JotCast | Energy & Income Advisor Live Chat January 2020

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Energy & Income Advisor Live Chat January 2020

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Elliott Gue

3:42

Yes, we do. I think that the current market for oil and energy stocks is somewhat like 2003-04 -- this was a period after a significant downtrend in oil when there was a lot of volatility. It takes time for investors to adjust to a change in the cycle but I think that even with oil averaging in the $55 to $60/bbl neighborhood this year, CLR and other producers will see significant free cash flow that will be tough to ignore, This should power a major upside re-rating to valuations. Some of our top picks include CXO, OXY, WPX and MRO.

Jack

3:54

LNG seems to be one of the fastest growing segments of the energy industry. You don't seem to have much interest in the LNG shippers with mostly Sells and one hold on TGP. I have a large position in TGP and added more this morning@$12.99 for a 7.7% distribution. Current DCF covers the new $.25 distribution by 3.8X so they are generating plenty of cash to pay down debt. Their fleet averages LT charters of about 8 years, take or pay, and no new ships on order. Why isn't TGP a BUY?

Elliott Gue

3:54

The LNG shipping industry has suffered from oversupply of ships. That's why you're seeing so many of these stocks slipping to all-time lows. The reason we have TGP as a hold, not a sell, is that they have the long-term contracting policy you mentioned. However, we just think that given the supply challenges to LNG shipping there are better risk-reward propositions elsewhere. We are planning additional deep-dive looks at LNG in upcoming issues.

herm

3:57

With many of our stocks falling in price, I assume that they will recover eventually as the coronavirus fades. I thought a quality stock like EPD might be a good buy Its down after earnings.

Elliott Gue

3:57

That is certainly our expectation. The current virus scare is similar in many ways to the extreme moves we see in oil following geopolitical newsflow -- it can clearly cause swings but the lasting impact has been, historically, quite limited in severity and duration.

Victor

4:02

Elliott WTI prices are trading in the low 50s, do you except a reversal from these levels? Would you buy some UCO here?

Elliott Gue

4:02

Technically, there's support for oil between roughly $50.50 and $52 and today's intra-day reversal came off a low of $51.66/bbl. Tough to know if that's the end of the move or if we'll see some more tests of support. However, we do not see oil remaining in the current area for long and continue to expect 2020 average prices closer to $60/bbl. We have been trading UCO in our Pig vs. Bear trading service -- we were short oil via SCO in mid-September, took profits and went long UCO in early October, then bailed on UCO for a solid gain right at the beginning of January. We are back in UCO now (we were too early getting in) in that service.

Victor

4:09

PDCE is bouncing from recent lows as oil drops in price. Outside the regulatory issues do you feel that PDCE can improve their cash flow and attract investors?

Elliott Gue

4:09

Yes, I actually think their acquisition of SRC Energy makes a ton of sense and the stock will ultimately be rewarded for that. The problem with PDCE is that, like all the other E&Ps, the stock in the short term trades off various "narratives" making the rounds. So, you have "narratives" out there re: US shale producers not making significant free cash flow (true 5 years ago, not so much in 2020) and the death of oil due to climate concerns (little or no supporting evidence but it gets lots of play in the media). As Warren Buffett once said in the short-term the market is a voting machine -- energy has been unpopular so it's underperforming -- while in the long run it's a weighing machine. Ultimately we think the fundamentals will be reflected in stock prices and we think that's likely a 2020 story because this is the year that free cash flow generation will really pick up.

Frank J.

4:13

EPD only going down - time to sell part?

Elliott Gue

4:13

Not in our view. The fundamentals of the company remain intact and they're poised for steady distro growth going forward. Stock has been trading sideways for years (since late 2015 it's basically flat before distros) due to sector-related sentiment headwinds but the fundamentals remain solid and we see patience rewarded this year.

Frank J.

4:14

Why is KMI not moving up?

Elliott Gue

4:14

KMI has returned 23% over the past 12 months and is less than $0.50 below its 52-week high. I think it's performing quire well, especially relative to the rest of the group.

Steve

4:18

What changes does Energy Transfer need to do to increase their undervalued stock price?

Elliott Gue

4:18

Fundamentally, I think they've done what they have to. It just takes time for a company to overcome skepticism that they've really changed. Also, I think to see more upside, you need to see an improvement in sentiment toward the group.

David LaRiccia

4:23

What is your opinion of the latest MPLX fourth quarter results?

