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

5:00

Yes, the Actively Managed Portfolio is where we believe EIA readers should be invested now. At least NBR has bounced a bit since the end of the year but things still seem to be going in the wrong direction here. I don't think the dividend cut is that big a deal as it really wasn't that important to the valuation. But the fact they cut the payout so steeply (-83.3%) and still had their credit rating cut by Fitch (BB-) is I think a good sign better values lie elsewhere. Incidentally, you're far from the only investor caught out in Nabors--currently 18 analysts tracked by Bloomberg still rate it buy--most for the past two years--with only 7 holds and one sell.

Jim N

5:05

Do you have any recent news on JONE? What is the chances of survival? Thanks.

Roger Conrad

5:05

Jones was expected report its Q4 earnings today but I expect we won't see numbers until well into next month assuming the company doesn't file Chapter 11. The bonds of April 2022 currently yield 132% to maturity and are priced at 9 cents on the dollar. That's a pretty good sign the bond market expects a bankruptcy that's not going to leave much if anything for common shareholders. There's still an analyst at Stifel who has a $1 buy target on JONE, but his return on the stock has been -97.83%. We still believe Jones was a good shot at one time--there were promising assets and it looked like financing to develop. But at this point there are a lot better places for your energy dollar.

Michael L

5:13

I would like your thoughts on some specific comments made during NBLX's conference call. Their position seems to be that they are allowing their sponsor, Noble, to work with Colorado politicians. It appears they are staying out of the discussions. From an operational standpoint, however, they seem to be saying that they are going to restrict their drilling to Weld County, where they already have 400 permits that would "provide many years of drilling along with the secure exploration window". My question is if you have any idea if the 400 permits could be revoked by the state government should a more restrictive law be enacted? These guys were, perhaps intentionally, pretty vague. If there was a comfort level that already issued permits could not be revoked, that would seem to go a long way toward resolving the basic issue with this midstream. Look forward to hearing your thoughts.

Elliott Gue

5:13

I understand that Noble is working with Colorado politicians. Interestingly, on their own conference call APC stated that they know no more about what Colorado plans to do than what's reported in the media. I honestly don't know whether Colorado can revoke already-issued permits; my guess is that would result in a legal challenge. However, even if they do not revoke any existing permits, draconian new regulations aimed at the industry would result in a significant decline in drilling activity and produced volumes in the Niobrara and that would, in turn, spell less volumes moving through NBLX infrastructure. Even if they could continue drilling for another 5 years on existing permits, that's going to reduce the value of midstream assets in the State, which often have a life expectancy in the 30+ year range. It's true that NBL/NBLX have Permian exposure also but this would likely result in a significant decline in both stocks.

Walter

5:14

Any comments on the weakness today in ETRN and EQM? Look like solid investments at these prices.

Roger Conrad

5:14

Prices of both EQM and ETRN are reacting to news this week on the Atlantic Coast Pipeline being built by consortium led by Dominion Energy and including Duke Energy and Southern Company. A US Court of Appeals ruled the US Forest Service lacks the jurisdiction to grant a permit for the pipeline to cross national parkland, which according to the ruling would require an act of Congress. Dominion the lead developer now plans to file an appeal to the US Supreme Court and stated in a press release today that it still expected to resume work on the pipeline in Q3 2019. The case directly impacts the Mountain Valley Pipeline being developed by EQM/ETRN, also in a consortium. Unless the ACP appeal is successful, the 70% completed MVP could be effectively blocked on the same grounds. We continue to believe both projects will eventually go through as they remain in heavy demand as US electric utilities move from coal to natural gas fired energy. But these are clouds hanging over these stocks until there's more clarity.

Elliott Gue

5:16

I do not think CO is going to go the "extreme" route because that would result in a significant drop in tax revenues. Also, my understanding is that a significant percentage of mineral rights in the State are owned by older, retired people who purchased these rights for income. Obviously, that's a key voting block (of people who tend to actually vote) that the governor would not be keen to annoy. On the other hand, there has got to be at least a small possibility that they will take regs too far -- after all, 3 years ago, Governor Polis was literally campaigning in favor of a referendum that would have ended 75%+ of all drilling in the State. So, just a lot of moving parts and a lot of State-level politics underway here...Something we'd rather step away from for now.

