JotCast | Energy & Income Advisor Live Chat March 2019

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Energy & Income Advisor Live Chat March 2019

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Roger Conrad

2:07

Hi everyone, welcome to this month's chat.

As always, there is no audio. Type in your questions and we

Elliott Gue

2:08

Hello everyone and welcome to the March chat. We'll answer the questions in the order received.

Roger Conrad

2:08

we'll get to all of them as quickly as we can. There will be a recorded transcript of all questions and answers at the conclusion of this chat. For those of you who sent in questions before the chat via email, we will be answering them throughout the chat.

David O

2:13

While I believe AOC and her clan exaggerate some about our imminent doom in 12 years due to CO2 suffocation, no doubt “cleaner energy” have and will make inroads into our traditional portfolios. My hope is cooler heads will prevail, and Nat Gas can do the job, but if Socialists become empowered, all bets are off. Please comment on my proposed strategy to deal with this as an investor. Rather than chasing the latest and greatest alternative energy scheme, enjoy my remaining decades in XOM, BP, Rds-A, CVX. They are big, tough, and smart. When alternatives arrive, they will be there with big $$$s. They presently (BP and RDS-A) have begun this. They probably could buy up all the upstarts tomorrow if they wanted to. I don’t think they are just going to roll over and become “buggy whips.” What is your sense?

Elliott Gue

2:13

In my view, there are no alternatives to oil in the intermediate term. Just look at Tesla -- they're caught between the proverbial rock and a hard place in that if they produce cars that make money (high-end feature-loaded luxury models -- then demand falls short. If they produce cheaper models that encourage demand, they lose money. Countries that have tried to discourage energy use (France via higher taxes on gas) have encountered problems (which are going to get worse the next time there's a recession). And then you have the problem that EVs also need scarce resources -- cobalt being the one I see as in the shortest supply over the intermediate term. I think the bigger risk here is that there's insufficient investment in new upstream developments (new fields) to meet growing global demand for crude oil.

Lyndon

2:13

BPMP is yielding a little over 8% and says, “We are committed to delivering our target of mid-teens per unit annual distribution growth through 2020.” How much did their distributable cash flow and EBITDA increase in 2018? What is their coverage ratio? What is their debt to EBITDA? What are their expansion plans?

Roger Conrad

2:13

BP Midstream is one that we plan to add to our MLP and Midstream coverage in the near future. The yield and distribution growth are pegged to drop down transactions the general partner has committed to. And while cost of capital is bit higher than they'd prefer, this is a commitment they can keep. They covered by 1.29 times in Q4 and have affirmed 2019.

Roger Conrad

2:15

Long term what happens to BPMP depends on what BP decides to do. Indications are they'll continue to support the MLP model of this unit and so long as they do, the distributions will be safe and will continue to grow--though possibly at a mid single digit rate after this year.

Frank

2:19

Thoughts on NGL; Are the Pfd's preferable? Sorry...

Roger Conrad

2:19

We like how NGL has been streamlining operations to focus on a few key areas, which combined with the distribution reduction has allowed it to reduce leverage and over time should allow it to build critical scale to compete long term. We also think that it has a ways to go and we like other MLPs and midstreams more. As for preferreds, my rule is to only buy fixed income issued by a company/MLP that I would want to own the common shares of. The preferred payout won't be cut except under extreme circumstances. But so long as NGL is restructuring, their credit will be at some risk. We track the company in our MLP Ratings table on the EIA website.

Howard F

2:22

your take on cf andx

Elliott Gue

2:22

CF Industries (CF) is a fertilizer producer that's focused on the nitrogen market. The process of producing nitrogen fertilizers requires the use of energy commodities -- coal, oil or natgas -- so clearly the US has a huge cost advantage here, given the low cost of US energy. CF is the biggest beneficiary of that. Near-term -- we had a cold wet fall and a cold winter so we're seeing some delays to plantings and fertilizer applications this year and that's hit demand for fertilizer near-term. I think you'll begin to see that ameliorate in Q2 2019 though. We did recommend this one in EIA sister publication Deep Dive Investing though from a risk discipline standpoint we recently got out -- may look to jump back in when the stock stabilizes. ANDX -- We have it rated a "Hold" and it's just not one of our favorites as the distribution coverage is thin at 1.02 times for Q4 and FY 2018....they've had to hold their distro constant as a result.

