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Energy & Income Advisor Live Chat July 2019
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AvatarRoger Conrad
1:58
Thanks everyone for tuning into this month's Energy and Income Advisor live chat. Remember there is no audio. Just type in your questions and Elliott and I will get to them in the order received as soon as is humanly possible. There will be a transcript of all questions and answers available at the end of the chat, and we will continue so long as there are questions in the queue or to answer from emails we've received prior to the chat.
As usual, I'd like to start with questions and answers received from emails, so here goes.
1:59
Q. Hi Roger and Elliott. What is your current view of Enerplus (NYSE: ERF)? Thanks as always for doing these chats and for all your help?--Jerry F.
A. Thank you for your questions Jerry. Enerplus won’t report its Q2 results until August 9. So I don’t have a lot to offer in the way of updating numbers beyond our comments in the International Coverage Universe table on the EIA website. Like many smaller oil and gas producers, and especially companies based in Canada, Enerplus’ shares have been weak this year, and especially since early May when oil and gas prices started to soften. I do continue to believe, however, that this company has several strengths that set it apart from peers, which is why we still rate it a buy up to 11. These include a still rising production profile in the richest areas of the Marcellus and Bakken shales, with the ability to cut expenses. The company has also kept its payout policy very conservative the past several years, which has allowed it to self-finance CAPEX and control debt. There are no debt maturities until 2021 and the CAD800 million credit line is entirely undrawn. These strengths have also convinced the analysts who
cover the stock to remain bullish (14 buys, 1 hold and no sells). The shares are going to have a tough time making real headway until investors get more comfortable with oil and gas prices in the current range. But I see a great deal more upside than downside in the shares at this point.
Q. I'm a bit confused - On July 26, you strongly suggested to sell EQM Midstream Partners (NYSE: EQM), and your MLP ratings is "SELL" but the comments next to the SELL rating were very favorable, with 6% distribution growth.--Michael G.
2:00
A. We highlight two reasons for caution at EQM as well as its general partner Equitrans Midstream (NYSE: ETRN) in our July 26 Alert “EQT Retrenches, Appalachian Gas Companies React.” One has to do with a very  recent development at major customer EQT Resources (NYSE: EQT), with the Rice family winning a long-running battle with the former management for control of the board. EQT now plans an overhaul of its drilling program with a focus on cutting costs, a very big one being what it pays EQM for midstream services. A significant reduction isn’t inevitable but it would certainly pressure EQM’s narrow distribution coverage (1.1 times in Q2) further. The other is continued delays winning needed permits to complete the Mountain Valley Pipeline. That’s old news, but the longer EQM has lead developer is delayed getting cash flow from a completed project, the higher its costs will go and again the more pressure on its distribution. Management is sticking to growth targets at this time. The reason for the sell is the
these pressures could make that impossible, which would almost certainly send shares to the low 30s and possibly lower. If management can navigate a new path with EQT and get MVP over the finish line, our recommendation will change.
Q. I very much appreciate your "High Yield Energy Target List", but I notice your choices are listed in alphabetical order.  Could you tell me, at today's prices, your top 3 picks in order of attractiveness? Thanks you. Thank you-- Jack A.

