JotCast | Energy & Income Advisor Live Chat March 2020 | 3/31/2020

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Energy & Income Advisor Live Chat March 2020

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Michael L

2:52

As you both have noted, year end guidance for the MLPs may no longer be relevant as things have changed significantly. This makes any updated guidance extremely important, as it is to get the updated information as soon as it comes out. I don't have a way to be alerted when companies provide guidance updates. Will you be notifying us when portfolio companies update guidance? I believe this is very important!

Roger Conrad

2:52

I wholeheartedly agree with you about updated guidance, not just for MLPs and energy stocks but really for the entire market. That includes sectors like utilities, which have historically weathered crises well but still need to be watched closely as this is new territory.

I've mentioned several companies during this chat that have updated their guidance since oil prices slumped into the low 20s. And I've talked about several we're still waiting on, like Energy Transfer and Enterprise.

Our intent is to get this information to you as it pertains to recommended companies, either in regular issues or in between with Alerts and Energy Commentary. But you can feel free to ask about anything in between, in this chat or later by dropping us a line at service@capitalisttimes.com

Fred

2:56

IF, the Dems pull a rabbit out of their hat at a Brokered Convention and name a Candidate other than Biden, and, God Forbid, they win the Presidency and the House and Senate, do you think any of our oil related investments could weather the storm, and, how would you expect the MLP's and the larger companies like XOM, etc to perform.

Elliott Gue

2:56

They call politics the "third rail" of the financial analysis business (and that's the rail that has electricity running through it). What I would say is that I just don't think that some of the more extreme measures you hear discussed on the campaign trail are going to materialize -- for example, if you ban fracturing, you'll face $100+ oil, rising US dependence on Saudi/Russia, a major income hit concentrated among lower wage earners and it would probably prolong (or cause) a recession. I just don't see that being a vote winner...Of course, I can't tell you that's not a risk but I have a hard time believing that some of the things we hear about from various candidates aren't just an effort to mobilize certain more extreme wings of the base.

rk

2:57

Of the following: EPD, MMP, OKE, which ones do you feel are in the best condition to weather this storm without cutting their dividends.

Roger Conrad

2:57

Of these three, we've had updated guidance from Magellan Midstream (business call March 30) and ONEOK (March 11). Enterprise promised March 19 that it would review CAPEX but has otherwise not updated.

That said, we believe all three are actually in very good shape to weather this without cutting dividends--though there is some uncertainty from the COVID-19 fallout and how that affects energy prices. That's in part due to results prior to the recent drop in oil prices that indicated they are adapting to a lower for longer price environment. And it's because of their lack of debt pressures and focus on lower risk assets and strong counter parties. So we're partial to all three.

barry

3:03

Is PAA considered one of the "bigs" like EPD? You think it will survive and be a stable as EPD?

Roger Conrad

3:03

We think so. As Elliott mentioned, even Plains' fee-based pipeline sector is seeing some disruption--they actually asked producers to cut output temporarily due to "logistics constraints." But this company also has the kind of broadly diversified portfolio of vital infrastructure assets that ensures it will be a key US midstream player after this is over. And the dividend cuts of a couple years ago have enabled it to deleverage as well--no debt maturities this year and just $600 mil next year. Also, the damage to the stock is not mirrored in the bond market, where the 4.9 bonds of Feb 2045 still yield just 7.67% to maturity. If I had to say which was stronger, I would say EPD. And neither PAA nor EPD has updated guidance. But PAA is definitely one of those bigs.

Susan A.

3:09

Could you possibly list the top companies you now believe will survive the oil price war and return close to their previous levels.
Thanks!
A faithful subscriber!