Pablo

5:27

With APU paying a 13% distribution why would UGI do anything other than a merger rollup?

Roger Conrad

5:27

For one thing, Amerigas has been around since April 1995 as an MLP affiliate of UGI. Over that time MLPs' appeal has waxed and waned, and management has been able to use that to maximum advantage building the leading propane distribution franchise in the US. Current management at UGI is relatively new, coming in in January 2016 and so may have a different view. We'll see what they say in April when they conclude the strategic review. In the meantime, as I noted answering an earlier question in that chat, APU is producing cash flow to cover the sum of distributions plus capital spending and has no debt maturities until 2022, so high yield notwithstanding there's no imminent market reason to roll-up. I would say, however, that a roll-up need not be a bad thing for APU shareholders. If UGI wants to buy it in, it's going to have to make an offer worth taking.

Jon

5:32

Another one if you have a chance. What are your thoughts on Keyera. Stock hasn't really come back. Can they succeed in a world where Canadian energy is bottled up and the U.S. supply increases?

Roger Conrad

5:32

Keyera's numbers are fine--14% higher distributable cash flow per share in 2018 is quite an achievement with these business conditions. The company brought new assets on stream in liquids infrastructure that raised margin and it's doing a lot right playing volatility in the marketing unit. Debt to EBITDA is just 2.6 times and the payout ratio is just 56% for 2018, and 47% for Q4. Bottom line is the franchise is solid so not much to worry about regards the dividend and there's likely an increase ahead for September. I also see the stock has broken above its 100 day MA, which though declining marks a big move from the late December low. I think this is a stock that's going to take patience but it's a survivor with promise in Canadian energy.

marty l

5:38

Hi Roger and Elliott. as, always, thanks for your insights. Could you elaborate a bit more on BPL? In the most recent issue, you indicated that it would be added to the endangered dividend/distro list, but it didn't actually get on the chart. What do you think the potential cut might be and what is the risk level? Thanks. Marty

Roger Conrad

5:38

Hi Marty. I was just getting to the questions you emailed in. I believe Elliott earlier provided a pretty extensive answer on MMP, so I'll keep my comments on BPL, KMI and ENLC, which you asked about. Regards BPL, I think they cut enough from the distribution to maintain the current rate, and they should have enough to fund most CAPEX and strengthen the balance sheet this year. What bothered me in the Q4 results released this month is there are still some substantial areas of weakness in the underlying business even with the asset sales, particularly in storage. The company also postponed what looked like one of their best projects. And there still appears to be no consequences for management after selling VTTI for such a big loss less than two years after buying it. Again, I don't see a lot of immediate risk here and I'd be tempted to elevate to a buy on a dip back to the mid to high 20s. But this outfit's growth prospects are unexciting at best and again it's still the same management that fumbled.

John

5:53

I'm interested in your opinion of Chesapeake Energy (CHK). I know it is not in your Coverage Universe and in general you have not been particularly bullish on natural gas E&Ps, but I'm wondering if you think that their situation (with the acquisition of Wildhorse) might finally be changing for the better.

Elliott Gue

5:53

I just don't think we're going to see much upside for natgas for years to come. This winter, we had the lowest storage on a seasonal basis in 15 years, then we got some cold weather in January and, yet, gas only managed a short-term trading rally with no sustained upside. Good for a trade in gas or an ETF like UNG perhaps but the fact that gas is trading back under $2.80 in midwinter with storage so far under average just tells me that this market faces chronic oversupply for years to come. That's not good news for gas-focused E&Ps like CHK or, in fact, E&Ps with a lot of gas production growth in the pipeline (pardon the pun) like APA.

