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Energy & Income Advisor Live Chat June2019
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AvatarRoger Conrad
2:01
Hi everyone and welcome to this month's Energy and Income Advisor live subscriber chat. We look forward to your questions.
2:02
A couple of housekeeping items first--There is no audio and there will be a published transcript available of all Q&A shortly following the close of this chat. That will be after we've answered all the questions in the queue, as well as what we've received via email prior to the chat.
Per usual, I'm going to start with answers to some questions we've received prior to the chat:
2:03
Q. Roger, What is your opinion on Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)? You have recommended it in the past as the low cost producer in Canada, but your coverage of Peyto seems to have been discontinued. Thanks—Ralph B.

A. Ralph, we continue to cover Peyto in our International Coverage Universe on the Energy and Income Advisor website. We have not been positive on this name as well as most Canadian oil and gas producers for some time, mainly because of the lack of takeaway capacity (pipelines, etc) where they operate. This has caused extreme pricing differentials with the North American benchmark Henry Hub.

The AECO Hub today, for example, reports a spot market price of just 42 cents per million BTUs for natural gas. That’s $2 below the Henry Hub price, which has come down sharply since winter.

Even with sub-$1 all-in cash costs, Peyto can’t make money at that level. Our feeling is this won’t be a permanent state of affairs, and in fact there is new natural gas transportation
capacity under construction in Canada that will benefit the company. But for now, Peyto has pretty much gone to ground—cutting back on outlays, reducing debt and slashing its monthly dividend again to 2 cents Canadian.

The silver lining is the stock is definitely starting to look like deep value and this company still has bonds trading at sizeable premiums to par value, meaning no chance of a bankruptcy filing. Expect to see an update of the Canadian energy stock universe in an upcoming issue of EIA.
2:04
Q. I will be traveling on July 1, so I wanted to submit a question in advance.  Thanks Elliott, Roger and Sherry.

I know you’ve commented positively on Antero Midstream Corp (NYSE: AM) in recent issues of EIA … and all 17 wall street analysts that follow AM are positive on this stock with 9 strong buy and 8 buy recommendations and a target price for the stock that averages $18 per share. What could the “market” be seeing that none of the analysts are seeing? This seems like a disconnect. Thanks!—Marty L.
A. Thanks Marty. I completely agree there’s a disconnect between Antero’s strong underlying business fundamentals and the seeming lack of investor interest in its shares. That’s why you can still get a well-covered yield of better than 10 percent growing at a reliable mid-single digit rate. I also note that the company recently upsized an offering of 9-year bonds from $600 mil to $650 mil at the modest interest rate of 5.75 percent, so the bond market has no problems buying its paper.

