JotCast | Energy & Income Advisor Live Chat June2019

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Energy & Income Advisor Live Chat June2019

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Elliott Gue

3:51

I don't have exact figures on that to give you. It will also depend upon factors like charging and engine efficiency. However, can put some meat on the bones for you -- specifically, I saw a report from Bloomberg showing that electric vehicles currently account for about 0.2% of global electricity demand and they're projecting that to rise to about 9% by 2050. To put that into context, Bloomberg has one of the more aggressive estimates for EV adoption out there (personally I think it's unrealistic) and they expect sales of EVs to top sales of internal combustion engines by 2035. But, the bottom line is that even in a scenario where EVs rise to make up most of the market for cars (as in Bloomberg's 2050 estimate) then electricity demand only sees a modest bump from EV adoption. Another report out of McKinsey on Germany shows battery electric vehicles at 40% of the total vehicle population in 2050 but accounting for only 40 TWh of demand out of a total of about 620 TWh. There are some concerns about the changi

Elliott Gue

3:52

changing shape of the load curve -- i.e. power demand in evening rises as people come home and plug in their cars.

Hans

3:53

Roger, Perhaps not Energy related, but would you know what happened to ARESF the stock dropped 10% today. Thanks

Roger Conrad

3:53

There's not really any news on this REIT. I also notice a massive discrepancy in the price of Artis' OTC listing (ARESF) and its Toronto Stock Exchange listing AX-U--which ARESF is supposed to track. That's net of a slight retreat in the Canadian dollar today. This leads me to believe what we're seeing today is basically what I saw many times when I edited an advisory called Canadian Edge earlier this decade with our former publisher. That's a false move in the OTC price of the shares.

Roger Conrad

3:54

Finishing my answer on Artis, I think it is turning the corner as a business after extreme weakness in the Calgary office market forced a 50% dividend cut late last year. If you haven't sold yet there's no reason to now. I track it in Deep Dive Investing's REIT Sheet, currently a hold.

Frank

3:54

I'd like to sneak in another question..about DKL. I seem to remember you cautioning about it being of higher risk. Could you elaborate? Thanx

Elliott Gue

3:54

DKL is a smaller MLP and their distribution cash coverage is only 1.06 to 1, which is on the low side. Also, cost of equity capital is on the high side (10%). That said, the company has followed through on plans to boost its distributions steadily and they do have some relatively low risk small-scale projects on track to boost cash flows over time.

Dan

4:01

Several analysts have raised their target price for FANG to $135/140. Is that realistic? ... if so, in what kind of time frame?

Roger Conrad

4:01

Diamondback Energy has a great reserve in the Permian Basin, which is balanced off somewhat by its roughly $5.7 bil in debt. On the other hand, the shares have been as high as $140 plus as recently as last October, so I think it could certainly get back there. The market is very likely looking for more evidence the company is self funding what has to date been extremely robust production growth. And we'll see another set of numbers in early August. We like several other producers more and they're in the Actively Managed Portfolio. But FANG is high quality.

Roger Conrad

4:03

We also like Viper Energy Partners (NSDQ: VNOM) below 40, as bet on energy prices. It's a royalty trust that varies its dividend with production on its lands and energy prices.

Jon B

4:05

One more if you have a chance. What do you think of bpmp? They seem to have a bit of a hodge podge of assets. Why own this over the likes of a Magellan or Enterprise with well connected far-reaching assets? Appreciate the chat.

Roger Conrad

4:05

You're welcome. We don't prefer it, though we do have plans to begin covering it in the MLP Ratings table on the EIA website. One could argue it has a supportive parent/GP that will drop down assets to raise cash. But there's also the potential for a roll-up and the terms of the drops may favor the parent. You don't have that problem with MMP and EPD--focused businesses, no GPs.

Herm

4:07

A philosophical question. There are a number of stocks in our coverage which at current prices seem like good values but with so many issues causing uncertainty and the market at a new high would you suggest holding off any new purchases and perhaps wait for a better buying opportunity?

Roger Conrad

4:07

Our view remains that energy is basically marching to its own drummer now as a sector. It's likely even a stock like EPD will drop further in a full on bear market. But one we still don't see the necessary condition for one--a recession--and two even if prices did drop, the companies we're recommending are raising capital largely independent of equity markets to grow. Distributions are well covered and balance sheets are stronger than they've been maybe ever as self funding continues.

Roger Conrad

4:11

Continuing the answer, you may get better entry points but what you're seeing now for the best in class is pretty close to what we used to call "dream buy" prices. One could set buy limit orders slightly below where current prices are as well. But again, our view is prices are already low enough to be worth adding best in class energy companies.

Andrew

4:19

Thanks for answering all these questions. I know you are bullish on TC Energy (TRP) and I've done pretty well with them (not as good as I have with Pembina however). But I keep reading that TRP has very high leverage - I've seen as high as 6X vs 3.5 for EPD or 4.5 for KMI. Can I hear your thoughts on their leverage?

