JotCast | Energy & Income Advisor Live Chat June2019

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Energy & Income Advisor Live Chat June2019

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Elliott Gue

2:48

I don't think that OXY is a takeover target right now because I think an acquirer would not want to buy a company that's just taking on a major acquisition. I suppose it's possible an acquirer could swoop in and buy OXY with a "promise" to sell off assets or some sort of plan to break up the OXY/APC deal. But, that all seems unlikely to me in an environment where investors are definitely not rewarding bold moves from energy companies.

Roger Conrad

2:43

Adding to my view on EnLink, it's in our High Yield Energy list because it meets a host of financial and operating criteria. I suspect some of the weakness is because it lost core investors with the ENLK merger--as AM has since the AMGP/AM deal--and has yet to pick up additional ones. But our view is the 10% yield is an opportunity for patient investors.

Elliott Gue

2:48

All that said, we continue to really like OXY here … the market is too negative on the prospects for cost savings and value generation from the APC deal and I think there's room for a positive surprise from the integration. Also, on a standalone basis, OXY is on track to generate significant free cash flow over the next 2 to 3 years even at moderate oil prices in the $55/bbl range. I do believe that as this free cash flow actually materializes, you'll see the stock rewarded for it.

Andy Z

2:49

Thanks for taking questions each month. Can you comment on Noble Midstream (NBLX)? I know recommended stepping aside due to the political environment in Colorado, but has anything changed regarding Noble's growth prospects and their stated goal of raising distribution 20%? Which by extension is a way of asking if you still recommend selling or has it improved enough that this is a hold? Thanks again.

Roger Conrad

2:49

One of the larger developments affecting Noble Midstream the past couple months is follow up legislation in Colorado that clarified a previous law. Based on our read, the changes do give companies some flexibility but it's still a more difficult environment ahead--which is one reason NBLX is making that big move into Texas. I don't see Colorado providing that 20% distribution growth.

Mark D

2:52

Hi Roger and Elliott thanks so much for doing these sessions for us . We appreciate your insights and thoughts. I would like your comments on the downward drift of SLB and HAL over the last year. Your paragraphs and comments on these two in our Live Chats and Monthly Issues don't correlate with what the market thinks and I would like understand what the market is seeing and responding to in greater strength than the encouraging fundamentals of these two and the worlds long term energy needs. Thanks so much Mark

Elliott Gue

2:52

When it comes to the services stocks, the market is focused on earnings prospects over the next 12 months or so. For SLB, they're focused on the fact that the big oil producers -- the integrated oils and national oil companies -- just aren't spending much on expoloration and development of new fields. That's SLB's "bread and butter" source of profits. For HAL, they're focused on shale producers and the "Shale 2.0" model of more restrained spending even when oil prices rise (these companies are focused on cash flow not production growth).

Roger Conrad

2:52

Adding to my answer on NBLX, I think the reason the shares didn't respond more favorably to a solid Q1 report and the better news in Colorado is management admitted it's currently doing a "strategic review," and has been less than forthcoming about what's being considered. The MLP could be sold, for example, or convert to a corporation. I don't either would necessarily be a bad outcome for investors. But they do mean uncertainty that's still hanging like a dark cloud over the NBLX.

Elliott Gue

2:54

Our view on services stocks is that longer term investment MUST rise. In the modern history of the industry we have not seen a spending retrenchment this prolonger and, eventually, producers will need to replace those reserves or global oil production will fall sharply and prices will rise. Historically, buying services names when they're this deeply out of favor has been a good move though it's definitely a trade that's requiring a lot of patience right now.

Cliff

2:55

Hi Roger. Your thoughts on HP?

In particular, what would you consider to be a good entry point and sell price target for this drilling services company that is beaten down with rest of E &P sector.

Not buying quite yet, but....

Was thinking of selling some puts with strike below 50 if can get premium ~ $4, thus breakeven near 12 mo low and divvy not bad.

Seems bad news for the sector mostly priced in, if assigned I get paid to wait, if expires make nice % yield for Jan expiration.

also thinking about doing same with SLB.

thanks in advance for kind input

Roger Conrad

2:55

I agree with everything Elliott just said. In retrospect, we were early in this cycle recommending energy services firms, including large ones like SLB and HP. But while the companies themselves have had to adapt to shale economics--where producers cut the spigot on and off in line with price signals--they are clearly surviving and positioning for the next upswing, even as many rivals have fallen by the wayside.

Barry

3:00

Is OXY now a screaming buy? Is it a likely takeover at this price?