Elliott Gue

3:10

Thanks for the questions and for being a long-time reader. On the upstream/producer front it's hard to beat the supermajors including XOM and CVX. They have a low cost of capital, XOM recently -- at the height of the March oil downdraft -- borrowed $8.5 billion. The 30-year paper they issued yields just over 3.15% at the time of this writing. That gives them the firepower to buy choice assets on the cheap. I like to look at the '86 experience as a decent roadmap -- oil prices declined about 70% between November 1985 and March 1986. But, if you bought Exxon in November 1985 (just before the collapse in oil) you would have generated a 146.6% gain including dividends over the ensuing 5 years. Among the independents, CXO has a favorable cash flow breakeven and one of the strongest commodity price hedge books to protect it through the remainder of 2020 and into 2021. For the midstreams, Roger has written about several of our favorites today -- EPD, ET and KMI among them

Brian

3:14

Would you please comment on the balance sheet strength of KMI, EPD and MPLX

Roger Conrad

3:14

Well, all three are still investment grade--Kinder BBB (stable), EPD BBB+ (stable) and MPLX BBB (stable). Yes credit raters are often behind the curve when an industry starts a decline. But when you're almost six years into one--as energy is--maintaining ratings like that does actually mean something, because they're basically going against every instinct credit agencies have.

Before the big drop in oil prices, all three of these were on track to generate enough free cash flow after CAPEX to cover distributions. If their contracts hold up, they still should this year. And they do have a cushion in case some don't. But I really think we need to wait on updated guidance.

What we do know is how much debt is maturing in 2020-21--which is likely the max until the cycle turns. For EPD, it's $2.325 bil (7.7% market cap). for KMI $3.924 bil (12.6%) and for MPLX $2.023 bil (17.4%). That's not excessive for any of them and cost of capital is still low. But it's something we'll be watching.

DRG

3:15

What are the reasons EOG never makes the list of recommended E&Ps in EIA, even in good times, even though it’s a seemingly well-run company and Wall Street gurus have maintained favorable view of this stock … your thoughts on the stock please. Thanks.

Elliott Gue

3:15

We've recommended EOG at times in the past and we continue to like their debt position. However, they have less than one-quarter of their 2020 production hedged, compared to 2/3rds at CXO. We think the hedge book will be a key differentiating factor this year as it will allow companies like CXO to weather near-term storms.

salvatore

3:18

Thanks for all your Input . I feel schlumberger ltd will have to

Elliott Gue

3:19

I think your question was cut off. If you were about to write that SLB will have to cut their dividend, I think that is a risk and the stock's 14.7% yield reflects that. However, I see SLB as the services firm most likely to emerge from this downturn in a stronger market position than before.

rk

3:20

A large percentage of EPD and OKE revenue(80%+) are based on a flat fee and not tied to energy prices. Is the major risk for these two companies counterparty risk? Also, would the price of natural gas necessarily follow the same downward trend as oil? thanks

Roger Conrad

3:20

Yes, it's counter party risk first, with the ability to roll over the next two years of debt maturities still a distant second. As for natural gas prices, they've been depressed for quite a while, with the benchmark Henry Hub at just $1.71 per thousand cubic foot--so that industry has had to adjust for a lot longer than oil midstream. In fact, there's a case to be made that curtailing shale oil output will benefit gas-focused areas eventually, since the associated gas produced with oil from places like the Permian Basin and Bakken is a major cause of current oversupply. Offsetting that of course is the prospective impact on demand from measures to restrict the spread of COVID-19--especially on prospective electricity demand. So far that's unknown, though there is some evidence that the impact may not be nearly as severe as feared--Dominion Energy (an electric and pipeline company) believes increased residential demand will offset reduced industrial and commercial losses to at least a large extent.

Larry S.

3:33

What is Elliot's opinion of: MPLX? Thanks.

Elliott Gue

3:33

With a dividend yield of 25%, the market is pricing in significant risk of a distribution cut. That's a risk but I think it's already priced in at current prices. In addition there are 2 positives I see: 1. Falling associated gas production as the oil-directed rig count falls should allow Appalachian gas to gain some share, supporting their gathering and processing business this year. 2. I think the conclusion of their strategic review re: MPLX structure removes an overhang. I think it's a good name to own though, of course, the next few months may be some tough sledding.

Fred

3:33

Do you have an opinion of Equinor (EQNR) or Orsted (DNNGY)? Has their diversification in renewable energy made them reasonable to consider in comparison with RDSA and TOT? Thank you.

