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Energy & Income Advisor Live Chat February 2019
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AvatarRoger Conrad
2:04
Hi everyone and welcome to the February Energy and Income Advisor subscribers's only chat.
2:06
Before we start, I want to remind everyone that this is a text only chat, there is no audio. There will be a complete transcript of all questions and answers available shortly after the end of this chat. We will continue the chat so long as there are unanswered questions both from the chat and from pre-chat emails we've received.
Carl
2:06
You've talked a lot about AMGP/AM but one concern I have is pipeline take-away capacity for its business. Comments?
AvatarRoger Conrad
2:10
I think that's a very real concern, in light of the success pipeline opponents have been having in the courts recently. The Atlantic Coast Pipeline's developers, for example, may have to take their case to the US Supreme Court in order to win a permit to cross the Appalachian Trail, though there are numerous pipeline crossings in such areas. It's important to remember, however, that there is takeaway capacity in the region and energy is still flowing out. The real constraint for Antero and others is the greater cost of transportation and if that keeps producers from pumping. At this point, it looks like growth of output is slowing at Antero Resources, which directly impacts AM/AMGP. But this is all in the guidance these companies have given and it's still a strong value proposition,
Lee Overton
2:11
i own epd,trp and bp. concerning bp is there another stock that you would recommend that sn't a mlp or would you stay put.
AvatarRoger Conrad
2:15
I think there are a number of attractive midstream and energy companies trading at good prices. The best place to look is the Actively Managed Portfolio in every issue of EIA. Since you seem to be interested primarily in income, check out the high yielding fare we highlighted in the issue we published just before the current one. The important thing is to buy below our target entry points. By the way, we believe this is a time to overweight energy--business fundamentals have turned up, valuations are almost as low as they've been since early 2016 when oil was $26 and change. And they seem to be catching a little momentum--with both the S&P Energy Index and Alerian MLP Index returning around 15% year to date--that is the best start to a year since the bull market began in early 2009.
Herman O
2:15
With tax season here again, I'm awaiting the K-1 from the several MPL's that I own. What other stocks are there that you could recommend that are similar in structure like KMI that do not issue K-1?
AvatarRoger Conrad
2:18
We have a number in the Actively Managed Portfolio. If you're looking at midstream, certainly TransCanada (TRP) and Pembina Pipeline (PBA) are organized as corporations rather than MLPs. The merged company from the AM/AMGP rollup will be a corporation with no K-1 as is I believe the resulting company from the recently closed merger of ENLC/ENLK. Thank you for this question. We will address it more completely in the upcoming issue of EIA.
Carl
2:18
As primarily a refined products transporter in a strong economy, why does MMP struggle to get back above $70 ?
AvatarElliott Gue
2:18
I don't see anything in MMP's latest results that is of great concern. While their EBITDA was a little on the light side and their guidance was conservative, I think that the main driver of this is spot shipments on its BridgeTex and Longhorn pipelines. Basically, when their is a wide differential between WTI priced in West Texas and in Houston that drives demand for spot shipments of crude at high tariff rates, inflating MMPs EBITDA. These differentials were wide at times last year but contracted as oil fell in Q4; today, these differentials have opened up again. Looking beyond that, they covered their 2018 distros 1.26 times and plan to grow their payout by 5% this year maintaining coverage of "at least 1.2 times." So, this remains a conservatively run MLP with steady distro growth potential. The distro yield is below that of your average MLP and MMP's growth rate isn't quite as rapid so, during periods when the sector is running up well, MMP doesn't tend to do as well as the Alerian.
AvatarRoger Conrad
2:20
By the way, Elliott and I continue to believe strongly in the value of the way MLPs pay distributions, especially for taxpayers in higher brackets investing outside of IRAs. There's nothing out there that pays yields so high with so little owed in current taxes. And there's still a step up in cost basis from anything you will to your heirs. Yes the K-1s can be time consuming, but what isn't these days when it comes to filing taxes and that extra effort can mean big savings.
Bud E.
2:21
Is there any information on timing of split for CPLP?
AvatarElliott Gue
2:21
One more thing regarding MMP is that I think you have to view the stock on a longer term basis. For example, over the past 5 years -- a tough period for energy and MLPs as it includes all of the 2014-2017 selloff -- MMP is actually up 11.3% compared to the Alerian down 26%. In fact, MMP has even beaten EPD over this time frame. So, it may lag a bit when the Alerian is in rally mode (some might say it's a little boring and defensive) but over the long haul, it has been one of the best performing MLPs we cover.
