JotCast | Energy & Income Advisor Live Chat January 2020

Return to

Energy & Income Advisor Live Chat January 2020

Prev Page View Full Chat Next Page

Roger Conrad

5:14

to be in Q4, recovery is only a matter of time.

harlanhorn

5:22

You have a buy on ENBL under $17 with it trading today at $9.63. Time to nipple or too soon given all the uncertainty around oil?

Roger Conrad

5:22

Worries about the coronavirus' potential impact on oil demand clearly reversed what had been a promising uptrend in US energy midstream stocks. But the real test for all them at least in first half of 2020 is how they hold up in the face of reduced CAPEX by shale oil and gas producers. That's what we've called the "midstream stress test" and it's what investors need to focus on now--rather than the short-term action in the oil market. Enable will release earnings Q4 results and update guidance on February 19. At that time, we'll see what impact there's been on their system throughputs from the slowdown in drilling in many Oklahoma locations. This company, however, came into Q4 with a very substantial cash cushion (1.4X distribution coverage) and some very strong volume trends in the Williston Basin. And its longer term debt continues to trade at a premium to par, meaning no credit pressures currently. Those are good signs it's going to report solid Q4 numbers next month--and why it still rates a buy.

Hans

5:26

Any update on AM and ENLC both are down 11 and 8%

Roger Conrad

5:26

Not really beyond what I've said earlier in the chat. Both are down mainly because of concerns about producers' CAPEX plans--Antero Resources in the case of AM and Devon Energy for EnLink. And investors are pretty much assuming the worst for both companies at this time. That leaves a lot of room for a substantial beat. But our advice remains to hold both until we see their Q4 results. We would also not invest new money until we see those numbers and guidance.

martyR

5:30

what happen to AM

Roger Conrad

5:30

As I've answered earlier in the chat, it's getting dragged down by growing concerns its primary customer and major owner Antero Resources will be unable to execute its CAPEX goals in the wake of the mild winter's negative impact on natural gas prices. That's not a universally held opinion, as we've seen several Wall Street upgrades of AR to buy recently. And there are also no sells on AM at this time. But when a sector gets hit hard as energy is now--a lot of these stocks are retesting their early December lows including AM--people don't really pay much attention to what's going on at individual companies. That can be a huge opportunity to buy, but only if you're prepared for stocks to fall even more before they turn up.

Jo T

5:34

Do you have updates on D and TRP? Thanks.

Roger Conrad

5:34

We track Dominion in EIAs sister advisory Conrad's Utility Investor rather than in EIA. What I can tell you is shares hit a new 52-week high today and are almost 10% higher than our maximum recommended entry point. D reports its Q4 results and updates guidance on Feb 11 and we think we'll see solid numbers--as the company shifts its growth CAPEX from natural gas infrastructure (including the still stalled Atlantic Coast Pipeline) to spending on renewable energy and its power grid, as is favored by Virginia regulators. But we would be cautious on price at these levels, as it's clear much of the stock's favorable momentum is due to the rush into the utility sector rather than individual company developments.

Roger Conrad

5:41

Turning to the TC Energy portion of jo T's question, that midstream company won't announce Q4 results until Feb 13. I expect to see continued execution of conservative CAPEX and for management to reaffirm plans to raise dividends 8-10% annually the next several years. But the stock's most recent move appears related to growing speculation its Keystone XL pipeline will at last get built. The project received final approval of the US Bureau of Land Management this week but still faces obstacles in the courts. That's good reason to be cautious on the stock trading roughly 10% higher than our maximum recommended entry point. It's interesting how TRP shares have held up so well. That's also true of Enbridge and Pembina--both also leading Canada based midstreams. It's a stark contrast to the performance of US midstreams--even blue chips like EPD--despite similar business factors affecting earnings. I believe one reason is there are too many owners of US midstream assets. But the Canadians' resiliency is also

5:42

good reason to hop the US companies will eventually bounce back, so long as they stay healthy on the inside.

Victor

5:47

Hi Roger, Please comment on D, it has been on a long uptrend. Do you still see this uptrend to continue?

Roger Conrad

5:47

Hi Victor. I discussed Dominion extensively in my answer to the last question I answered and won't repeat what I said there. But the short answer is this is a great company I've personally held for more than 30 years and though there have been ups and downs it's generally uptrended over that time--it's got a great franchise and management has time and again shown the ability to tack on strategy to get the most for its investments--and keep its regulators and customers happy. It's doing that right now with a huge solar energy buildout in Virginia for Amazon and others. It may get to build the Atlantic Coast Pipeline as well--though that's a much heavier regulatory lift. My main reservation now, as is the case with many utilities, is valuation. Our maximum recommended entry point now is 80 and we'd wait for a dip to that level to buy.

