JotCast | Energy & Income Advisor Live Chat February 2019

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Energy & Income Advisor Live Chat February 2019

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Roger Conrad

2:59

We've had a buy target on Vermilion Energy at a much higher level than it has traded recently. Full Q4 earnings aren't due out until February 28 before the open. But judging from business developments like the closing of the Corrib transaction in late December and the fact that it sells most of its energy outside North America, I expect a stable result--which is a pretty stark contrast to the meltdown in other Canada-based producers that have suffered from staggering price differentials caused by a transportation capacity shortage. If one wanted to set a buy limit order at a Dream Buy price, I would use a price of around $20. But I want to see Q4 results before I make too strong a recommendation on this one.

DRG

3:03

What would be your current top picks on the E&Ps ? Additionally, your take on OXY and APC.

Elliott Gue

3:03

We have 5 E&Ps in the Actively Managed Portfolio: WPX, MRO, OXY, CXO and APC. The XOP (which I use as a sort of proxy for the group's performance) is down pretty close to 30% since the end of Q3 2018. The market seems to be favoring more defensive names that have breakevens around $50/bbl or lower and can return capital to shareholders in rising oil price environments. OXY and MRO, which I wrote about quite a lot in the last issue of Energy & Income Advisor, are two examples of names that fit the bill. CXO is another one that's a high quality producer that I believe overreacted to its Q4 earnings number. I think APC is an opportunity here but the "Colorado Question" I highlighted in the last issue is a risk near-term. WPX is a smaller name and, therefore, out of favor in the current environment but I think it's a quality producer that will attract more interest as oil prices continue to rise.

Alok

3:04

SHLX: Distro was raised as expected; Except for yield, Stock has no life in it. Keep holding?

Roger Conrad

3:04

I think the big question with SHLX as I indicated earlier in the chat is when management and the general partner are going to set some real long-term guidance. I'm encouraged management still expects a double-digit distribution increase for 2019, which will take the yield pretty close to 10% based on the current price. That alone is an attractive value proposition. But I think what the market is looking for is clarification for 2020 and beyond on the GP's intention, what drop downs we can expect, what organic CAPEX we can expect and ultimately how much distribution growth will slow. We may upgrade SHLX to a buy again based on safe dividend alone. But that's what we really want to see before getting bullish again.

Elliott Gue

3:09

I don't think President Trump's tweets will have a long-term impact on oil prices. Supply and demand drive oil and I think that balance is tightening faster than many think especially with the chaos underway in Venezuela. Also, while I certainly think that efforts to oust Maduro and end the nation's ill-fated "21st Century Socialism" esperiement make sense, don't expect Venezuelan oil production to recover quickly after Maduro leaves office. It will take many years and many billions of dollars to correct years of insane mismanagement of Venezuela's oil wealth by Maduro and Chavez. US-China trade talks will be positive for oil prices as a successful conclusion would tend to be bullish for the US, Chinese and global economies which supports demand. I covered WPX above a bit -- I think that the problem there is just that it's a small company in an out of favor industry group. I think WPX will rally if oil continues to rise as I expect.

Herm

3:09

Can you comment on WPX which seems to be weak lately. Is there anything we are missing. Pres. Trump tweets that he wants lower oil prices but if a deal is reached for the US-CHINA trade talks, how will that effect energy stocks?

Elliott Gue

3:09

My fault there again...my answer was posted before the question...

Alok

3:10

With CXO down following earnings release; is it a good value proposition near $ 108?

Elliott Gue

3:10

Basically, yes. CXO is a high quality producer with a low breakeven cost and the capacity to generate significant cash flow in coming years. Management is growing oil production while spending less capital -- over time, I expect capital efficiency to drive upside.

Mack

3:12

Has anything changed with DKL or HESM in the last qtr (or so) that would make you change your recommendation on these MLPs?

