JotCast | Energy & Income Advisor Live Chat March 2020

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Energy & Income Advisor Live Chat March 2020

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Charlie

4:26

Are the dividends for XOM, RDS.B and CVX safe?

Elliott Gue

4:26

I think XOM and CVX are safe and those are two of our favorites...both will do as much as possible to defend those payouts. RDS is the least safe of the three.

Mack

4:28

On KMI -- Do you think they will go ahead with the promised div increase in the next two months?? Re: HESM -- Would you put it in the same group as MPLX and PAA, i.e. strong company & safe div?

Roger Conrad

4:28

Hess Midstream's prospects are closely tied to those of its GP and biggest customer Hess Corp (NYSE: HES). That company is somewhat larger and stronger than Oasis Petroleum, which I discussed above. But at the end of the day it operates in the same region (Bakken) and also has some difficult economics at these oil prices. I think the company has the internal resources to ride this out--and no debt maturities until 2023 for HES and only $60 mil for HESM through 2023. But it's not as large and diversified as those other names.

Regarding Kinder's promised dividend increase, the company has not updated its guidance this month, so we don't have a lot to go on besides conjecture. The company did get the go ahead to increase Elba Island LNG's contracted capacity and a judge has allowed work to go ahead on the Permian Highway natural gas pipeline. And of course insiders are buying.

The only reason I can see for halting the increase would be to hold in more cash--possibly to pay off debt.

ron

4:30

With oil at 15$ a lot of companies will go out of business. E&P companies like MRO & WPX used to be favorites at much higher prices. Will these companies survive for another time some years down the road?

Elliott Gue

4:30

MRO and WPX both have good acreage and low breakeven costs. I am just not confident they can sustain $15 oil for long enough to weather the current storms and come out the other side, which is why we no longer recommend them. Once we get to the bottom of this cycle, we'll likely start to troll the smaller and lower-quality E&Ps for winners but, until this cycle bottoms, I think we're likely to remain focused on high-grading.

Mack

4:32

SHLX recently did a transaction wherein they got rid of IDRs (I think) in exchange for issuing new units, and acquired an asset from the GP. Does this make SHLX a buy now?

Roger Conrad

4:32

As I answered to a previous question on SHLX, the last guidance update we've had from management was when that deal was announced in late February--before the most recent drop in oil. I do like the IDR buyout and drop down and expect both to be long-term accretive for SHLX. And I don't see significant debt pressures either. But I also want to see that guidance update before we get more bullish on this stock--which by the way has been rated buy up to a much higher price (22) for some time. It's tracked in the MLPs and Midstream coverage universe table on the EIA website.

Eric

4:34

Are there any shipping companies worth buying to take advantage of the huge oil contango?

Elliott Gue

4:34

To an extent it will benefit all of them. The economics are pretty compelling -- you have a VLCC tanker with capacity of 2 million bbl. Buy oil at $20 and fill it for $40 million, then sell April 2021 futures for $36/bbl and pocket a cool $32 million if only you can rent the tanker at a cost of less than $32 million per year. Some reports suggest 15 to 20 tankers coming out of the market over the past few weeks booked for long-term storage and VLCC rates from Saudi to China up 10x from early March to today ($230,000+ dayrates). Roger and I have been watching the group...the biggest problem right now is that many of these companies are pretty low quality stocks with terrible balance sheers.

JGH

4:35

Would you recommend selling the "losses" - waiting the for 30 day and then buying back in. Unfortuately, I've got a small pile of SLB at higher prices... ~45 - I still believe in the sector but wondering if it will ever get up to that price again ... Same for OXY

Roger Conrad

4:35

We believe there's a high probability oil prices will slip into the mid-teens before the cycle turns up. So it's quite possible both of these stocks will go lower as well before they turn higher, as we obviously expect.

Timing on something like this is always tricky and we don't provide that specific level of individual advice here. But selling depressed stocks with losses and buying back in after the wash rule runs its course can be a good strategy for some investors.

Bud Edmondson

4:40

Please commenton DKL at 9

Elliott Gue

4:40

We continue to have some concerns about the parent, Delek USA (DK), Originally that's why we sold it from the portfolio back in 2018 or 2019. In addition, in this environment, we're not keen on buying or owning anything but the most high-grade names. It's the sort of name we'll likely revisit as a recommendation once this cycle bottoms (we're just not there yet).

Mack

4:43

OK, time for the crazy question of the day: ENLC just cut its div by 50%. The second cut this year! But at the current price ($1.01) that $0.372 annual div = a 36% yield. Is it safe? An aggressive buy for sure but what do you think?

Roger Conrad

4:43

It's certainly possible EnLink has now done enough dividend cutting to weather the rest of this downturn. Unfortunately, the record of this sector since mid-2014--when oil prices broke for good under $100 a barrel for the cycle--is that when a company cuts its payout once, its odds of a second cut increase, and they go up further still after a second cut--with the most common result being a complete elimination of the payout.

Now that we have a combined supply and demand crush on energy stocks, it's likely the odds of one distribution cut leading to another are even greater than before. Also, EnLink's update was very long on cost cutting and debt service--but very short on guidance for revenue. That tells me there's a lot they don't know. Another bad sign: Bonds of June 2025 yield nearly 21% to maturity. We think there are better ways to bet on an energy rebound.

Clint W

4:48

In a previous response, you mentioned the possibility of ET buying out the limited partners. How does that work? Can the buyout be forced at a price a unit holder does not want to accept?

Roger Conrad

4:48

No. In this case, insiders including Mr. Warren only own 14.46% of the outstanding shares--they'd need a lot of support from everyone else to get anything through. Energy Transfer also has a lot of individual shareholders as opposed to institutions (45% plus). That's more than Enterprise at about 30%. My view is they could make a successful offer at something around $10--if they moved relatively quickly. But these insider purchases could also just be that Warren and others view ET as extremely cheap, which I would concur with.

