JotCast | Energy & Income Advisor Live Chat July 2019

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Energy & Income Advisor Live Chat July 2019

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Lee B

2:56

Gents,
Please comment on WES

Roger Conrad

2:56

Lee, I don't have a lot to add to my answer to a question earlier in the chat. They're cutting their outlook to reflect greater uncertainty as parent/general partner-to-be Occidental considers its next steps once it completes its acquisition of Anadarko. WES management said during the earnings call that OXY can't unilaterally change rates on existing contracts. But there may be a renegotiation and OXY is considering selling its future 55.45% ownership stake. In any case, a lot of that looks priced in and we'd hang in.

Buddy

2:59

You will probably get 100 questions today about AM but I will go ahead and ask for a current update and outlook. also, is it a buy at the current depressed level? (I am not long but it was on my radar). Many thanks.

Roger Conrad

2:59

There's really not much to say until Antero Midstream and its parent/biggest customer Antero Resources report out Q2 results later today--the earnings call is tomorrow morning. We talked about some of the bigger issues in Appalachian midstream in the July 26 Alert as well as in several questions this chat. Our view is to hang in until we get a good read from the numbers and guidance. And I can promise you an Alert Antero at that time, as well as for any other high yielding MLPs meriting comment.

Howard F

3:09

What is your take on ECA and Dov

Elliott Gue

3:09

Dover (DOV) is a name we've recommended in Deep Dive Investing for some time. It's a defensive industrial stock that makes, among other things, self-service gasoline pumps and those commercial freezer/fridge compartments in grocery and convenience stores. They exited exposure to the energy business with the spin off of their artificial lift company into a separate business called Apergy last year. We continue to like the stock and it has done well for us in Deep Dive (up roughly 60% from recommendation). My only knock on it is that it's a little expensive trading at more than 16 times forward earnings, near the top end of its range in recent years. It's above our buy target in Deep Dive Investing right now but we're not recommending it as a sale either -- likely we'll allow our recommended "stop on close" to take us out of DOV should it break lower but will keep riding the stock higher as long as it performs well.

Bill

3:09

Elliott and Roger,

EIA does a great job covering hydrocarbon supply and demand, potential price moves and related equities. However, younger investors are favoring ESG index stocks, which in many cases eliminate oil and gas extraction and processing securities. While some of the majors are moving to renewables and your CUI service covers many renewables-focused securities like CWEN, BEP, NEE, HASI and AES, one potential reason oil and gas stocks haven’t enjoyed a full rebound may be the growth in ESG-focused investing. Have you considered including more new energy stocks, such as Sunrun, battery producers and car charger manufacturers in either service?
Thanks,
Bill

Roger Conrad

3:09

Thanks Bill. As editors and publishers, it's fair to say that we have a lot of discussion about what topics belong in what advisories. We want to give you what you want. But on the other hand, we also want to ensure we keep focus at our advisories. And at this point, all things electricity are at CUI, while all other energy is the province of EIA. This is a dynamic discussion and I hear what you say about ESG. But at this time, we see a great deal of opportunity in oil and gas, including for yield. And that's where our focus now is for EIA.

Eric

3:14

Why is MPLX underperforming the other large-cap midstreams? Is it too much exposure to the Appalachia? Is it just the MLP index rebalancing that occurred this past Monday?

Roger Conrad

3:14

As I indicated in a previous answer during the chat, I think the closing of the MLP's merger with Andeavor Logistics has likely created some technical turbulence in the shares--and at a time when the entire midstream sector has come into weakness due to concerns about more conservative production plans in US shale, particularly for natural gas. We really need to wait for earnings tomorrow before drawing too many conclusions from an operating standpoint. But I think the distribution increase announced last week is a hopeful sign.

DRG

3:17

What seems to be the issue with one of your highly recommended mid-stream player - AM ? After going sideways for a while following the merger with its GP, it has taken a turn for the worse recently. Does the market know something that we are overlooking or is this an opportunity to back up the truck ? Your thoughts please.

Roger Conrad

3:17

I don't have a lot to add to my answers to several earlier questions, or the July 26 Alert we sent to EIA readers "EQT Retrenches, Appalachian Gas Companies React." But i do think we'll get some answers as to the current health of Antero Midstream and its relationship with parent/biggest customer Antero Resources when they announce Q2 results later today. I don't think we want to do anything but hold on until we get them.

poorkev

3:20

Hello, Any thoughts on CEO or COP? Thanks.

Elliott Gue

3:20

CNOOC (CEO) has really focused on cost reductions in recent years and it's only sanctioning China oil projects with breakeven costs below $35/bbl. I think you'll probably need to see a rally in China and some signs of stabilizing growth as a catalyst to get a bigger move out of the stock but it's a solid company and they do have some production growth over the next few years. COP: Like most energy producers the stock hasn't performed very well but, a sI explained with reference to CLR earlier, it's a company that can produce copious free cash flow at modest oil prices, returning capital via dividends and buybacks. The share count is down in the region of 100 million shares since the end of 2016. Market may continue to focus on oil price volatility and macro headlines in the short run but I think ultimately that value will out.