Roger Conrad

3:00

As Elliott has said, we still like OXY. The Anadarko deal is based on good industrial logic and the combination will still be small enough to be a valuable takeover. That actually may happen sooner if Icahn succeeds in blocking the deal. But the main point here is OXY with or without APC has some of the world's most valuable energy reserves--and there's a pretty sizable dividend to reward the patient.

Mark D

3:03

Hi Roger and Elliott

Elliott Gue

3:03

I just covered OXY in response to a prior question. Further to that, I wanted to make a broader comment on the sector that applies to OXY. In my view the valuation disconnect between likely longer-term oil pices and the E&P companies is the widest I've seen in my career. The better names are generating copious free cash flows with oil around $55 and deploying that capital to pay down debt and buy back stock. Among the larger E&Ps we recommend, debt just isn't much of a problem right now -- look at MRO where net debt is down from around $6 bn at year end 2015, falling to $4 billion this year. MRO is going to generate some $1.3 bn to $1.5 bn in free cash flow in 2019 and 2020 even with oil around $55/bbl. Eventually, if the stocks don't reflect free cash flow growth you're going to start seeing talk of some of these big producers going private.

Howard F

3:04

Do you see any hope for NBR

Roger Conrad

3:04

My take on that is probably it survives but why own it when you can have one of the companies in the Actively Managed Portfolio instead. Plenty of these are pretty close to deep value too and they don't have Noble's debt problem of $3.6 bil versus a market cap of just $1.1 bil. Sometimes when you get ready to ride a recovery it makes sense to change to a faster horse.

Lee

3:10

I have been reading more and more of the efforts by environmental groups to stall, delay, and stop infrastructure projects. Do you think their successes will continue and which geographic areas other than Texas, Oklahoma, Louisiana are more favorable in terms of courts and regulation? I am considering consolidating my midstream portfolio to best in class (EPD, MMP, KMI, ET. Et al) MLPs that operate mainly in the safer political environments. Would you consider producing a list of those for EIA publication?

Roger Conrad

3:10

This is a topic we've focused on quite a bit recently in EIA, including the Energy Commentary we posted last week "Best Bets on Pipeline Politics." If you didn't see it, you can find it on the EIA website under the "Articles" tab. I do see the "keep it in the ground" crowd continuing to mount challenges to new projects wherever they see an opening--and as I point out in "Best Bets" these groups are better funded now than they've ever been.

Roger Conrad

3:12

Adding to that pipelines answer, exposure to regulatory risk is an important part of our search criteria for energy stocks. The four names you mention--EPD, KMI, ET and MMP--all have in common limited immediate risk, mainly because they're concentrated in the traditional energy patch states where support for the industry is still solid. I don't rule out political challenges there either at some point. But for now they're in good shape.

Frank

3:17

Thoughts on DCP and CEPPU, please

Roger Conrad

3:17

We continue to rate DCP a buy under 35 in our MLP Ratings midstream coverage universe. Like so many of these companies, the high yield of 10% plus prices in far too much risk to a distribution that was covered by 1.45 times in Q1, as assets performed strongly. I don't see distribution growth anytime soon, as management has clearly elected to build coverage and tackle debt. That's a good move long-term and it's paid off with a bond rating upsized in May. We also like the Texas exposure.

Roger Conrad

3:19

Do you mean Sanchez Midstream Partners from CEPPU? It's a sell and we expect the distribution to be eliminated later this year, due to problems with its parent and largest customer Sanchez Energy.

Jon B

3:25

Saw an early response to a question on AM. With parent nearly fully hedged for next two years on nat gas and selling into foreign markets, seems like AM should be beneficiary. Question is, do you have any knowledge of why Warburg Pincus sold out of AR and AM? They must have had pretty intimate knowledge of the business prospects.

Roger Conrad

3:25

I don't pretend to read minds but I have a suspicion that the sales may be rooted in the fact that Warburg had exposure to both MLPs--and that when the merger happened they were overly exposed to a single name. Just FYI, they continue to hold a 7.91% stake, which puts them just behind Antero Resources the parent in terms of being the largest holders.

Roger Conrad

3:28

Adding to that answer about Antero, as a reader previously pointed out in their question, there are also a large number of research analysts that are bullish on Antero--including Citi, which made it a buy about a month ago. I don't know if you want to assign more credence to one research house's view over another's. But in my view, the better idea is to focus on the operating numbers ourselves--Q1 was solid; we'll see if Q2 is as well when Antero reports later this month.