Elliott Gue

4:23

I've covered the MPLX earnings a bit already in the chat. Suffice it to say that I think there has been some concern that weaker regions like Appalachia (natgas) would drag down results for the company as a whole. However, as it turned out, their Marcellus and Utica regions actually had strong results and management expects continued growth through 2021.

We do think that the company could convert to a corporation and still maintain its dividend. It's still a name we like.

Roger Conrad

4:25

Hey everyone. Sorry to be so long getting on.

Jim N.

4:30

Enterprises shortfall announced today

I felt that the fourth quarter shortfall from last year was not adequately explained. I would be interested in your analysis.
Keep up the excellent work.

Elliott Gue

4:30

Thanks for the kind comments about our work. We have a deeper dive into the Enterprise results slated for the next issue (due out shortly). That said, our initial take is that it wasn't much of a miss -- we tend to focus on distributable cash flow and adjusted EBITDA measures for MLPs rather than headline earnings and revenues. On that basis they were roughly in-line with expectations. The thing about EPD is that they're exceptionally well-diversified so they can continue their slow-but-steady distro growth and solid coverage through almost any commodity price scenario.

Barry J.

4:32

Hi Guys:
What is your continued assessment of AM and ENLC? Do you concur with Liam Denny’s Jan. 16 article’s analysis of ENLC’s cut as being inadequate and unrealistic? Both stocks continue to drop even after AM’s buyback of shares and ENLC’s distribution cut.
Best,
Barry

Roger Conrad

4:32

First off, I think it's speculative to draw too many conclusions on either company until they announce Q4 results and update guidance. For Antero and its most important customer Antero Resources, that's February 12. Both Anteros have now given up most of the gains they made from early December to mid-January. I think at the current price a lot of potential bad news has been baked in but the most recent hard news for either was positive--on Jan 15, they announced progress on AM's buyback of its shares currently held by Antero Resources, which simultaneously cuts AR's debt and AM's dividend obligation. Again, I want to see what comes out Feb 12 and until then I rate AM a hold.

jack

4:33

In a previous response you expressed concerns about DK. What are your concerns?

Elliott Gue

4:33

They're an inland refiner, meaning they have facilities located off the coast. As a result, they've benefited from huge oil price discounts (such as Permian crude prices vs Brent or WTI-Cushing) over the past 2 years, which has boosted their margins. However, that's fading as new pipelines collapse inland price discounts.

Michael L

4:35

Just curious if either of you see anything in the MRO quarterly report that would be a predictor for OXY's report, which is due out soon. Thanks for the usual great work. Really appreciate the in-depth 3 part analysis of the oil market.

Elliott Gue

4:35

Not really. MRO doesn't have much in the Permian, which is the focus of OXY's business. Plus, I think what will move OXY is further news related to their integration of Anadarko.

Roger Conrad

4:37

Continuing Barry's question, EnLink Midstream announces Q4 results on Feb 25 and we believe it makes sense to hold on until that date as well. As we wrote in EIA when the dividend cut was announced, guidance appears to be pretty conservative now and the cut should provide a cushion to the dividend. I suspect a lot depends on the Dow Inc/Devon Energy effort to ramp up production at certain wells in Oklahoma. But it certainly seems as though everyone is assuming the worst. That's not to say it might not happen but anything short of that is likely to produce a rebound. Keep in mind that a lot of the selling we're seeing in energy stocks now is the result of worries about demand in the face of the coronavirus--not how these midstream companies are handling the sector stress test. And several have reported pretty solid numbers for Q4--EPD, KMI, MPLX and HESM in particular.

Frank

4:43

Thoughts on T

Roger Conrad

4:43

Obviously we don't track AT&T in EIA. But I though the Q4 results were generally pretty good and demonstrated the company is following through on its deal with Elliott Management to take several steps to enhance shareholder value. I know the bears want everyone to focus on DirecTV subscribers lost--including one heavily publicized perma bear who was telling everyone to sell the stock in the high 20s not long ago and is now trumpeting that the company is going to be broken up. But despite all the chatter, AT&T beat its guidance for its three most important metrics--wireless customers, debt reduction and free cash flow generation. And despite that, the stock still trades at just 10X expected 2020 earnings and yields 5.6%. Look for more on AT&T in the upcoming issue of CUI.