Robert P.

3:23

Hi Roger and Elliott, look forward to your live webcasts as always. Right now my main concern is Antero Midstream-AM. What will you be looking for in tomorrow's conference call? My finger is on the sell button, because the outlook of natural gas pricing, no mention of there water recycling segment to expand with other customers, dcf coverage is not improving, as some of the larger companies in Nat.Gas. They are headquartered in Denver, and makes me wonder why they aren't closer to their operations, have any concern to you? Again, your expectations tomorrow on takeaway from conference call. As you can tell, I am disappointed in what has been going on with them since merging. Thanks so much, and your stability always keeps me from overreacting.

Roger Conrad

3:23

I think those are all very good questions to ask when AM announces numbers later today and holds its earnings call tomorrow morning. And how they're answered will certainly be a major factor whether we decide to push the sell button with you, or recommend sticking with Antero Midstream in anticipation of a recovery. My expectation now is what we hear won't be as dire as the drop in the share price would indicate. But I'm going to take a hard look at what's shown and said and then make a decision if I want to bet with management or cut this one loose.

Howard F

3:23

it is always great to hear your live chat.

Roger Conrad

3:23

Thanks Howard.

John

3:26

The number of drilling rigs continues to decline but there are still predictions that the US will be able to increase production of oil. Is this because of DUCs that are now being completed or are producers continuing to becoming more efficient at drilling wells? Also, how much of the "sweet spots" in the Permian basin have been drilled and are currently producing oil?

Elliott Gue

3:26

The short answer is it's because of all of those things. Efficiency has been a huge driver of production growth in recent years -- in this week's issue of EIA I'll have some more numbers and charts related to this. But, based on EIA data the Permian oil-directed rig count was about the same 440 or so rigs in October 2013 and June 2019. Yet, in June 2019 the same number of rigs produced more than 3.5 times more oil. I do think that US production growth estimates in 2019/20 are too high for a number of reasons. First, efficiency gains are slowing as the main levers the industry has used -- more proppant, longer wells -- are reaching their limits. At the same time, parent-child well interference is a big issue and what it basically means is that producers can probably drill fewer wells on their shale fairway (sweet spot acreage) than they thought a few years ago. Also, I believe the market has been slow to recognize shale discipline -- for the first time I can remember shale producers are NOT reacting to higher

oil prices.

JEFFREY H

3:27

HI FOLKS, I PUT THIS QUESTION IN EMAIL QUEUE BUT WILL AGAIN NOW. ANY THOUGHTS ABOUT VET? IT GOT CLOBBERED AFTER ANNOUNCING BUYBACK AND FRENCH REFINERY OUTAGE. COMPANY SAYS IT'S COMMITTED TO DIVIDEND, HOW DO YOU FEEL ABOUT THAT ? THANKS.

Roger Conrad

3:27

Hi Jeffrey. Yes I was just getting around to answering your Vermilion question. The Q2 numbers were pretty much what I was expecting, excluding the temporary impact of the outage at the French refinery of course. Other than that, they seem to be executing their low risk drilling plan, which in Q2 was actually entirely self funded despite a big drop in benchmark selling prices in several markets. I do think the stock buyback is a vote of confidence by management, but the market is obviously concerned about what happens if gas prices stay weak in Europe and Canada.

Mark

3:31

Hi Roger and Elliott In your last issue you talked about falling oil and gas production and I would like you updated prognosis for improved stock performance for our portfolio members MRO, WPX, and OXY all of which are sharply down since early May and at or near 52 week lows. Thanks Mark

Elliott Gue

3:31

I coverde some of these points in response to a prior question but the bottom line is that thee producers are proving their ability to generate meaningful free cash flow at current/lower oil prices. They're paying down debt (already pretty low), buying back stocks and initiating or raising dividends. The market isn't giving them any credit as it remains focused on factors like oil price volatility but we believe it will be tough to ignore these fundamentals over the long haul. In some cases, even assuming a pretty flat curve these E&Ps would be in a position to pay down all their debt and buy back 50% or more of their shares in 10 years. Eventually stocks should get credit and the upside re-rating could be dramatic indeed.

Roger Conrad

3:32

Continuing on Vermilion, they've never cut their distribution--even when they converted to a corporation or went through the big energy price declines in 2008 and 2015. So I think they would continue to resist that if at all possible. Management has talked about cutting debt to under 1.5 times EBITDA, but only gradually over time and there has been progress in that direction. I think investors are used to seeing high energy yields get cut, so lower prices tend to beget even lower ones. But this company is sticking to strategy at this time. I wouldn't say it was a "safe" stock but I think it's a good high yielding energy bet, especially from here.