Roger Conrad

3:33

Equinor is certainly one we could pick up coverage of in the future. It's certainly not immune from the drop in oil prices. But like Total, management's focus since 2014 on cutting costs and investing downstream--including renewables--has improved resiliency. And like all state controlled oil companies, it has a certain stability. Orsted is of course all renewables development--which remains a popular sector as environmental mandates remain in place.

As far as comparisons go, Royal Dutch and Total are in something of another league--much larger players mainly. If I have to pick from among these 4, I go with Total's low costs, renewables and electricity investment and A+ balance sheet.

Mark

3:40

Hi Roger Could you answer an early question about your thoughts on ET potentially converting to a C-Corp. Also what are the chances that HAL and Marathon survive

Roger Conrad

3:40

What Kelcy Warren has talked about publicly--the last time I know of was the Q4 call in mid-February--is offering a C-Corp share as an alternative to holding Energy Transfer through the MLP structure. That would be pretty much what Brookfield Renewable Partners has announced plans to do, partly by spinning off shares to current unitholders. That's a way to get more institutional participation without forcing long-time unitholders (including Mr Warren at nearly 10%) to pay a big tax bill.

There hasn't been much said about this "plan" since the sector started its most recent plunge. I expect it will at least by the Q1 call in early May--though another possibility I've heard is management may make an offer to by the whole thing in. In any case, as I think I've made clear today, I believe there's too much risk right now priced into ET, especially with its bonds due May 2050 yielding only about 6.5% to maturity.

Roger Conrad

3:43

Regarding the part of Mark's question concerning Halliburton and Marathon Oil--we didn't recommend selling them because we didn't think they'd survive. In fact, we would view that as highly likely even with oil eventually sliding to the mid-teens this year. Rather, with the entire sector on its back, we wanted to narrow our holdings to stocks we liked the most--deploy where we'd get the most bang for our buck. That's how we believe that we're going to do best coming out of this.

rk

3:46

Do you feel there is another leg down on energy stocks or have we seen a bottom?

Elliott Gue

3:46

I think there is room for another leg down in many of these names or at least a re-test of recent lows. There are two reasons: 1. The broader market S&P 500 is in a bear market and the current rally off the lows looks like a bear market rally. That could continue a bit longer -- in fact, as a matter of full disclosure, we did enter a long position in the S&P 500 ETF in our Pig vs. Bear trading product last week. However, if history is any guide, we'll retest and (probably) log a new low before this bear market is complete. I don't think any stocks or sectors would be immune, including energy. 2. Our short-term oil outlook is quite bearish -- while we think our favorites will come out of this in stronger positions, I can't see a scenario where WTI prints $15/bbl and energy stocks don't fall back from recent levels.

Ssuan A

3:52

What are your thoughts on CLR?

Elliott Gue

3:52

They're in a tough position because they, as a matter of policy, don't hedge production and they're exposed to higher cost production in Bakken. I put a table of producers in the last issue with a column titled "2020 Hedge %" and I think that's going to be a really important fundamental to watch this year. The reason is that producers can cut CAPEX to the bond but they can't really make money over the long term sub $30/bbl...no one can, not even the Saudis for more than a few months without risking their currency's peg to the US $. So, what we really like to see is names like CXO that have 60%+ of their 2020 output hedged at higher prices using swaps rather than option collars (which limit downside protection). This is a great bridge through what looks like a tough next few months.

salvatore

3:55

Can you update on shlx and ceqp thanks

Roger Conrad

3:55

Neither has issued a guidance update since oil made its latest plunge. Crestwood did announced a 58% cut in CAPEX for this year from 2019 when it released last year's results in mid-February. But this is primarily a G&P company that counts Chesapeake and OXY as major customers, so it's quite possible it will have to take even more aggressive action. The share price certainly reflects that with a current yield of 60% plus--so we think it's worth waiting until there are more hard facts. The company also has no maturing debt until 2023, though May 2027 bonds trade at an elevated yield to maturity of about 16%.

As for SHLX, they announced a series of transforming moves at the end of February--including the elimination of IDRs and another big drop down from GP Shell. Royal Dutch's interest is now squarely aligned with SHLX, as it owns about 47%. SHLX' assets are very steady and there appears limited risk to closing these deals by Q2, as well as limited debt risk. I would like to see guidance though.