Roger Conrad

3:12

Delek raised its distribution by another 2 cents per quarter per unit in late January. Hess delivered a similar boost percentage wise around the same time. The underlying businesses of these MLPs still appears to be quite solid. Hess covered distributions by 1.15 times, and affirmed a long-run growth target of 15% for distributions on asset expansion and higher volumes. Delek has 1.19 times 2018 coverage and debt to EBITDA of 4.1 times also on asset growth and strong facilities performance. Bottom line is nothing has changed in our recommendation of either MLP. We do note that DKL's high yield makes it more difficult to issue equity, which may eventually curb upside. But 10% is a pretty solid value proposition on its own, even if distribution growth tapers off. And there's no debt due until 2023, with $660 mil available in credit lines.

Dipak

3:22

Your views on the prospect of TRGP and NBLX please

Elliott Gue

3:22

We actually just sold NBLX from the Active Portfolio because of the Colorado overhang...Basically, we just aren't sure what Colorado's governor and legislature are going to do regarding energy regulations. I suspect they won't go "extreme" and ban most new drilling but the governor has campaigned on an environmental platform and pretty aggressive drilling regs in years past so we think that the rally in NBLX this year represents a good opportunity to step aside.

Roger Conrad

3:28

I have answers to a few pre-chat questions at this time.

Q. Dear Roger. I just sent you a question about taxation of Canadian stocks. I neglected to mention that the two in question are REITs: Canadian Apartment (CDPYF) and Riocan Real Estate (RIOCF). Thanks.—Lowell R.

3:29

A. Dividends paid by Canadian stocks to US investors are withheld at a 15% rate by Canadian authorities. US investors can file to recoup the withholding by filing a Form 1116 with their US taxes. Canadian dividends are not supposed to be withheld from US IRAs and other tax advantaged accounts, though I’ve found in practice many brokerages either can’t or won’t file the necessary paperwork to get this done. It’s also true that some brokerages insist that 25% be withheld, which is what residents of many other countries (not the US) are charged. Making sure this doesn’t happen to you may also involve calling someone. But if you have a sizeable position, it will be worth it. What I can say is both of these Canadian REITs have been well worth holding over the years despite the tax treatment. Even in the face of a falling Canadian dollar, Canadian Apartment earned 18.5% annually compounded over the last five years. RioCan came in at only about 1%, but since early 2016 it’s returned a solid 12 percent compounded.

3:40

Q. Is there a symbol for natural gas to follow each day? Isn't it quoted in BTUs and is there an oil to gas calculation?—Mike C.

A. If you don’t have access to commodity futures prices—Natural Gas can be tracked NG1 on Bloomberg—the next best thing is U.S. Natural Gas Fund LP (NYSE: UNG). The fund’s objective is for its net asset value to track the price of natural gas delivered to the Henry Hub in Louisiana, which is the commonly accepted benchmark price for North American natural gas. I would caution you, however, that because of varying conditions for transportation, prices for natural gas can vary wildly, even within the same state. Florida Gas Transmission Zone 3, for example, recently traded right in line with Henry Hub, while Zone 2 sold for a 23 cent discount. The widest discount is at Alberta’s AECO Hub, where gas recently traded as much as $1.50 per gigajoule less than Henry Hub.

As far as an oil to gas calculation goes, based on energy content the common calculation is oil should be priced at 6 times gas. But again in practice, this relationship almost never holds. With West Texas Intermediate at Cushing, Oklahoma priced at $55.47 a barrel, Henry Hub should be at over $9 per thousand cubic foot, and it’s currently at $2.84.

mariiyn

3:45

just checking in..what is your opinion on JKS as it relates to agreement with NEE/NEP?

Roger Conrad

3:45

I think the deal to basically locate a factory adjacent to a major buyer like NextEra was a major coup for JinkoSolar. And I think the company has other advantages over rival solar components producers as well, including being based in east Asia where solar demand is explosive. My view is this is very much a scale business where the players are locked in a race to the bottom in terms of price, even as customers demand greater efficiency. Jinko should emerge as one of the winners. My problem with stocks in this sector is they often get treated like high tech royalty in terms of valuation, when they really should be viewed as manufacturers locked in cutthroat competition. I'd rather own the adopters like NextEra, which win from lower prices and greater efficiency.