Victor

5:55

WES is at its lowest level in over 5 years. Do you see more of the same in the future? or a reversal at some point?

Roger Conrad

5:55

Western Midstream had been in an uptrend from its December lows until coronavirus fears started to hit oil prices. But the main issues for a future recovery are still the same as they've been the past six months. That is the company's ability to weather the midstream stress test as producers cut back on their CAPEX (including its most important customer Occidental Petroleum) and just what OXY intends to do with the 53.45% of WES it owns after acquiring Anadarko last year. The rationale for our continuing buy recommendation remains the same as it was before the coronavirus hit: We believe the company's assets are well positioned in key basins and will attract third party customers if OXY cuts back as many expects and that it will be easily able to achieve its targets of 6-8% annual distribution growth with 1.2 times coverage. What OXY will do is uncertain. But we continue to believe investors are over estimating its risks and undervaluing its upside. WES announces Q4 results on Feb 27 and we expect

Roger Conrad

5:56

more clarity on both counts at that time.

Mack

6:01

ENLC has cut its distrib to $0.1875 for 4Q19 and I have to assume it will be kept at that amount for 2-yrs while finances recover. At today's price the yield is still a high 14.5%. There are worse things. But is the business now stabilized, and is the reduced payout safe? Thanks.

Roger Conrad

6:01

Again, I would not expect to see a lot more on ENLC until they announce Q4 results and update 2020 guidance on February 25. Based on what we've seen so far, we expect them to meet what appears to be very modest guidance for cash flow and expectations for drilling in areas their assets serve. In fact, the primary reason many investors are doubting their guidance seems to be they've missed numbers in the past, rather than anything to do with the substance of what management is projecting. That said, we've had the shares a hold for some time and that remains our recommendation for more aggressive investors until we do see those numbers.

Ron

6:07

Thoughts on Am and Enlc.

Roger Conrad

6:07

Hi Ron, I believe I've adequately addressed both Antero Midstream and EnLink Midstream in the answers I've just given. Again, both have been rated holds by us for some time, and with the caveat they're our highest risk midstreams. And our view right now is we need to see the hard numbers and guidance they'll release next month to move us off our hold recommendation--if they prove their resiliency, we'll keep them holds or upgrade to buy. If not, we'll take the losses and move on. Conservative investors will be best off with the four high quality midstreams that have reported Q4 numbers that I noted above and review in depth in the upcoming EIA--EPD, KMI, HESM and MPLX.

Mack

6:11

Any update on the situation at OMP?

Roger Conrad

6:11

As I noted answering an earlier question, the "preliminary" Q4 results were a lot better than I expected, in terms of both system throughputs and the bottom line. The news at least temporarily halted what had been a pretty relentless selloff the past couple weeks, as many investors have worried primary customer Oasis Petroleum's production plans would falter. But at least so far, that doesn't appear to be happening and in the meantime you have that rarity of a stock yielding nearly 14%, covering its distribution with profit better than 2-to-1 and growing the payout 20% a year. Maybe it won't last. But that's something I don't believe I've ever seen in 35 years or so in this business. And at least for aggressive investors, it's hard not to see OMP as attractive.

Charlie

6:12

Please comment on AM and ENLC and recent earnings reports

Roger Conrad

6:12

Thanks for your question Charlie. I hope I've answered it to your satisfaction with my answers in the chat. If not, please let me know by writing to us at service@capitalisttimes.com

Frank

6:17

DCP, Thoughts

Roger Conrad

6:17

The big date for DCP Midstream is Feb 11, when they announce Q4 results and update their 2020 guidance. We do not expect to see any change in their distribution of 78 cents per quarter, which they've paid since Feb 2015. There's no real pressure on credit, with even the MLP's longer term debt trading at big premiums to par value. There are no longer incentive distribution rights to pay out. And the company is leveraging an established position in the natural gas liquids business. We've rated DCP a hold pretty consistently the past several years. The recent dip has us looking at it for a potential upgrade but our current advice is still hold.

Charlie

6:24

Please comment on ENLC, ENBL,OMP and AM...recent earnings, safety and dividend...thank you again for these valuable monthly chats!!!

Roger Conrad

6:24

Thanks so much Charlie. As I've noted in my answers earlier in this chat--which I apologize for not joining until about 4:30 due to a family emergency--none of these midstream companies have yet announced Q4 results and updated guidance so there's still much we don't know. As we reported in Energy and Income Advisor, all appeared to be weathering what we've called the midstream stress test as of Q3 results and guidance. And you can view what we said in our archives by typing the name of the company in the box by the magnifying glass in the top right corner of the EIA website. What we have seen since are some pretty dynamite "preliminary" results from Oasis Midstream, a dividend announcement from Antero that affirmed its strategic plans with parent Antero Resources are progressing and the dividend cut and revised guidance at EnLink. None of what we saw, however, has caused us to change our advice for these four, and neither has the selloff. Again, the benchmark for midstream is how companies are weathering

Roger Conrad

6:25

reduced producer CAPEX. So long as they are, we'll stick with them.