Mr. G

4:00

What's with BPY/BPYU recommended CUI+?

Roger Conrad

4:00

As I've pointed out in the portfolio updates, this company is operating in a tough space where there's been a lot of selling. We've kept it primarily because it's not a typical owner of shopping malls but a successful repurposer, with a huge financial backer in Brookfield Asset Management. And because the company issued a pretty solid guidance update on March 20 that affirmed strength of its leases and substantial liquidity that should enable it to take advantage of others' weakness. It's down some more today and our patience isn't limitless. But insider buying is encouraging. Look for more on BPY in next week's update.

Mack

4:12

Hi Guys. Always appreciate these chats especially in times like we're in now. Re: beaten down prices = high yields, OMP (49%) and CEQP (70%!!) may top the list. Either something real bad is going to happen to these two or they are the deal of the century. Which is it? Thanks.

Roger Conrad

4:12

Mack. We actually changed our recommendation to sell on Oasis Midstream earlier this month. I'm sorry you didn't see it. But after today's increase, the price back in the ballpark of where it was then.

OMP's crackup is entirely due to growing concern Oasis Petroleum--its general partner and biggest customer by far--won't be able to maintain its production plans and may not be able to avoid filing bankruptcy, especially after this latest drop in oil prices. The assets in the Bakken are solid and will have a future when oil prices return to the $35 to $40 range over the intermediate term. But in light of how severe market conditions have become, there are other stocks we'd rather ride.

I answered a question in depth on Crestwood a bit earlier in the chat. We've stayed with that one so far over OMP in part because it's not so dependent on a single customer.

Sandtrapfinder/Howard

4:12

You and other investment advisers have noted that the reduction in shale oil production will also reduce the associated gas production. Will this be a big enough reduction to result in an increase in gas prices and "pure" production. Will this have a positve impact on the gas producers and pipeline companies. With this thought in mind I have maintained a position in AM. What are your thoughts

Elliott Gue

4:12

Thanks for the question. One of the biggest headwinds for natgas over the past couple of years has been this wall of associated gas production from producers in places like the Permian Basin targeting oil. Some of these wells produce copious quantities of natgas dissolved in the oil and they tend to get gassier as they age -- the big problem with that is that the normal price-supply relationship doesn't work since the gas is a by-product of oil production. Over the next few months, associated gas production will come down and that's good for gas prices and, as I mentioned earlier in the chat, I think you'll see Northeast producers gain some share. That said, gas still faces plenty of headwinds on the demand side, especially when it comes to industrial demand. Not sure there will be a significant rise in gas prices near term -- maybe if storage tightens it will set us up for a seasonal pop at year-end but I struggle to see the case for this driving a sustained move in gas before Q4 2020. We'd prefer MPLX to AM

nolan01@verizon.net

4:19

Do you think there is any possibility that OAS will survive or is it dead and just doesn't know it

Roger Conrad

4:19

Oasis' bonds due May 2026 are selling for just 17 cents on the dollar and a yield to maturity of over 52%--so the bond market is definitely pricing in the possibility of Chapter 11. And for that matter the stock at about 35 cents per share is as well. There's really nothing wrong with this company other than the fact it can't sell its oil economically at current market prices--Bakken Guernsey hub oil, for example, ended today at less than $8 per barrel--and that was after a rise of almost $5 today. With COVID-19 laying waste to demand, inventories are building up to the point where storage is full. And no one is getting hit worse than independents like Oasis--which means Oasis Midstream is also at risk as I noted answering an earlier question. The assets are great and will almost certainly get pumped eventually. And there are no debt maturities until next year. But the next few months are going to be critical and we'd rather stand aside for now.

Elliott Gue

4:23

I've noticed a few questions today about HES and had a couple more on a radio show I was on a while back. I think the big reason this stock has held up fairly well is they have a great hedge book -- more than 3/4 of 2020 oil production is hedged and it's at a weight ed average price of $55.67 (simple long oil put options, no collars). They also have a $1.5 bn cash position, an undrawn revolver, no near-term debt maturities and a promising Guyana project with low breakevens. I still prefer CXO avove HES due to lower shale breakevens and better inventory but I think that's why HES has held up better than many other names out there.

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