Mark

3:37

Hi Roger Could you comment on the financial and operational performance of the Australian LNG producer Santos. Have they reduced their debt levels and increased the flow of NG feedstock to meet their LNG needs. Have they successfully increased their LNG shipments to China. Thanks

Roger Conrad

3:37

Santos is one of the Australian oil and gas producers we track in the International Coverage Universe on the EIA website. They are definitely in growth mode, boosting output 32% in first half 2019 and they're planning more expansion focused on LNG--acquiring 14.3% of a project in Papua New Guinea recently. A lot of that product is going to China but also to other Asian nations, and it remains in demand in Australia as well where the government is encouraging new E&P. We rate the stock a hold after it recent boost and prefer Oil Search and Woodside. But Santos looks solid.

Mack

3:37

Do you have any updated opinion on post-spinoff CPLP, both CPLP and the other spin-off company (who's name I can remember!)

Elliott Gue

3:37

Diamond S Shipping is the spin-off. I think these companies are pretty well run but the problem is that the tanker market is pretty depressed and has been for a long while. Eventually supply and demand may rebalance but not at this time. We sold out our tanker exposure some time ago I the model portfolio because the recovery in tanker rates was just not materializing. I think we'd need to see improvement in the fundamentals of the tanker market before getting involved.

John

3:42

Roger, read your earlier answer on Oasis. Not sure your answer addressed my question, as Q2 earnings will not necessarily address the various items I set forth (e.g., low liquidity for stock, 100% debt to finance Capex, junk credit for parent company on whose fortunes OMP depends, etc.). Would appreciate your perspective on those as it would seem that these need to be taken into account along with the positives. Also, the Q1 answer of the CEO that "we'll deal with IDR issue when it becomes an issue" (perhaps an unfair paraphrase, but nonetheless answer did not specifically address the question asked) raised a red flag for me.

Roger Conrad

3:42

We will see new numbers for distribution coverage, which directly relates to funding for CAPEX. And again, if the guidance is still for 1.7 to 1.9 times in the second half, that eliminates a great deal of need for outside capital. I also don't believe it's accurate that they've been wholly reliant on debt to fund CAPEX. Oasis is rated B+ by S&P with a stable outlook, but the bonds of May 2026 yield only about 7% to maturity, so it's still able to access capital markets on reasonable terms. The credit line maturing in 2022 is ICE LIBOR plus 175 basis points--again reasonable terms.

Roger Conrad

3:45

No doubt the CEO will be asked about the IDRs again during the conference call, which might provide a read on future plans. The company is dependent on OAS' drilling plans and we have seen what can happen to midstreams when their primary E&P customer cuts back--EQT's current actions regarding EQM for example. At this point, however, OAS has given no indication that it's not continuing with its plans in the Bakken. And again until we get actual numbers, we really don't have a basis to judge their motives.

3:48

One more point on Oasis Midstream, they've laid out a business plan that will allow them to expand coverage to 1.7 to 1.9 times while ramping up the distribution by 15%. The 8.62% yield the common units trade to me clearly indicates a great deal of investor skepticism they can do it--very likely because investors are asking the same questions you are. But that's a pretty low bar of expectations--not unique in this sector by any means, but it can mean very good things if the results are even slightly better than what people are expecting.

Mack

3:54

ENLC price has dropped below 10 and yield is about 11.7% Very low price and high yield. Is there something to worry about here that we've been missing?? Thanks.

Roger Conrad

3:54

I hate to give almost the same answer to the question of why all of these high yield MLPs have given ground. But until we see Q2 numbers and hear guidance--which for EnLink will be August 6--there's really not much to do but speculate. EnLink is heavily invested in the Permian Basin and some midstream companies and producers have relayed concerns about volumes going forward. The in line distribution increase we saw earlier this month is encouraging that we won't see a big negative surprise for ENLC. So were Enterprise Products Partners' very steady results and CEO Jim Teague's statement that Permian flows were at "expected levels."

Roger Conrad

3:57

Adding to my EnLink answer, Teague also said "the Houston Ship Channel is now just as important as the Strait of Hormuz."--Hyperbole perhaps but not exactly what you'd hear if an E&P region and its related midstream companies were on the brink of collapse. Kinder Morgan's results earlier in the month said pretty much the same thing. In any case, the drop in EnLink has left shares at a price indicating very low expectations that won't be hard to beat August 6--and until then the best idea is just to hang in there.

4:03

Your thoughts on ROAN & RVRA obtained from a bond recommended several years ago please

Roger Conrad

4:03

I think both companies will survive despite the retreat in their share prices. One encouraging fact about ROAN is the 43.59% lift in insider ownership the past six months, even as the stock has dropped by 85% this year. Earnings are August 7. RVRA reports on August 8, and is down close to 30% this year but has virtually no debt with $390 mil in available credit. Our preference in E&P stocks is definitely what we hold in the Portfolio. But for those who still haven't sold this pair, the best course at this point is to hold.

4:05

I know AM is in you model portfolio and classified as conservative holding. However in a few shorts months the stock has tanked almost 20 percent. In looking back you see how dependent they are on AR which is concentrated in Appalachia and nat gas. Should this been a major factor in your strong outlook regarding AM.

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