Charlie

3:48

Any update on Peyto which seems to be recovering its price a bit and ENBL which is still mired down in the $15 range?

Roger Conrad

3:48

I mentioned the price of natural gas at the AECO hub in Alberta in answering an earlier question in the chat. That really sums up Peyto's problem now--big price differentials due to inadequate takeaway capacity that have cut deeply into margins, despite management's legendary success reducing costs and especially cash costs per BOE. Everyone knows this company will make it and that enough capacity will eventually be built to haul away this very cheap gas. The problem as Peyto stated in its 3-year strategic plan is it won't happen any time soon and until then survival is really all we can expect for the best in class Canadians. I think eventually Peyto gets interesting again but we see better opportunities this year.

4:13

Q. Gentlemen: Retired...need income. Would love to own a water utility, but they just don’t pay. Given the absolute necessity of copious amounts of water by the gas frackers, might the midstream gas producers become “surrogate water stocks,” as you folks have been alluding to? What are your suggestions if so? NBLX? I already own KMI so I’m holding onto it? EQM vs ETRN? AMGP?. Thanks—David O.

4:14

A. The former CEO of Aqua America Nick DeBenedictis had a saying that investor owned water utilities were basically Wall Street’s equivalent of collector cars. Mainly, there were so few of any size that they couldn’t help be traded at what would for other utilities be extremely high valuations. That’s definitely the case as we enter year 11 of this bull market in stocks and in view of the sector’s merger activity, though I would argue Aqua America’s (NYSE: WTR) many strengths make it a strong buy on any dip to the low 30s. I track all US water utilities in Conrad’s Utility Investor. But I think you are onto something regards companies involved in the frac water business.

The traditional water cycle for shale drilling has been that companies use water that’s onsite, and then haul the wastewater away in trucks to disposal “wells.” As wells have grown larger, fresh water has been trucked or piped in from other sources. This process has become increasingly expensive on both ends the bigger shale wells have been developed, as well as triggered environmental consequences such as earthquakes triggered by disposal wells, road damage from truck traffic. By building facilities to recycle the frac water, companies can cut water procurement and disposal costs up to 70 cents on the dollar using best available technology.

The two ways to play are technology companies like Veolia Environnement (Paris: VIE, OTC: VEOEY), which has built a recycling facility for Antero Midstream Partners (NYSE: AM), soon to be merged into Antero Midstream GP (NYSE: AMGP). The other way is with the midstream companies that own and operate these facilities like Antero. EQM Midstream Partners (NYSE: EQM) and its general partner Equitrans (NYSE: ETRN) are also entrants in this business. Water is a somewhat larger business for Antero at this point. But I think any company involved with gathering and processing in a big way is a potential entrant. Look for more on this question in a future EIA. In the meantime, AMGP is a favored recommendation in the Actively Managed EIA Portfolio.

Charlie

4:22

Thanks, Roger...and what about ENBL and its price staying down around $15?

Roger Conrad

4:22

Sorry, I guess I had so much to say on Peyto I left out Enable. I see two basic issues holding ENBL in a relatively narrow trading range at this point. First, despite very strong Q4 results, management is not raising the distribution from the 31.8 cents per quarter where it's been frozen since November 2015. That of course means more cash available to fund capital projects, which are exciting particularly in the SCOOP/STACK of central Oklahoma. But with 2018 coverage of 1.38 times and management making great progress strengthening the balance sheet, I think people are wondering if ever they'll be comfortable enough to reward us with a raise. The second reason for being rangebound is 50% general partner Centerpoint is still not being clear with its intentions for its 53.98% common equity stake. Until they are, I would look for Enable to trade at a discount to the best in class MLPs, though it looks to keep shining as a business.

4:26

One other point. During Enable's Q4 call, the CFO John Laws was asked about the situation with Centerpoint. He responded by saying "we probably have more clarity from Centerpoint than we've had in a while," and that the GP had apparently ruled out selling down Enable shares to permanently fund its acquisition of utility Vectren. That in itself is a good sign as it should eliminate short-term pressure on Enable's unit price at least for that reason. Until Centerpoint makes its intentions clear, I think the uncertainty is going to hang over Enable. But that said, I think it is attractive for long-term minded investors--and you get paid pretty nicely to wait with the 8.5% yield.