Roger Conrad

4:19

Debt/EBITDA is on the high side but in the case of TRP I don't think it gives a clear picture of leverage risk. For example, the company is rated BBB+ by S&P with a stable outlook, that's the same as EPD and higher than KMI. They also have bonds maturing in October 2049 that yield just 3.87% to maturity--so obviously the bond market isn't worried about TC Energy's debt either.

Roger Conrad

4:19

Bottom line is I think this says more about the risk of over focusing on a single number when looking at company leverage, rather than anything about TRP.

Andrew

4:22

Can I ask on more. you talked about ENLC and AM, already, but do you see them cutting distributions? +10% is generally viewed as pricing in a cut. If the market is going to reward them for their distribution, why a) keep raising and b) why not retain more and fund even more growth with case vs debt? Would the shares collapse if they stopped raising and/or cut the payout?

Roger Conrad

4:22

Like I said, I don't read minds. But both AM and ENLC have solid coverage ratios, manageable leverage and management that says they intend to reliably increase payouts over time. I also think the record is pretty clear that investors do not reward dividend cutters--no matter what management says, they're always a sign of weakness. What these companies might do is throttle back on distribution growth to hold in more cash flow. That's a strategy that has been rewarded by investors.

Roger Conrad

4:23

That said, there's nothing at this point to indicate these companies aren't going to follow through on their previously announced financial strategies.

Mel W.

4:27

Hey Roger, Hope all's well with you. Questions about hanging on to, Bird Construction BIRDF, Cineplex CPXGF, TEL Telefonica, ARESF Artis Real Estate. All have been down for sometime and wondering best direction. Thank you

Roger Conrad

4:27

I think Telefonica SA is still a worthwhile bet on global 5-G development and deep value at just 10.4 times expected 2019 earnings per share. I cover it in Conrad's Utility Investor. Artis I addressed above. Bird we still track in EIA in the International Coverage Universe--it's been a sell for some time and I think odds still favor another dividend cut later this year. Cineplex still looks solid to me, especially after the dividend increase this month. They've stuck to their core business over the years and continue to find ways to grow conservatively.

Roger Conrad

4:27

Thank you for the well wishes!

Arnold S

4:45

What do you think about ETR. A steady March upwards for a year now. Too late to buy?

Roger Conrad

4:45

I think for now it is. We had a long standing buy target for the stock at 90 and it's now well over $100. I like the direction of the company to grow its energy patch utility franchise and the exit from wholesale nuclear power has gone about as well as we could have hoped, with Pilgrim shutting down today. But at 17.7 times expected 2019 earnings, this all appears to be in the share price. It is still a Conservative Holding in Conrad's Utility Investor but as a hold at this point.

Pablo

4:49

Referring back to your earlier answer on AM’s lagging performance. Do you think the market is looking too closely at AR’s slowing down on their production schedule and their price being down over 25% YTD?

Roger Conrad

4:49

I think there's concern about sufficient offtake capacity in Appalachia--and a growing discount in selling price versus Henry Hub--for there to be a great deal of skepticism regarding producers' plans in the region. I think that could be alleviated by forward momentum with the Mountain Valley Pipeline or the Atlantic Coast Pipeline. But you still have a company here (AM) that's laid out a pretty compelling asset growth strategy despite these factors--that still suggests a disconnect in my view.

Roger Conrad

4:49

in terms of valuation

Pablo

5:17

Could you please comment on CXO. I read that their Permian acreage is some of the best but the market has them in a trading range around $100. Do they have a problem finding pipeline capacity to get their product to market?

Elliott Gue

5:17

I don't think that pipeline capacity is the driving force for performance it was 12 months ago because of new capacity that's starting up right now. You can see it in the Midland-Cushing and Midland-Houston price differentials which have shrunk to just $0.20/bbl and $4.50/bbl respectively from 17.90/bbl and well north of $20/bbl respectively last summer. As for CXO's performance it appears all market related to me -- CXO is up about 1% YTD, which is in line with the E&P index at +2.3 to 3%.

Kathy

5:42

Thoughts on BEP. Long term hold?

Roger Conrad

5:42

Yes, though I wouldn't chase it over 35 on the NYSE-listed share. Next earnings are in early August and I think we'll see more successful asset expansion. The share price is affected by the USD/Canadian dollar exchange rate since the home market is Toronto. But I think this long-time negative is becoming a long-term positive.

Roger Conrad

6:19

Well that looks like all we have this month in the queue and via email. Thanks everyone for participating this month and don't forget you'll be emailed a link to access the complete chat transcript shortly after we close the chat. You can also access it directly on the site.

Hope all of you have a Happy 4th of July. Talk to you again next month, or sooner if you drop us a line at service@capitalisttimes.com.

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