Roger Conrad

5:57

Marty to finish your question, I think the situation is about 180 degrees opposite with Kinder. They have affirmed 25% dividend growth for both 2019 and 2020 for good reason--they are self funding growth of very secure fee-based assets, mainly natural gas pipelines. That's enabled them to deleverage well ahead of schedule, which recently resulted in having their credit rating raised to BBB. I think they're going to have continue posting strong results to win over investors. But the analyst community tracked by Bloomberg is now 19 buys, 3 holds and 1 sell and insiders have been net buyers the last six months. I think this stock will break out over our buy target of 22 the next six months. I also think EnLink Midstream is a good choice post merger with ENLK. Management has laid out a plan for modest and low risk growth in the 9.4% dividend the next few years and I think that will eventually give us some capital gains as well.

Michael L

6:04

Have either of you had a chance to look at Oneok's numbers which they filed yesterday? If so, would like your thoughts. It doesn't look nearly as bad to me as today's trading suggests.

Roger Conrad

6:04

I don't see any reason to change our buy target on OKE from under 65 based on the numbers. Certainly, 23% higher EBITDA and 1.37 times distribution coverage are no disaster, nor is a 16% lift in natural gas volumes and 12% more NGL volumes processed. I think the reaction was mainly to a more modest growth projection for this year of 6% to midpoint EBITDA. In my view, that leaves a lot of room for beating and maybe raising guidance. But in any case, this company seems to be in the right places doing the right things to continue growing. And with 80% of NGLs, 85% of gathering/processing and 95% of gas pipelines fee-based, this is a company that's dramatically reduced exposure to the commodity price cycle and is squarely positioned to profit from increased US production. The company also guided to 20% higher EBITDA for 2020 over 2019 based on $4.4 bil capital projects to go into service this year. In any case, it's back below our buy target of 65 at least for a day.

marty l

6:05

Hi, sent in a few questions before the chat, but now that I'm on line, I'll resubmit in case they didn't get to you ...

I use my allocation to midstream MLPs for income and income growth (total return/appreciation is secondary). Now that BPL has recovered a bit recently, I will be exiting and looking for a replacement. KMI is too low of a yield for my objectives. Which MLP do you think might have the best balance between "BPL like yield" and "EPD like quality/potential" ... perhaps ENLC? (I already have full allocations to EPD, MMP, MPLX and WES).
Thanks!

Roger Conrad

6:07

Thanks Marty. I hope we've been able to answer these to your satisfaction. If not, please drop us a line at service@capitalisttimes.com. But summing up, we view KMI and ENLC as good additions to the four midstream companies you name here. And they're also in the Actively Managed Portfolio.

Hans

6:16

Roger, Soho just dropped 11% what is happening to this one.

Roger Conrad

6:16

Sotherly Hotels announced earnings today for Q4, so this selling is a reaction to what they announced. However, I would caution against drawing too many conclusions about what this selloff means. As we've seen before, it doesn't take a lot to move this stock up and down. And it was trading well above our buy target of 7 before today as well. I thought the numbers were generally solid, RevPAR (revenue per available unit) was up 6% on 3.8% improved occupancy and 2.2% higher rates across the hotel portfolio. EBITDA margin was up 20 basis points as the company continues to add and upgrade properties. The numbers on occupancy down the portfolio provided by management were also pretty stable, with more showing higher occupancy than lower. The company reauthorized its stock buyback program, affirming its strong cash situation. The payout ratio based on funds from operations per share is 48.1% for the full year. These results were also achieved despite severe weather impact and a more volatile business environment.

6:18

A comment made by management during the conference call sticks with me to the effect that they believe the hotel cycle is in the "8th inning" and the REIT needs to be prepared for a possible downturn or recession. On the one hand, this sounds like a downer. On the other, however, it means management is a lot more likely to be prepared when things do turn down by being a bit more conservative when the environment is still generally good. Bottom line, no change in the advice here despite the big day, which basically put the price of this stock back where it was a month ago.

Buddy

6:25

Observation...I own several big oil stocks, all paying really generous dividends. Each stock is up at least 20%. I have lost money in every Permian oil stock I have purchased. Why even mess around with Permian stocks, they mostly pay not dividends and they are lousy investments!