Jon

4:34

Hi guys, thanks for the discussion. Can you comment on Landmark? They seem to be re-structuring the business, selling off a bunch of assets into a joint venture, moving away from sponsored dropdowns, and now focusing on their FlexGrid solution for high density wireless. Seems pretty early in the company's history to be changing up the plan so significantly. Also, is their FlexGrid platform going to provide the same economies that putting up a single tower did for the tower companies? Thanks.

Roger Conrad

4:34

I think what Landmark is doing should be good for its business long-term, and in fact is a long overdue response to this partnership's inability to raise equity capital on economic terms in recent years. I think the joint venture with Brookfield ensures there will be capital to keep growth by acquisitions going, though the rate of return for Landmark may not be what it would have been doing deals alone. I think the -16% sequential revenue decline in Q4 from Q3 as the result of putting assets into the joint venture will strain cash flow available to pay distributions. It's possible that can be handled by simply continuing to freeze the distribution, as distributable cash flow was actually higher by 18.3% from a year ago. What keeps me from being more bullish right now is that this is a major strategic shift, and as recently as last year's MLPA conference in May, the CEO was assuring me in person that results would back a 10% distribution increase last year. Again, the decision to freeze was I think justified

4:37

and needed. But I want to see some follow through on this plan this year. I don't know the answer to the FlexGrid question but it's a good one and seems to fit the needs of a 5-G world. But the further they go from their core competency of owning leases under fixed assets, the more they're going to be competing potentially with much larger companies with better capitalization. Also, management's protests to the contrary, I'm not sure they wouldn't be a loser if Sprint is allowed to merge with T-Mobile USA, as those two together will be strongly incentivized to slash costs.

4:45

Pat, we definitely look at EVs as a potential game changer--but one that at this point where proponents' promises still greatly exceed anything on the ground. My strong belief is China is going to change the economics of batteries the way they have solar components, by ramping up production and driving efficiency gains. But we are still a long way from EVs being truly competitive, especially when you consider the lack of real charging infrastructure that would be attractive to consumers. I think there's a lot of money and effort going in this direction, which makes it more likely. But I think you also have to consider that when we talk about use of gasoline by automobiles there are really two factors to consider. One is that EVs as a percentage of new car sales are likely to rise in coming years. The other is the number of conventional vehicles on the road is still rising, and very likely will continue to even if and when EVs hit 40% of new sales. That's where demand for gasoline lives.

4:47

Certainly a lot can happen here. That's why we watch the numbers. But at this point, there are a lot of other factors affecting the price of oil in a much greater way than EVs on the road. As for electric utilities, I think their real skin in the game is getting more charging stations into rate base, rather than an increase in electricity demand. In fact, companies are likely to look for ways to accommodate more EVs while minimizing incremental demand--that's the most cost effective way to raise earnings and dividends. My favorite play in that area is Edison International (NYSE: EIX), which I track in CUI.

Pat Robins

4:47

wanted to request that you take another look at the likely impact of a more rapid of EVs than you assumed a year or so ago. With VW committing to a complete changeover in 5-6 years and with countries like Norway getting ready to ban the sale of anything other than EVs within 5 years, and China threatening similar top down edicts, what would the oil impact be if the market became say 40% EVs globally by 2025?. And is this seriously bullish for electric utilities? Thanks.

Roger Conrad

4:48

Sorry to post the answer before the question on that one.

4:50

Q. What are your thoughts on Landmark now that they have reported on Q4 2018. I noted they said they aren’t pursuing drop downs from the parent, but looking for direct investments at a higher cap rate. Appreciate your thoughts.--Michael L.

A. I hope I answered your question earlier in the chat. Bottom line is this is a big shift for them. It has potential implications for cash flow in 2019, and by extension the distribution and I want to see more results before I get comfortable again with this name.

Hans

5:00

I still have NBR, I know you had it a sell a long time ago, is it worthwhile to hold on or sell it now and put the money into a stock in the managed portfolio

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