A. Thanks Jack. We’re happy you like this new feature. We do feature the companies in each issue that we believe offer the best value. Perhaps a star or some other marking in the table would be useful for this list, as well as for our Actively Managed Portfolio. At this point, none of the eight have reported Q2 earnings but all will have in the next few weeks, and I will have an update for everyone at that time.
Frank
2:06
TGE taking a beating. Deservedly?    Thanx
AvatarRoger Conrad
2:06
It's really part of the retreat we've seen in midstream companies with exposure to Appalachia, which picked up steam after the comments made by the new CEO EQT Resources Toby Rice. Interestingly, Enagas seems to be taking advantage to increase its stake in the company to 28.4%. TGE had solid distribution coverage of 1.35 times in Q2 and made progress on major projects. We still like it up to 26. There is likely to be less activity in key regions the next year or so but it still looks solid with no debt maturities until 2023.
Jeffrey H.
2:12
Dear Roger/Elliot, Quarter 2 earnings call for WES revealed 1.2X coverage but significantly lowered guidance.  The stock is down about 13% as I write.  Does the punishment fit the crime?  How much is the OXY/APC deal muddying the waters? If you had the stock would you unload or hold?  Many thanks.  The market's behavior may be painful. but these are always rewarding.
AvatarRoger Conrad
2:12
The guidance reduction is related to concerns about throughput on WES' system, which is turn is based on concerns production in the Delaware Basin could contract. They also cut their coverage estimate to 1.1 times for the second half of 2019, though maintained distribution growth guidance of 5-6% a year. I think the drop in the shares today, however, is probably more related to concerns about the battle for Occidental's board and what that means ultimately for WES' business plans.
Buddy
2:13
It was a surprisingly good quarter for NOV and RIG wasn't bad either.  Does this translate into a better outlook for international oil service stocks, which have been in the toilet forever?
AvatarElliott Gue
2:13
In fact, we'll be putting out an issuer of EIA on some of the services earnings and an update of the industry this week. There's definitely a turn in international markets -- in particular, looking at the seasonal cadence of revenue growth for SLB this year I think their targeted international revenue growth of 7 to 8% looks conservative. International CAPEX on exploration and development has been through an unprecedented depression in recent years; production has remained steady only because of projects that were authorized before 2015 that are just now going into production. However, base decline rates are finally catching up and we think you're seeing the early stages of what's likely to be a prolonged recovery in spending as companies attempt to replace reserves. We're not huge fans of the deepwater driller here as I am not convinced dayrates will rise enough to support free cash flow and valuations but I think this is good news for internationally levered services firms.
AvatarRoger Conrad
2:14
To finish on WES. We still view these as prime assets in a great region for long-term growth. But until OXY decides what it's going to do--which probably depends on whether or not Icahn succeeds--WES is likely to stay volatile. We still rate it a buy in our MLP Ratings table on the EIA site.
Lee O.
2:18
i know this is energy but would you comment on dominion earnings
AvatarRoger Conrad
2:18
Sure. Dominion's numbers were right in the middle of its previously issued guidance range--actually at the top end including the benefit of hotter weather. They also affirmed 2019 EPS guidance--so no surprises there. Not surprisingly, the Atlantic Coast Pipeline's prospects dominated the Q&A session. We learned the company has spent $1.7 bil to date and expects to double that finishing the project. My contention for a while has been ACP would be the key to D stock until resolved. That's still my view. I rate it a buy up to 80.
Buddy
2:19
EPD had a great quarter and DCF-Payout coverage is now a record 1.8X.  Do you think this changes the outlook for future payout increases?
AvatarElliott Gue
2:19
Many of the large-cap MLPs have become very conservative in recent years in terms of insisting on self-funding (using internally generated cash flow to fund expansion rather than borrowing or issuing units). This shift is based on Wall Street and investor preference -- prior to 2015-16, investors rewarded growth but , as capital costs rose, that flipped.  Savvy MLPs like EPD were among the first to recognize this shift and adapt. Unitholders have been rewarded -- EPD is up 27%+ since the end of 2017 compared to a 1.1% gain in the Alerian MLP Index and an 8.2% decline in the S&P 500 energy Index. I suspect they'll continue to build coverage and self-fund until investors are more willing to reward distribution growth again (my sense is we're not there yet).
Pat M.
2:22
Hello Roger and Elliott,