Roger Conrad

6:25

I'm also a big fan of super majors, and have basically owned Chevron in a DRIP since I bought Texaco fresh out of business school. I'm frankly afraid to sell it now because of the taxes I'd have to pay, but I'm literally making almost as much in dividends every year as I paid for the initial shares. These companies are literally in a class by themselves in the energy space and I think they are the best way to play for conservative investors. On the other hand, while they do well in the early part of the energy price cycle, it's the smaller producers that do better as the cycle unfolds, and we do see more upside in those names right now given where we see the cycle is. As for the Permian, Chevron and Exxon are now among the biggest players as there has been a dramatic consolidation. I also did very well with Energen Corp, a small player which has now been merged into Diamondback Energy.

Buddy

6:34

Will Trump have continued success in getting OPEC to increase production to deflate the price of crude oil. Between drugs and oil, he is truly the "Price Control" president, almost taking a page out of Richard Nixon's playbook!

Roger Conrad

6:34

US presidents do wield quite a bit of power and can influence many things. But I think there's a tendency to maybe overestimate the impact they have on large markets, such as the US stock market and oil. I think OPEC will continue to play its own game but the real wildcard in the energy space is the shale producers, particularly the companies in places like the Permian that you referred to in your first question. I think a lot of people are still underestimating the extent to which they can bring costs down and self-finance CAPEX, and thereby continue to raise production in a conservative way at $50 oil. Its not that OPEC isn't producing enough. It's that they have to be careful about producing too much lest they risk a big drop in prices that puts a big hole in their national budgets. That's still how we see this market.

6:47

Q. Hi Roger: I imagine that you will be issuing a report of the ERF and PSA earnings but I thought I'd write anyway. Market seems to be enthusiastic about the former but less so(maybe even negative) about the latter. Looking forward to your view. Thanks.--Jerry F.

A. I thought Enerplus had some very strong numbers, especially considering how tough this market has been for Canadian energy producers. That’s of course in large part because of their operations in the US. But 22% improved liquids production and 44% higher funds flow are great numbers. And they’ve been self financing CAPEX after dividends as well, which has kept debt low. The company also maintained prior 2019 guidance, again no mean feat in this environment.

Also, when you say PSA, I’m assuming you mean Pembina. They had even better numbers than I expected, which says a lot since I’ve gotten used to robust cash flow growth as they add new assets. I think they’re likely to get another spur as gas and NGLs export focused assets come on stream the next few years. In the meantime, they pay out only about half of cash flow, and adjusted EBITDA covered the sum of dividends plus all CAPEX, interest expense and taxes with room to spare. I like Pembina on dips to 35 or lower, Enerplus up to 10 after these results.

Steve

6:53

Please comment on crestwood

Elliott Gue

6:53

CEQP is a solid MLP that took its medicine (cut distributions) early on in the oil bear market. Now, it has distribution coverage of 1.5 times, which is among the highest in our coverage universe as well as a debt/EBITDA in the 4.25 times range, down substantially over the past 3 years. It's still a name we like with a yield of 7.6% and the potential to grow its payout at some point over the next 4 quarters.

Mack

6:53

Elliott & Roger -- Thanks so much for your time & insights. Sooooo valuable.

Elliott Gue

6:53

Thanks for attending the chat...We enjoy doing these chats every month

Roger Conrad

6:53

They had another solid quarter and beat 2018 guidance targets. They also set 2019 EBITDA guidance with a midpoint of 13% growth and for 15% growth in DCF. All this is backed by projects with a great deal of visibility, including growth in the frac water business, which I addressed answering a question earlier in the chat. Coverage was very strong at 1.51 times in Q4, meaning management is delevering and is capable of a great deal of self funding CAPEX. Debt to EBITDA is down to 4.25 times, which is huge considering where this comapny was just a couple years ago. Like everyone else, we're wondering when they'll resume distribution growth again, given the expectation of debt to EBITDA of 3.5 to 4 times this year and 1,7 to 1.75 coverage. But as Elliott says we like this name.

Thanks everyone, seconding what Elliott just said. We'll see you next time!

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