I think there were solid long-term economic reasons for management to combine Antero Midstream Partners with its general partner into a new corporation earlier this year. But I have to figure management is disappointed with the -5.3 percent total return since including dividends, especially since the Alerian MLP Index is actually up 2.3 percent over the same time frame.
In my opinion, that should give other MLP management teams a little pause before they decide to convert to C-corps. Clearly, Antero has lost some of its core shareholders and has yet to replace them. We still like this company very much as a long-term play and expect to see solid second quarter numbers when they’re announced at the end of the month. And it’s a buy up to 14 for anyone who doesn’t already own it. But if you’re looking for a reason why this stock may be lagging, I think that’s a pretty good explanation. Note that Antero Resources (NYSE: AR) owns 31.26 percent of the company.
2:05
Q. Hi Folks, Thanks for another opportunity to pick your brains. I went into Inter Pipeline (TSX: IPL, OTC: IPPLF) in 2016-2017 when you considered it  a "low risk" investment in midstream.  It's now down mightily. I do understand that there are issues with Canadian oil sands, but I don't understand why this company is getting clobbered so badly. Would you kindly explain?  Do you foresee a dividend cut or a buyout at a low price?  Do you foresee any bright spots in the company's future? Are its NLG investments are a red flag in this market environment? Is it time to decamp?
A.Hi Jeffrey. Regarding Inter Pipeline, the Canadian midstream company’s stock has been a disappointing performer compared to, for example, Pembina Pipeline Corp (TSX: PPL, NYSE: PBA). Since the beginning of 2016, however, it’s still returned about 22.5 percent in addition to raising its dividend three times for a total of 9.6 percent. Again, those aren’t quite Pembina numbers (103.9 percent with 5 dividend increases, total of 31.1 percent). But in light of the bloodbath of Canadian producers stemming from oil price differentials as high as $30 to $40 a barrel at times—as well as the Alberta government’s decision to force production cutbacks—that’s not a terrible performance. You still also have decent dividend coverage (payout 82 percent in a seasonally weak Q1), a robust asset expansion program including propane processing infrastructure and European energy storage and debt reduction. I don’t see a rapid turnaround until there’s better news from the Canadian energy patch. But this is still a good name in
the Canadian midstream space and we continue to recommend a buy for those who don’t already own it.
2:06
Q. Roger and Elliot. I am sure you will discuss this, but I will ask just in case.  With WTI advancing into the mid 50s, why have US energy stocks (both midstream and producers) remained so low?  Are you still bullish on oil and if so, do you see advances in the energy sector equities?  I've stayed with names like MRO and OXY despite their decline and I hold most of your best in class MLPs.  On your advice, I bought EPD below $20 in January 2017, and I certainly haven't regretted it. Recently you have suggested that now is another great time to buy best in class. Do you still think so? You've been calling for the market to pay attention for quite some time now, but so far the market isn't listening.  Is the market simply fixated on "the coming downturn?" The dividends and distributions are nice but…Many thanks.--Jeffrey H.
Regarding energy equities in general, we believe there’s strong value with the best in class offering growing and high yields backed by proven business strategies and increasingly self-funding of capital spending. Eventually, we believe this will bring back the dollars to the sector, but in the meantime the dividends alone are a pretty nice reward for being patient.
2:07
Sorry that last paragraph is the answer to the question.
Howard F
2:13
do you follow either ENPH or SPWR
AvatarRoger Conrad
2:13
We do track SunPower (NSDQ: SPWR) in Conrad's Utility Investor in our Utility Report Card. The producer of solar components has struggled the past couple years, first with very tough competition from China and what's been a literal race to the bottom in terms of solar panel prices and then starting last year with President Trump's tariffs, which disrupted their supply chain. In my view, the best thing this stock has had going for it is Total SA's 55.18% ownership stake, which is essentially a backstop for the business.
AvatarRoger Conrad
2:15
To make another point on the solar business, while I think SPWR is doing what it takes to survive a difficult market environment, I'm much more attracted to adopters of solar than manufacturers, which are under incredible pressure to provide an ever-cheaper and more efficient project. ENPH's focus on improving efficiency may be a bit more resilient but I would still strongly advice not mistaking these for tech companies.
Arnold S.
2:15
Hello there, thanks for doing the chat today. Could you please briefly comment on whether these would currently be a good buy?

MPO Midstates Petroleum - near a one year low.
MPC and MRO (both Marathon but is one preferable to the other?)
NBL  Noble Energy.