barrgold

2:24

I have a small loss in PBFX that I have held since 2014. It yields

Roger Conrad

2:24

We also rate PBFX a hold. The simplification deal that swaps shares to the general partner in exchange for eliminating incentive distribution rights should be a plus. But cost of capital is still high, which makes it more difficult to grow. Also distribution coverage is fairly thin. I do think the payout is solid here and that they will raise at a modest pace.

Michael L.

2:29

Hi Roger and Elliott. Is the now merged Western Midstream Partners still part of the new portfolio? It isn't shown in the Actively managed Portfolio.
Thanks

Roger Conrad

2:29

We made a considerable number of end of year moves to streamline the various portfolios we still have. One was to cut this position. We do rate it a buy up to 35 and continue to track the company--which combined the former WES and WGP--in the MLP Ratings/Midstream coverage universe.

Eric

2:32

Question I have, is oil range-bound because of all the oil worldwide that can be produced with the big contribution of shale oil? however the pipelines have to transport that oil to the shipping docks so could the oil pipelines be the number one investment? If so, which of pipelines would be the highest quality for oil transportation and growth

Elliott Gue

2:32

We don't see the price of oil as rangebound. Shale production growth has been dramatic in recent years but our research suggests it's going to slow down substantially in coming years for a number of reasons, both financial and technical. On the financial front, the upstream producers just aren't going to spend as much as they have been -- investors are asking for debt paydowns and returns on investments over production growth. On the technical front, the parent-child issue we outlined in the last issue is not fully appreciated in my view but there's a growing chorus of industry participants talking about it. I think you'll find winners in upstream, midstream and services in this environment though I think the best returns will be from stock selection over energy "sector" (i.e. Buy Marathon not an ETF tracking upstream names). As far as the pipeline names are concerned, we have AM, CEQP, ET, EPD, HESM, MMP, OMP and PAGP in the Active T. Return Portfolio and those are our favorites here.

Hans

2:35

APC still around 44-45 you have it as a buy up to 74 is this justified.

Elliott Gue

2:35

We continue to like APC. Colorado is a short-term drag but we think that they're one of the leader sof the "Shale 2.0" business model. Basically, they're setting capital spending as if oil were around $50/bbl and returning FCF above that to shareholders via dividends, debt paydowns and buybacks. We think that as the value of this strategy becomes more obvious this year, stocks like APC are due a dramatic re-rating higher.

Brian

2:40

So we know the macro economic climate will effect oil prices. When Powell tried to raise rates and effect QT the markets sold off. Powell backed off. We also can see with our own eyes that inflation is higher than the CPI. At what point do you think interest rates have to rise? Do you guess that favorable supply/demand will be a strong enough tailwind 2-5yrs out?

Elliott Gue

2:41

It's a little esoteric but I think something very important is going on behind the scenes at the Fed. Basically, if you look at the measures of inflation the Fed watches most closely (PCE price index) or even CPI (core or headline), inflation has consistently fallen short of the Fed's 2% target for almost the entire cycle. If you read comments from various officials (including Powell) you'll see that their concern right now is inflation that's too LOW not too high. The leading theory at the Fed (Powell, Clarida and others have commented on this) is that the problem is low inflation expectations (basically the idea is that people expect inflation to be low so it is low). Personally, I see problems with this theory but what I think doesn't matter -- the Fed's proposed solution to this is to try and push inflation well above their 2% target when the economy is growing so that it averages 2% over the cycle. So, I think you're going to see them formally adopt an average inflation targeting system this year.

2:42

The main result of this is that they're going to be slower to raise rates than they otherwise would be. On the margin, this is good for oil and other commodities but I would say that I think the supply demand issues we've highlighted in Energy & Income Advisor are far and away the more important drivers of oil.