I noticed that no super major oil companies are in the " Actively Managed Portfolio".  Would you explain how companies like Chevron, Total ect. fit into your energy investment strategy?
Thanks
AvatarRoger Conrad
2:22
I think of the super majors as being as close as you can get to "forever" stocks--they always emerge more powerful from every cycle with a rising dividend. And for disclosure, I've personally owned CVX through a DRIP since the days when Texaco was independent. On the other hand, they don't provide the alpha in a rising market that smaller, more focused producers do, so given our view that energy is cheap we've tended to favor the latter in the Actively Managed Portfolio.
McMack
2:27
Questions on MPLX:  [1] Are there rumors of MPLX converting to corp structure?   [2] The price fell off a clift in mid July.  I think this is about the time the Andeavor deal was announced.  Is that what caused the drop?  [3] What's the status of the Andeavor deal.  Did it close yesterday?  And what do you think the Andeavour assets will do for MPLX earnings and cash flow?
AvatarRoger Conrad
2:27
I'd hesitate to draw too many conclusions before tomorrow when MPLX releases Q2 results and updates guidance. Marathon Petroleum owns 47.73% of common units and would have the say if there were a conversion/roll-up merger. But at this point, that seems unlikely with the Andeavor deal closing yesterday and both S&P and Fitch raising the credit rating to BBB. We also saw an in line distribution increase announced last week. We will be updating MPLX and other high yielding MLPs when the numbers come in. But for now, let's sit tight.
Alan R.
2:28
What is your outlook for oil and natural gas prices over the next year?  If economies are slowing worldwide, as appears to be happening, won’t this have a negative impact on supply and demand?
Thanks
AvatarElliott Gue
2:28
So far demand is holding up reasonably well, especially in the US. Demand is also supported by relatively low prices -- oil prices will probably be lower, on average, in 2019 than last year. Of course, that could change if there's a global Recession however, despite all the hype in the media, that's not our forecast at this time. In EIA's sister publication, Deep Dive Investing, we've developed a 10-Point Bear market checklist, which evaluates trends in 10 separate economic indicators that have a good track record of forecasting downturns....At this time, this indicator isn't flashing red, though it suggests we're in a "soft patch" more akin to what the US experienced in 2015-16 and 2011 than 2007. I think the supply side of the equation has been the bigger driver of prices -- concerns that US oil production will continue to grow much faster than demand. My belief is that we're already seeing a slowdown in US oil production growth due to the producers' decision to prioritize cash flow over production growth.
AvatarElliott Gue
2:30
I neglected to mention natgas -- No change to my outlook there. Demand growth is fine and exports are a release valve but there's just too much supply that's economic to produce even at ultra-low prices. There may be some tradable weather-driven spikes but no sustained rally. We also recommend you avoid names with significant gas-led growth in coming years -- Apache (APA) comes to moind as a sell.
John A
2:35
Could you address some negatives on Oasis Midstream (could only find positives in last web chat, biweekly issues, etc.):

IDR’s (estimate that will be at 50% split starting Q2 2020)

Down the road, could convert to a lower dividend-paying entity similar to other MLP’s w/ IDR’s (“back door dividend cut”) via merger with parent or some other form of reorganization; this is what happened with Kinder, etc. when cost of capital elevated to unsustainable level

Parent company owns 68% of MLP

Revenue mostly originates from parent company, although by end of 2019 expect outside sources to be 15-20% of total

Using debt to finance Capex (equity cost of capital elevated)