Thanks.
AvatarElliott Gue
2:15
Thanks for attending this month's chat. To be honest, MPO isn't a name I've looked at in a while but I do know the company. I think the problem you have there is that they really need higher oil prices to generate free cash flow from their more mature fields. At the current time, even companies like MRO, CXO, CLR -- the big shale producers -- aren't performing well as stocks despite the fact that they can generate significant free cash flow even with oil around $50/bbl. In effect, even energy companies that are performing very well as businesses aren't performing well as stocks because the sector is out of favor and investors have grown tired with extreme volatility in oil prices. In this environment, I'd rather buy the highest quality, lowest cost producers with a decent debt position and wait for the market to recognize their value (value will out eventually) than to take a shot with a small, lower quality producer like MPO.
AvatarElliott Gue
2:17
To that I'd add that we prefer MRO to MPC here. I am starting to get interested in the refiners (MPC is a refiner) as I suspect crack spreads are bottoming but I still think there's more upside in the high-quality producers with strong free cash flow like MRO. NBL is a solid producer, the only "knock" against them is "Colorado confusion," and uncertainty surrounding the future of regulation in the State.
Loralie
2:19
I so appreciate these info sessions. What is your current take on:
TNK, ERF, VET, CRC, WMB and AETUF? Thank you.
AvatarRoger Conrad
2:19
At one time or another, we've recommended selling most of these in the past year, which has saved readers at least a little pain. As I noted above, it's been a very tough couple years for Canadian energy stocks. I think AETUF, VET and ERF are all basically solid and will survive and we will be updating the space in a future EIA. I think if you still own them, there's no reason to sell now.
AvatarRoger Conrad
2:22
As for Williams, it's still a buy up to 28, as it has been since acquiring WPZ. The company is increasing dividends as it brings new assets on stream in line with guidance. And as it becomes increasingly difficult to site and build new pipelines, its existing assets are only becoming more valuable. Finally, we see a tough road ahead for TNK--as oil tankers remain in a glut. Someday that won't be the case but there's no dividend to reward the patient.
Pat M
2:26
Hello Roger and Elliott,

I would like your thoughts on prospects for: Vermillion (Vet), Keyera , and a bonus one, Canadian Apt REIT.

I really like that you give a $ weight to your EIA Actively Managed Portfolio stocks.  This is the most helpful change that you have made in a long time.

Thanks for your efforts!
AvatarRoger Conrad
2:26
Thank you! We're glad you like this feature! I think Vermilion will continue to weather this slide in the Canadian energy patch mainly because it's diversified in Europe and Australia where energy prices are higher. I'm very interested in what sort of dividend metrics they announce for Q2 in late July. But at this point, the stock is starting to look like deep value.
AvatarRoger Conrad
2:29
Adding to my answer, Keyera continues to weather the massive downturn in the Canadian energy patch by virtue of having assets in the right places and good customers. I think we can still look forward to modest dividend growth this year as it adds new assets. It's a midstream for patient investors but I'm looking for a new entry point. Look for one in a future EIA issue.
2:30
Finally, Canadian Apartment remains a very steady story with mid-single digit dividend growth as it adds quality residential assets in Canada's best markets. I do track it in the Deep Dive Investing REIT Sheet, along with other solid Canadian REITs.
David O.
2:31
Love plastic!  Love our petrochemicals and EIA recommendations!  But our friends on the left are absolutely determined to “save the planet” from Big Oil, the new “Tobacco.”  You see the early push back on single use plastic containers...and straws!   I read someplace where the paper container alternatives require 4 times more energy to produce...I’m all for it😊!  Would you consider a company like Westrock WRK (paper / cardboard) to hedge some of our positions?

Now retired...living off investment income.  Have real trouble finding yield beyond your recommendations.  In a properly and optimally diversified portfolio, what would you say is the maximum percent one should have in EIA recommendations???  20%?  40%?
AvatarElliott Gue
2:31
It's interesting you should mention that. I actually read a piece on Bloomberg recently (the writer tends to be more left-leaning) that was actually pointing out that despite all the focus on single-use plastic bags and plastic straws the actual portion of the plastic waste stream derived from thes esources is actually pretty meaningful. In effect, it's an example of something that gets a ton of headlines but actually has pretty minimal impact on plastic demand vis a vis other materials.

On a lighter and more anecdotal basis, I know that since they banned plastic straws down here in Miami Beach I've found the paper substitutes pretty much useless. Takes at least 2 paper straws to work through one mojito. So maybe that's even more incremental demand.