Hans

3:29

Elliott, could you give us an update on MRC and CLB Thanks

Elliott Gue

3:29

Sure, MRC is basically a distributor of basic oilfield consumables. It's not done much as a stock recently though it has outperformed most of the services and equipment names just by staying relatively flat. I think that represents the stability of demand for the sort of products they distribute, which is less volatile than demand for rigs or demand for hydraulic fracturing services. We don't have it in the model portfolio because we don't see any imminent upside catalysts and we think there's probably more upside in other names. But, MRC is a solid company overall. As for Core Labs (CLB), you'll see talk about their leverage to shale drilling but the core of there business (pardon the pun) is really deepwater. That's where their margins are highest. The problem is much the same as that facing a name like SLB...there just isn't much spending on new exploration and development. I think it's coming (eventually the big oils MUST replace reserves) but the timing of the turn is a bit difficult.

3:30

CLB is, however, well-placed and a cheap way to play the eventual turn in the cycle.

Frank

3:31

CEPPU is a pfd of CEQP.

Roger Conrad

3:31

Thanks. We still very much like the common for Crestwood and continue to believe it will have the wherewithal to resume regular distribution growth this year. That to us is far more valuable than the slightly increased safety of owning a preferred stock. Crestwood is also tracked in our MLP Ratings table and we're looking for good Q2 numbers later this month.

Frank

3:35

You frequently use the words "patient" and "patience". How about a list of high yield stks requiring more than average patience? I'm wondering about candidates other than your high yield energy target list. Thanx

Roger Conrad

3:35

That's an interesting idea. Thank you. I would say that our general view on yield now is that there are still energy companies headed for distribution cuts against their best efforts. Some will do so because they need to cut debt. Some will because there's pressure on revenue that they can't replace, since they can't access capital on economic terms. Some will cut because they want to do more CAPEX and can't issue shares or bonds on good terms. And others will cut as the result of "strategic" reviews.

Roger Conrad

3:36

Finishing the high yield stocks with extra patience question, we prefer to avoid all of those risks--particularly with so many upper single digit/lower double-digit yields available with companies that don't share them. But you can look forward to a more yield focused piece in a future EIA. Thanks for the idea.

Robert P.

3:39

Hi Roger and Elliott, it is always forward looking to spend time with both of you online.. I have been a long time holder of Genesis (GEL), selling from time to time when stock price moves upwards to $22-23 range. Roger, you have been negative on their debt with a significant amount coming due in 2021, and have it as a sell. When you listen to qtrly webcast, the ceo never sounds real positive or upbeat( might just be me). During his webcast, he seems to always mention the company is conservatively managed and disciplined, the offshore pipes are always going to get better down the road and unexpected refinery shutdowns. What do you think about this and what would change your advice on signaling a buy again? The qtrly distribution has kept me from selling all of it, but rather sell from time to time.

Roger Conrad

3:39

Genesis as you might recall was one of our original portfolio holdings when Elliott and I launched an advisory called MLP Profits at our former publisher. By the time we started our own company and EIA, GEL was one of the more expensive MLPs and we already saw a challenge--in that management seemed to be sacrificing business cohesiveness in order to continue to meet 10% annualized distribution growth guidance. Unfortunately, it's never seemed to tackle that problem and as a result this MLP is still a hodge podge of assets, with as you point out a debt problem.

Roger Conrad

3:43

Continuing my answer on Genesis, they cut their distribution back in November 2017 and then started increasing it again. That ended this spring. I think the 1.42 times coverage ratio in Q1 provides a measure of safety--though again the combination of business including offshore pipes and soda ash is somewhat bizarre. But debt to EBITDA of 5.08 times is clearly a red flag. Bottom line--there are just too many other energy stocks with similar yields and far fewer risks.

Herm

3:48

I would appreciate your thoughts for COP which like some of the other E&P stocks hasn't move much. CFRA has it as its Focus Stock this week.

Roger Conrad

3:48

I don't have a lot more to add to what Elliott has said about the general weakness in E&P stocks and energy stocks in general. ConocoPhillips is one of the larger players with a very solid balance sheet and a safe (though under 2%) and growing dividend (9% last year). It's pretty much dead flat since the beginning of the year, which is very much an underperformance of the S&P Energy Index. I would say we prefer more focused names like those in the Actively Managed Portfolio.

John

3:51

How much additional electrical energy would be needed to replace the gasoline currently used in cars and light trucks? Or how many kilowatt hours is equivalent to the amount of gasoline consumed in this country every year?

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