Parent company rated junk by credit agencies

Low liquidity in stock (trades 100,000 shares/day)
AvatarRoger Conrad
2:35
As with MPLX, I'd really hesitate to draw too many conclusions about OMP's weaknesses and strengths before they announce Q2 numbers on August 6. Until then, we're trying to draw conclusions based on information current March 31. OMP launched in September 2017 and parent Oasis Petroleum owns 45.27% of the common equity. It's possible they could conclude OMP is no longer a suitable model for funding business growth. but that would be a radical departure from everything they've done so far.
Mark
2:35
Hi Roger  With the expected decrease in E&P could you comment on Portfolio member HAL . This is trading around 30% of your Buy up to price and down 50% for the year. What are you thoughts on improvements in market performance over the next 6 to 12 months . I would also appreciate you thoughts on improved market performance for SLB . Thanks Mark
AvatarElliott Gue
2:35
Thanks for the question. We actually have an entire EIA issue dedicated to the services names coming out over the next day or two (this week). Simply put, as I mentioned in reply to a prior question, international is looking good while North America is in the proverbial doghouse right now. SLB has the most leverage to international markets -- 4 times the earnings leverage to international spending vis a vis HAL -- so they're best-place dto take advantage of that. Also, with a new CEO taking the reins tomorrow (August 1) and recent focus on reducing CAPEX intensity I think SLB's 5%+ yield is sustainable. The CEO is scheduled to go out on the speaking circuit this fall and I think that could be an upside catalyst for the stock as he outlines some of their proprietary technology. The stock is almost silly cheap at current prices.
AvatarElliott Gue
2:37
HAL: It's the best of breed as far as North America is concerns though at this time that adds up to being the best house in a terrible neighborhood. I think that ultimately you're going to see a shift in the North Am. services industry in 3 parts: 1. Consolidation (small players are struggling), technology (additional productivity and efficiency improvements require new technology) and closer service/E&P integration. These should all be positive for HAL but I think the time frame and catalysts are less certain than for SLB at this point.
AvatarRoger Conrad
2:40
Adding further to my answer on OMP, the current guidance is for distribution coverage of 1.7 to 1.9 times for the full year. That implies a great deal of self funding and reduced dependence on outside capital going forward, which means a lower cost of funding CAPEX. Also, there are no debt maturities until 2022 at OMP. OAS has none until 2021. Finally, I see the low market capitalization of $739 mil as an opportunity rather than a risk. The larger this MLP gets, the greater institutional participation, which should push it higher. And of the 11 analysts covering OMP, 9 buys, 2 holds and no sells.
Michael L.
2:46
Hi Roger,

I know that Antero reports this afternoon, and I'm sure many of us are very interested in the results.

I would like to know what aspect of their reporting will give us the best understanding of how bad, or not, the "Appalachia problem" is for AM.

Also, Consolidated Comm. bonds: I have noticed the price has been going down on these over the last 10 days or so. Have you noticed anything in their performance that would have triggered that?

Thanks for all your fine work over the decades (Yes, it's been that long)!
AvatarRoger Conrad
2:46
Thanks Michael. I think with Consolidated Communications bonds, there's a lot of anxiety about how much Q2 revenue shrank, and the impact on free cash flow. The bonds' yield to maturity is elevated but still not at what one could call a distressed level. My view is still that these get paid off in full in 2022. But I will be updating CUI readers on these results in the issue going out early next week, and if they affect that call.
Howard F
2:46
CLR
AvatarElliott Gue
2:46
Like so many of the shale E&Ps Continental Resources (CLR) isn't yet getting credit for the dramatic change in its business and profitability in recent years. Here's  company that generated negative $1.22 billion in free cash flow in 2015 but managed to generate +$541 million in 2018 and is on course for $650 to $700 million this year DESPITE a sizable drop in energy prices 2019 vs. 2018. It's hard to put your finger on the reason behind the divergence between free cash flow and the share price though I suspect there are many factors -- recent oil price volatility has turned investors off the sector, passive fund flows, concerns about 2020 oil outlook and disbelief that CLR and other producers are actually finding discipline. However, my view is that over the next few years, using very conservative oil price assumptions, CLR and other E&Ps are on track to generate piles of FCF--enough to pay off their debt (or reduce leverage way below target levels), buy back stock and pay a dividend (CLR just announced its
AvatarRoger Conrad
2:49
As for Michael's question on Antero Midstream, I think the key factor is going to be general partner Antero Resources' plans, and if these have changed significantly from what they were at the Q1 earnings call. The ultimate problem is the lack of sufficient transport capacity (pipelines) out of Appalachia, coupled with a surge of "associated" gas coming out of the Permian Basin. That's compressed pricing in the region and is forcing producers to reconsider their economics.
2:52
Continuing on Antero, this company has solid management and great assets, particularly in water recycling that can really help producers cut costs. And its capital structure has also reduced costs. The question is if Antero Resources needs to make really radical adjustments in its plans at this time, as EQT Resources intends to, and how that will affect AM. Investors at this point are pricing in a major impact. We
We'll see this evening if that's been justified.
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