That said, and in all seriousness, in the past we have definitely looked for hedges along the lines you mentioned. For example, back in 2015 we recommended airlines and cruise ship operators, both groups that benefit from falling oil prices. Fast food companie
AvatarElliott Gue
2:32
companies are also inversely correlated to oil prices -- lower energy prices represent a significant tax cut, particularly for low to middle income consumers.

Another group that I've looked at extensively is the fertilizer producers -- falling natgas prices are a huge boon to US nitrogen (and to a lesser extent phosphate) producers as it's the single largest cost center.

Not ready to recommend any specifics right now but these are all areas we do monitor and would consider recommending as a hedge.
2:33
Finally, we generally do not recommend going above one-third of your portfolio in any one sector (energy or any other). It also makes sense to diversify within energy -- i.e. oil-focused midstream energy companies/MLPs, producers, services stocks, midstream companies more focused on gas , etc.
Howard F
2:34
I installed SunPower  panels by an authorized dealer and was so impressed I bought ENPH (Parent Company) and SPWR and in one month I am doing quite well with both.  Bought on gut feeling.
AvatarRoger Conrad
2:34
SunPower in particular had gotten pretty cheap I think. I'm sure you've seen from their chart, however, that its been quite a volatile stock the past few years. I do think the worst on tariffs at least is behind them, as they did later earn an exemption. But this is still a tough business to make money in despite all the adoption--just too many manufacturers fighting it out. Treat it like a trade.
Fred
2:37
What are your feelings about ET at the present?
AvatarRoger Conrad
2:37
We really think Energy Transfer has turned the corner on its debt problem, which was primarily responsible for all those "stealth" distribution cuts we saw every time they merged. We've included ET in our High Yield Energy List, which is now a regular feature of EIA. Coverage is strong and the company is ramping up expansion of Texas assets. They may not resume regular distribution growth this year to hold in more cash but they're on track to and the yield is high.
ted
2:40
Hello Elliot & Roger, Thanks for another chat, they are invaluable....last month Elliot you gave an in depth explanation of the "adjustment" figure for the monthly EIA supply report, and my take was that by it's nature it is a delayed indicator...my question is, when do you think it will finally effect current oil prices, or if it is  still a valid part of the fundamental picture. Thank You
AvatarElliott Gue
2:40
Yes, in a sense the adjustment factor is the EIA's way of adjusting for short term issues with their data collection. Because of changes in the US energy market -- US becoming a bigger producer, exporter of oil -- there are just more moving parts in the US energy market and it's becomoing harder to estimate the supply/demand outlook in real-time (or a near real-time) basis. To me it makes little sense that just a few weeks ago we got the largest single weekly oil inventory build in history and last week we got the second-largest decline in inventories in history. Supply and demand just don't turn on a dime like that -- my guess is that a good part of these distortions are down to timing of imports and exports each week. To your questions, habits die hard in financial markets -- traders are used to watching weekly inventory numbers like a hawk and I think you'll continue to see prices move each week regardless of the degree of noise in the high-frequency weekly data. Over a longer time frame -- say 2 to 3 mont
Dick
2:41
Any information or change in recommendation for ENLC.  I  added shares about two month ago at 20% higher prices  I am concerned about recent share price action. Despite a 11% plus current yield and Company forecasted Dividend increases of 5-10% annual, plus deferred Tax on 100% of Dividends for next two/three years, ENLC has recently been trading in high 9’s
AvatarRoger Conrad
2:41
We've been disappointed in EnLink's performance as well, though it has bounced the past few days. That said, there's been no indication they won't hold to their dividend growth forecast (I think 5% is more reasonable but still more than enough to justify the valuation. We have another batch of earnings out on August 6, but with this company's debt trading at solid premiums to par value I think there's actually less to the recent drop than meets the eye.
Mark D
2:41
Could you comment on OXY . Is our best exit strategy a takeover bid of OXY or do you they can recover following their APC takeover. What things encourages you and concerns you about OXY. Thanks Mark
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