correctly that you changed your view on ET not too long ago. If that is correct could you comment on the reasons and outlook? Thanks.

Roger Conrad

3:18

We turned negative on ET some years ago when it was still Energy Transfer Partners largely because management guidance was consistently sliding from quarter to quarter--and we came to doubt the dividend. As it turned out, the payout was cut as a part of mergers first with Sunoco Logistics and most recently with general partner Energy Transfer Equity. That view shifted after several quarters data made it apparent that these were the adjustments needed to hold in enough cash to make a dent on leverage and fund key projects, such as the Dakota Access Pipeline. Now the company has great operating and financial metrics but faces skeptical investors. We think that makes a great opportunity to buy.

Roger Conrad

3:21

I think the reputational damage may take a while to repair. And we will watch quarterly earnings to make sure the midstream stress test isn't taking a toll.

Tom

3:22

I just saw your comment about BP being delisted. I can't find that in the news on the stock. When is that happening please?

Roger Conrad

3:22

They decided to delist from the NYSE--presumably to save the expense. Shares now trade OTC as BTGOF, and of course they still trade in London at BT/A.

Roger Conrad

3:23

They don't trade as BT on the NYSE though,

Ken in Phoenix

3:25

Last year you had some non energy picks that I researched, bought, and made a bundle on Zoetis. Anything outside your normal remit this year for 2020?

Elliott Gue

3:26

Thanks Ken, glad ZTS worked for you. It was a recommendation from our Deep Dive Investing service (Energy & Income Advisor's Sister publication) though as a matter of full disclosure I should say that we did recently recommend taking profits on it in DDI as the valuations got a little stretched and we feel that ZTS may see some headwinds given the market's recent rotation in favor of more cyclical "value" groups. Over in Deep Dive, we added exposure to some select semiconductor names back in October and November (though some are now back well above our buy recommendation prices) and we've also assembled a position in a number of gold mining stocks that have been performing well lately. I actually have a list of about 2 to 3 dozen more value-oriented stocks I'm looking at for the service as adds early in the New year -- Haven't pulled the trigger on any yet but likely will early in 2020. I can offer some names up if you remind me on next month's chat. Also, we're offering 90-day risk-free trial memberships to

Mack

3:27

Question about your recommending PAGP over PAA. I get that PAGP gets rid of the K-1 headache, but it also means that distribs are taxed as dividends in the year they are reported. Depending on one's tax situation, PAA and the K-1 enable you to defer the tax consequences. Is there any other reason for liking PAGP over PAA. Also, is PAA's business & balance sheet still in good shape? Thanks.

Roger Conrad

3:27

PAGP and PAA are basically two ways to own the same group of assets and operations, so whichever way to own that makes sense to your situation is the one you should own. As for performance, it was a flat year for both as stocks but the company itself had a solid first nine months of 2019, as it oriented its portfolio toward stronger basins like the Permian. And distribution coverage is set to come in at 2.06 times, allowing for self funding and deleveraging. We like Plains no matter how you buy it.

Elliott Gue

3:27

Got cut off there again. What I meant to say is that we do have 90-day risk free trial memberships to Deep Dive open to select readers as a special New Year's promotion (all EIA readers are, of course, elgible) if you're interested in more picks like ZTS.

richard

3:30

I have a question on OXY. I have read your comments in the monthly issues and on previous chats---they are bullish and suggest if OXY executes there will be free cash flow and the dividend now about 8% could come down to say 5% with the stock price about doubling. My question is if things look so positive why are you holding only 45 OXY shares in your managed portfolio--this seems low for a stock that could double

Elliott Gue

3:30

I actually think a lot of the exploration & production companies could see 50% to 100% gains over the next 12 to 18 months if they can execute on their free cash flow strategy and oil prices remain near $60/bbl as we expect. We have recommendations on several in the portfolio -- OXY, CXO, WPX, MRO as examples -- so our overall exposure to this industry sub-group is high. I am also looking to add more producers and recommend boosting exposure to the group in 2020 -- we believe it's one of the best groups to buy early in the cycle.

DragomirP

3:31

Hello Elliot and Roger, Do you have a suggestion other than tax free VWITX to park money in a ROTH or IRA. Thanks.

Roger Conrad

3:31

I realize there's no tax advantage to holding a muni fund in a tax sheltered account. But I would like this one anyway, as munis I believe are one part of the bond market that's undervalued relative to risk, so yields are higher. As for an alternative, I don't have a specific one but any that allow you to get at your money in a reasonable way, pay around 2.5% and have a history of minimal volatility would be solid choices. The key is being able to get at your money.

richard

3:31

I don't know if my question on OXY was sent, but please explain why only 45 shares in your portfolio for a stock that could double with your bullish comments--thanks

Elliott Gue

3:31

Thanks, see my answer just above. Basically, it's just a function of the fact that we recommend multiple producers so, taken together, we have a lot of exposure to the group in the portfolio.

Sohel

3:31

I think BT delisted?

Roger Conrad

3:31

Yes. You can still trade shares over the counter under the symbol BTGOF. And the company is still trading in London, just no longer on the NYSE>

Hans

3:35

What is your valuation of PAA and DKL

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