Roger Conrad

2:44

Adding to Eric's question about pipelines being a number one investment, there's no question about there being a shortage of capacity that continues to affect regional pricing in North America. One reason is opponents of projects have unprecedented access to funding so they can litigate basically any project in multiple venues. We believe this favors the best capitalized companies that have focused efforts on energy friendly places like Texas. Our favorites from the Actively Managed Portfolio still include EPD, MMP, PAA, PBA, TRP and KMI.

Doug

2:46

HAL and SLB both have earnings analysis predictions of significantly lowered non GAAP earnings as compared to the previous 3 quarters. With crude oil price up, is this a sign of trouble for them?

Elliott Gue

2:46

I think the downward revisions you've seen over the past few months are the result of lower oil prices...There's always a bit of a lag here and I think that if you see oil prices continue on up, you could see earnings estimates rise again as analysts re-set their models to reflect higher oil prices. Also, remember that services are kind of a second-derivative play...they don't benefit directly from rising oil prices, they benefit from rising drilling activity, which always lags prices by a few quarters. Longer term, I do think this industry is changing -- the focus is moving in favor of contracts that reward services firms for achieving better well results rather than a simple pay for service type of arrangement.

Lee O

2:47

i own trp and epd. i bought trp thinking it would offer more growth potential.i am now up 11.5%.do you have a pipeline you think better or stay put.i am very long holder of epd and will keep it.

Roger Conrad

2:47

I think TRP is like EPD a keeper in the North American midstream space. Two things holding back the price the past couple years have been a weak Canadian dollar and the ups and downs of getting the Keystone XL pipeline built. My contention is odds do now favor this pipeline but that TRP doesn't depend on it to fuel upper single digit dividend growth annually that will over time lift its share price. Like I said in a previous answer a moment ago, we do have several pipeline recommendations to spread investment around. But TRP is on our buy list up to USD50.

barrgold

2:48

What are your thoughts on PBFX? I have an 8% loss but it yields more than 9%. I have it since 2014. Its only a small position. Thanks!

Roger Conrad

2:48

As I answered earlier in the chat, PBFX has fairly thin distribution coverage and a relatively high cost of capital with a yield of nearly 10%. The deal to swap IDRs for shares should benefit growth over time. But we currently rate PBFX a hold.

George W

2:52

I'm sitting on a pile of PEYUF at a significant loss, any ideas on how to proceed?

Roger Conrad

2:52

One of the moves we made at the end of last year was to take the loss on Peyto. This is still the lowest cost producer in a region with huge potential output. And there are pipelines and midstream infrastructure getting built now to move Canadian gas and NGLs to the Pacific coast for export. But these will take time. We see a lot of promise with this company as well as other Canadian gas and NGL focused producers like ARC. But it's going to take a lot of patience. We currently rate Peyto a hold, though it will definitely be on our buy list when we're ready to load up on Canada.

Lyndon

2:53

What is your take on the announcement by MMP that the Permian Gulf Coast pipeline as initially announced will proceed?

Elliott Gue

2:53

MMP indicated that this project is unlikely to proceed. I think the concern is that coupled with some of the other pipelines under consideration, this would result in excess capacity in the region near term. MMP is very conservatively run and I think that this just means that they could not meet their required rate of return -- it's probably a mild positive for other Permian pipeline operators like PAA/PAGP.

richard

2:54

what are your current thoughts on Noble Midstream NBLX

Elliott Gue

2:54

We recommended selling it a few issues ago into strength. We just feel that the situation in Colorado is too unpredictable and we'd rather wait for more clarity.

Howard F

2:58

your take on ctl keyuf

Roger Conrad

2:58

Keyera remains a very high quality Canadian midstream but with growth currently constrained by the shortage of long haul transportation capacity out of Alberta. I liked their Q4 results as showing their contracts are holding, as they cut costs and control leverage. But at this point, we prefer PBA, TRP and even ENB in the Canadian midstream space.

I'm not sure if you're asking about Continental Resources, which we rate a buy up to 55. The company appears to have adjusted to the current level of energy prices and has considerable upside through drilling opportunities. We track it in our "Coverage Universe" of producers and service company names.

Howard F

3:05

thoughts on snv and shly

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