Elliott Gue

4:46

As a side point relative to the coronavirus, oil and markets. Today the WHO comes out and says that this virus is a global health emergency and...the market rallies sharply to close higher. WTI, which had been down near $51.65 pops to trade near $53. I think the most obvious cause for this is that WHO basically commended China on their response (China was criticized for its SARS response 17 years ago) and said travel and trade restrictions were not necessary. Could this be the low of the Wuhan coronavirus panic? Too early to say for sure, but it does underline the fact that most of the selling in oil/stocks has been driven by sentiment/panic and a desire to book some gains in a market that was up 31% in 2019. So, my point is that trading on headlines like this is a losing proposition in oil markets -- sentiment can turn on a dime and I do expect that within a month or two not many poeple will still be talking about this virus.

Lee O.

4:50

discuss epd earnings.

Roger Conrad

4:50

Elliott has already addressed this one in the chat. But I would add that an 11% increase in distributable cash flow for a 1.7X coverage ratio is hardly a "miss." They also retained 24% more cash flow in 2019 than they did a year ago and funded the entire equity portion of what was a robust CAPEX plan. It is true that management is going to be conservative with asset expansion in 2020--just as it has been the past five years. And management is keeping things conservative by extending the low single digit growth rate for another year, with a plan of using 2% of cash flow from operations to buy back shares. But the past week's share decline notwithstanding, there's not a lot of risk here. We address the midstreams that have reported Q4 (including EPD) in the upcoming issue of EIA.

Mack

4:55

FYI -- Report just came across on CNBC that MRO is exploring sale of its Speedway division. If that happens, or is expected to happen, would it be good for MPLX?

Elliott Gue

4:55

Just to clarify, Marathon Oil (MRO) has no real relationship to MPLX. Marathon Petroleum (MPC) is a separate company that owns approx. 63% of MPLX units. MPC owns Speedway (gas stations and convenience stores) and announced a planned spin-off of this unit back in November of 2019 so what appears to have happened is that they received interest from other company's in buying Speedway outright rather than spinning it off. So, now MPC may choose to sell Speedway or may choose to spin it off, depending on which route is more lucrative or which they believe will result in a better valuation. I'd expect this to be neutral for MPLX -- no impact on their cash flows or distribution power either way.

Steve

4:55

Any new news on the high yielders? For example ENLC after payout reduction?

Roger Conrad

4:55

Not really Steve, What we're interested in is how these companies are handling what we've called the midstream stress test--and the next opportunity to do that is going to be when they announce Q4 earnings and update us on guidance. So far, only 4 of our midstream recommendations have reported results--EPD, HESM, KMI and MPLX. All of them covered their distributions by a very wide margin and kept debt under control, while bringing new assets on line on time and budget. All four have tamped down CAPEX plans for 2020 from 2019, reflecting the more difficult current environment with producers cutting their CAPEX. But as you'll see in the upcoming EIA, all look very solid going forward. And yes, we would view a conversion at MPLX as positive--just as Hess Midstream's was last year.

harlanhorn

5:03

OMP just pre-announced some great numbers but the stock continues to go down in sentiment with oil overall. You have a buy at under $20 with its current price at $15.00. Your thoughts?

Roger Conrad

5:03

First off, these are preliminary numbers and the full set won't be out until Feb 26. But clearly Oasis Midstream did beat its earlier guidance pretty handily--and with Q4 estimated distribution coverage of 2.1x to 2.3x, even after 20% annual distribution growth--they appear to be in very good shape heading into 2020. What people are going to be watching is of course what's going on at Oasis Petroleum, which still accounts for more than two thirds of system volumes. They also don't report until Feb 26 but have issued preliminary numbers supportive of Oasis Midstream. I want to see what the final numbers are. But at least based on what we've seen so far, OMP and even OAS are being carried down by overall sector sentiment. And so long as they continue to execute as companies, we should see a big recovery from current prices. We still rate OMP a buy up to 20.

harlanhorn

5:14

MPLX looked like a steal at $26 but now trades at $23.30 now.

Roger Conrad

5:14

Just as high priced stocks can get more expensive before a reversal, so can stocks trading a low measures of valuation get even cheaper before they recover. The important thing for a laggard like MPLX is the underlying company stay solid on inside until investor fears about the wider world--or there's clarity on some issue spooking investors, such as MPLX' potential conversion from an MLP to a corporation this year. The example of Hess Midstream's successful conversion should put investors' minds at ease regarding what would happen if MPLX converts, just as its solid Q4 results (1.4X coverage ratio) should put to rest worries about distribution safety. So should management's conservative approach to new projects as demonstrated by reduced plans for CAPEX. Investors obviously are paying far more attention to oil price weakness than these favorable developments. That means MPLX holders are going to have to be patient until they do. But so long as the underlying company stays as solid as it showed itself

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