AvatarRoger Conrad
2:23
Nothing that recent. CPLP did announce its Q4 earnings at the end of January, which I thought were reasonably promising in terms of operating strength. They're obviously suffering from a weak business environment because of too much capacity but the point of this spinoff/merger is to position the company to weather the cycle. Management stated the merger is "expected" to close by the end of Q1. At that time, Diamond S Shipping will begin trading and we'll get our first indication of what this deal is worth.
MartyR
2:24
will you be able to have the time stamp show up on the transcript?
AvatarRoger Conrad
2:25
I don't have an answer for you at this point but we will check it out.
Dennis Z
2:25
Please give us your current thoughts on PXD.  Thanks
AvatarRoger Conrad
2:28
We've had a buy on Pioneer Natural Resources in the current price range for some time and that remains our recommendation. The stock is of course going to follow oil prices but we see a lot of positives in the strong balance sheet and first mover land position. as well as management's drive to lower costs both operating and for inputs like sand and water. There are some takeaway capacity concerns near term from the Permian Basin that is its heart but we expect these to lessen as new pipeline capacity comes on stream in the next 12 to 18 months. There are probably other producers that offer more upside on a rise in oil but this is a blue chip independent.
Bill F
2:28
which dropped to 0.9x in 4Q 2018.  They issued preferred stock and debt to finance most of their growth projects.  With these new projects, and your outlook for hydrocarbons pricing, what is the likelihood in the near term that they may generate enough Free Cash Flow to cover all expenditures, including new projects, without accessing the capital markets? Thanks
jack
2:29
Looking through your coverage universe I do not see any refinery stocks, or did I just miss them? Probably because they have been in a severe bear mkt. for 6-8 months but I would think stocks like MPC&VLO at least deserve coverage? A few months ago I was attracted to DK for the following reasons: According to  Schwab fwd. PE is 7.6X; According to DK presentation of 12/3/18 EV/EBITDA is 5.0X. At year end DK has minimal debt, and $1.1 billion cash on the balance sheet; They have a $50 million share buyback/quarter in place, and have been increasing their dividend. They own 63.4% of their MLP DKL which has been increasing their cash distribution. about 10%/year. You have a BUY on DKL. I have a large position in DK@$32.00. What, if anything. am I missing on DK?
AvatarElliott Gue
2:29
We recommended some of the refiners a few years back but we have been bearish on the group more recently. The thing to remember about refiners is that they do NOT benefit from rising oil prices. Oil is a raw material for refiners so when the price goes up, their feedstock costs increase. In contrast, when the price of oil falls that lowers their costs. Instead, refiners are basically manufacturers and they profit from the spread between the cost of oil and the value of the gasoline/diesel they sell. I think refining margins will moderate generally going forward as the price of oil rises and (as new pipelines come onstream in the second half) regional basis differentials in North America contract. falling heavy oil supply (Venezuela and Canada) is another headache for the US refiners as they already are processing a lot of sweet crude (and ultralight shale oil). Refining MLPs like DKL don't have exposure to falling refining margins but the refiners themselves do. Not our favorite group here.
AvatarRoger Conrad
2:29
Bill, the question was cut off so I'm not sure what stock you're referring to. Can you re-enter it?
DRG
2:29
Financial markets are supposedly forward looking, why then is the market penalizing companies like EPD, MMP and MPLX who have delivered increasing DCF but have pared down distribution growth to fund their ambitious growth plans instead of equity financing. These projects will potentially drive future DCF growth. Are we missing something here that is making the markets penalize these great mid-stream players.  If not, do you think now is an opportunity to back up the track on these three for long term capital appreciation while enjoying 6% plus yield.  Your thoughts on each of these stocks?
AvatarRoger Conrad
2:31
I think all three of those are strong players and are the kind of names that investors will come back to as they revisit the MLP sector. I think we are well into the business recovery for the MLPs and midstreams that survived the downturn in the cycle. I think valuations are certainly very attractive and as I pointed out in answering an earlier question, I think there's some momentum building for MLPs in general.
2:34
The biggest problem for MLPs right now is investor sentiment--I think a lot of people just gave up when the FERC issued that ruling (even though they basically vacated it later) last spring on regulated pipeline rates, and when we started seeing some of the GP rollups. Regards your statement markets are always forward looking, I think that's true, but would add the caveat that investors typically are looking ahead through a lens that can't help but be clouded by past experience. All of those MLP dividend cuts are still a quite raw memory.
Barrgold
2:35
Do you like the etf USAI?  Thanks!