Lee

6:31

Has there been any change in your view of GEL? I liquidated half a few years ago but have a small position left, against which I write monthly covered calls

Roger Conrad

6:31

Not really. Our view is still that this company's operations are too much of a mish mash (soda ash mine, shipping etc) for it to have sufficient focus and scale. That was acceptable in the days of $100 oil and $5 natural gas. But at a time when the entire industry is cutting costs to the bone, it's a dangerous position to be in. Genesis isn't currently on our Endangered Dividends List. But we'll strongly consider putting it there if Q4 numbers due out in mid-February continue to show deterioration. One metric to watch is "available cash before reserves" which covered the payout by 1.22X in Q3. Debt to EBITDA is also flashing yellow at 4.91X.

Ken in Phx

6:35

HESM has been behaving better than others in the sector. Comments on why?

Roger Conrad

6:35

One reason is they converted to a corporation last month, eliminating a major hangup for many investors and opening it up to new institutions. That same deal also went through as basically tax-free for existing MLP investors. And it also included a major asset drop down and simplification of structure from its largest shareholders Hess Corp and Global Infrastructure Partners. Finally, Q4 results released this week were quite strong, demonstrating the success of the new structure and guidance remained strong--with Hess Corp affirming aggressive plans in the Bakken where the company's assets are. We rate HESM a buy up to 24.

Guest

6:41

do you likeBp at 37 ish and Total under 50?

Roger Conrad

6:41

Certainly Total SA under 50, The yield is now nearly 6% and the company expects to generate more than $12 bil in free cash flow in 2020 after $15.5 bil in CAPEX, or enough to cover the dividend by more than 1.6 times. Total is also becoming a global leader in energy technology including batteries. We'll see earnings on Feb 6 as well as updated guidance. But this looks like an excellent entry point at 10.5X expected 2020 earnings.

I'm a bit less excited about BP as a decade of dealing with the Gulf oil well blowout has left it in a less solid position than its fellow super majors. Rather, consider ExxonMobil--which is paying its highest dividend yield in decades--or Chevron paying 4.6% after an 8.4% boost announced this week. We'll be doing a deep dive on the super majors in an upcoming issue.

Jim N

6:41

Do you have any recent info on WES ( Western Midstream). Is it going down because of OXY?

Elliott Gue

6:41

I think uncertainty re: the Anadarko/Occidental merger is one issue. The other one is really just the broader sentiment toward energy and MLPs.

Bill F.

6:52

Roger and Elliott,

In researching ESG Exchange-Traded Funds for an endowment fund on which I serve, I found that, as elsewhere in asset management, fees are being reduced in a “race to the bottom” to gain size. Newer ETFs with lower expense ratios are garnering dramatic flows. For example, iShares ESGU and SUSL, with lower expenses than their older iShares sister ESG ETFs, have taken in a combined $5 billion in the last nine months. Morningstar Direct sees iShares, Calvert, Vanguard, TIAA and Xtrackers combined to have taken in some $20 billion in 2019 in ESG-focused open-end funds and ETFs.

Siblis Research notes that the Energy Sector has declined from 7.56% of the S&P 500 as of year-end 2016 to 4.35% as of 12/31/19, but the four iShares ESG ETFs (excluding their Low Carbon one, CRBN) have a smaller allocation, ranging from 2.8% to 3.7% as of this week. Such a weighting likely has helped such funds outperform the S&P in 2019, although longer-established ETFs in this area have until recently, tracked clos

Roger Conrad

6:52

Thanks for your comment Bill. You're certainly correct that energy's share of the S&P 500 has declined precipitously the past few years. That's simply because even the best companies' stocks have basically run in place or declined as the rest of the market has moved higher. Our view is you typically see these kinds of extremes at the inflection point of major reversals, which most people will only recognize in hindsight--usually well after the actual turn. That remains our view for the energy sector, though as we've pointed out here many companies currently fact business challenges.

You're also right about the popularity of "low carbon" investment themes. In fact, two of our EIA Actively Managed Portfolio holdings were huge beneficiaries last year--Brookfield Renewable Partners and Northland Power Inc. And both have added to their gains this year as well. But while these contract power producers certainly do have momentum now, we see more upside in what's not now popular--which includes most of

Roger Conrad

6:53

the companies we've discussed here.

Connecting…

Your current subscriptions

None

E-mail Address	Chat Owner	Status	Remove

Enter your email address to be notified when Sherry Roberts hosts a chat