AvatarElliott Gue
2:35
Sure, no real change on our outlook for crude. In short, we remain bullish and believe we'll see a continued recovery. The Brent futures curve is now solidly back into backwardation (bullish) and the supply/demand balance is tightening due to OPEC production cuts, and a collapse in Venezuelan output. I think mid $60s for WTI; mid-70s for Brent is a reasonable target in the first half of the year. We continue to like OXY...As we explained in the most recent issue of Energy & Income Advisor, these big producers are remaining disciplined. Basically, they're focused on drilling to be profitable in the $45 to $50+/bbl range and then committing to returning any free cash flow generated due to prices above that range in the form of dividends or share buybacks. Shell is a solid supermajor with a particular expertise in LNG developments and deepwater. Company had a strong Q4 earnings report as well and that 6% yield is pretty attractive in the current environment.
aer
2:35
Updates on your outlook on oil prices?  Views on OXY and Royal Dutch as well please.  Thank you.
AvatarElliott Gue
2:36
Sorry, please see my answer above the question...
AvatarRoger Conrad
2:37
USAI looks interesting and I like the portfolio they hold. Two problems: I would rather hold the individual stocks I like within it and it's not very big at $12.2 million market capitalization, which could be a liquidity challenge at some point.
Mack
2:38
Is EPD's $2.0B stock buyback large enough to be significant, or is it mainly window dressing?
AvatarRoger Conrad
2:41
I think EPD's stock buyback is significant for several reasons. First and most important, it shows the MLP is generating a ton of cash over and above what it needs for dividends, debt service and funding the equity portion of CAPEX. They have a great deal of financial flexibility in other words that the market isn't giving them credit for. Second, while $2 bil is only about 3% of $61 bil market capitalization, that 3% does represent a lot of cash distributions EPD won't have to pay out going forward, which will increase its cash pile. Third, it's a statement from management that they view the stock as undervalued. I generally favor dividend growth and debt reduction over stock buybacks but this is an encouraging move.
Mack
2:48
What will it take to get SHLX onto the Focus List or in the Active Portfolio?
AvatarRoger Conrad
2:48
We're in the middle of a full-on review of the MLPs in the coverage universe in light of calendar Q4 earnings and guidance calls. And SHLX is definitely one we're interested in. That said, Q4 results were not as impressive as what we've seen at other MLPs in the Actively Managed Portfolio, with a sequential decline in DCF on lower volumes at two systems. Coverage is decent at 1.2 times and debt to EBITDA is low at 2.9 times. But what we don't know is what Royal Dutch Shell eventually plans to do with this MLP. The value proposition of a 9% yield backed by some solid assets is attractive on its own, even if distribution growth is rolled back to low to mid single digits in 2020. But to raise our recommendation again, I think we need to see management put down some markers past 2019 in terms of drop downs, dividend policy etc.
Lee
2:51
Please share your current opinion of SLB and HAL
AvatarElliott Gue
2:51
We actually covered SLB in the last issue of Energy & Income Advisor and the bottom line is that we still like the stock and believe it's the best of breed services firm trading just off multi-decade valuation lows. In the short run, the company is taking a very conservative approach toward spending, which means the 4.5% yield is safe and the company will likely generate additional free cash flow for buybacks. In addition, SLB specializes in very advanced "high tech" services aimed at maximizing recovery rates from wells in a cost effective manner. I think this core competency is what's truly in demand as producers enter a new spending cycle in the next 1 or 2 years. In the short run, the stock fell in Q4 with oil on the view that this decline in oil prices delayed a new spending cycle. While that's probably true, I think there will be a new spending cycle because most global producers just aren't replacing their reserves and that will have to change.
2:52
HAL is my second favorite. I think that near term, their North American business has slowed sharply due to lower oil price and as producers wait for new pipeline capacity. However, eventually producers are going to need to fracture all the wells they've drilled in the past 12 to 24 months and HAL will benefit.
Alok
2:52
APU is still treading water under $30. Please give us your current take. I am in at 36$, should we continue to hold?
AvatarRoger Conrad
2:52
The issue with Amerigas Partners really hasn't changed the past few quarters. The propane distributor posted a very strong FY2019 Q1 (end Dec 31), as it navigated volatile weather and wholesale prices to boost revenues and margins. And adjusted EBITDA on a rolling 12-month basis again covered the payout plus all CAPEX, taxes and debt interest. That's a pretty solid affirmation of its business plan. What we won't know until April is the result of GP UGI's "strategic review" and whether that includes a roll up merger as some are now speculating. We've re-instated a buy target at 30, as we think even a roll up will fetch more than that. But until there's clarity here, APU is going to trade in a tight range.
Frank
2:59
Buy limit on VET?
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