Ken in Phoenix

4:57

What do you think KMI will do re their long planned dividend increase to 1.25? The market is expecting it and is likely to see a cancellation as too similar to the promise back in 2015 to keep increasing dividends. Rich Kinder keeps buying every month in huge amounts. He certainly doesn't need the dividends, but he owns over $3BB of the stock. He's been going after the proverbial falling knife.

Roger Conrad

4:57

Hi Ken. Just for the record, I did receive your email prior to the chat and if I see you've asked anything we haven't answered, I will do so before closing.

I did express the view a bit earlier in the chat that Kinder has given us no indication it will not raise the quarterly dividend to 31.25 cents per share when it makes the next declaration on April 15. But we've also not had a comprehensive guidance update since mid-February and a lot has changed in the market.

I'm not at all certain an increase is priced in at this point, since that would take the yield to almost 9%. I'm also not sure I would agree investors would take a decision to delay a 25% div hike the way they did (understandably) when Kinder announced that 75.5% cut back in late 2015. But I like insider buying and Kinder is up to 11.3% of the company, with insiders overall holding 14%. Maybe Kinder will make an offer. In any case, the bond market apparently isn't worried about the company's health with Mar 2048 bonds yielding 4.8% to maturity.

Andrew

5:08

Hi Roger

In 2008, you were a voice of calm in the storm. I remember clearly your advice that the names you were recommending were solid and would pull through and not to bail. You also offered a list of 'swaps' i.e. sell this company at a lost and buy this similar company to ride the recovery (and still lock in a loss). I followed your advice and made a lot of money when the market came back. So thank you. Do you have any plans to do something similar in this market?

Also thank you and Elliott for all the work you're doing for us. It can't be any fun for you two either. So thank you for being calm and reasoned.

Roger Conrad

5:08

Thanks Andrew. Between the two of us and our other partners at EIA's publisher, we've certainly see our share of bear markets to know you've got to keep your head, even if everyone else around you isn't. This market of course has the added element of a health crisis that I hope everyone has been able to take precautions against. But we're still talking about the same things, i.e. looking for opportunities and trying to avoid mistakes that can blow a permanent hole in portfolios.

Energy sure seems like it's doing that now. And even the more conservative stocks in our portfolios have taken on water so far in 2020. But we believe very strongly that there is a major opportunity to unload weaker fare and load up on best in class energy companies--many of which are actually as cheap as they've been at any time since the early '00s. We've made a number of moves in the EIA Portfolio so far, as well as the High Yield Energy List to reflect that strategy. Please let us know if you have questions about any of them.

Andrew

5:15

Can you comment on two issues: Hess Midstream (HESM.) It's all over the place, yesterday it was seriously down, today it's up 23% I keep searching for new other than oil and I don't see any. Any reason for these huge swings?

Second Enbridge (ENB) I own TC Energy (TRP) [and PBA], but ENB is down much more and yields almost 60% more. Is there any reason for this divergence? I understand why PBA, which is the smallest of the 3 would be down more as more risky, but ENB is the big daddy. It was (is still?) the biggest midstream player in NA. Shouldn't it be at least as strong as TC Energy?

Roger Conrad

5:15

Hess Midstream did update guidance back on March 17--and it was pretty encouraging for the most part. They cut CAPEX for 2020 by about $200 mil over the next two years, which reflects Hess Corp's plans. But the 2020 EBITDA guidance mid-point was cut just 4% and free cash flow was raised by 12%, reflecting the lower spending. Management also slowed but did not stop distribution growth--now anticipated at 5% a year. Guidance is further backed by the fact contracts are fee based rather than volume dependent. Much depends on Hess Corp's health, as I indicated earlier. But that appears solid enough to honor commitments, which is the key here.

As for why shares have been so recently volatile, there's been basically the same action in other midstreams--and the likely catalyst is oil prices. I would expect this kind of action to continue until oil does finally bottom. But the important thing for Hess is to watch Hess Corp and pay attention to further guidance updates. We think it's pricing in a lot already.

Roger Conrad

5:22

As for the second part of Andrew's question, I think the reason TRP has outperformed may be it's demonstrated strength 4 times since its February guidance update--winning an agreement to resume Coastal GasLink work, the Pioneer Pipeline acquisition, the decision to build the long delayed Keystone XL pipeline and the company's financial backing by Alberta for that effort. But the real question here is if Pembina or Enbridge is really weaker than TRP and the answer from guidance issued so far is no. Completing the Line 3 pipeline this year in time for a 2020 start date is a key issue. But we continue to like all three of these midstreams.

Brian B

5:30

I own a hybrid bond from CenterPoint (treated as a preferred) that has been selling off and I'm considering adding to that position. Your thoughts? And then can you define the risk at Enable?

Roger Conrad

5:30

Centerpoint shares have been weaker than those of other utilities because of the Enable investment--which is 50% of the GP and 53.73% of the common units. Drilling activity in Enable's Oklahoma service territory has been a concern and the company has not updated guidance since announcing Q4 numbers in mid-February. Enable got a boost from FERC approval of rate settlements on certain of its pipelines--which are a very steady source of cash flow. But until there's updated guidance, investors are clearly assuming the worst for the stock--bond yields are also elevated but not yet indicating real distress, with May 2044 bonds yielding 14.6% to maturity.

But the bottom line for CNP shares and therefore these mandatorily convertible preferred shares--which track the stock--is until Enable can quantify risk, they'll be under pressure. There's still time for a rebound with the conversion into CNP shares not until 9/1/2021. And I think there's a good chance for one as I believe the risk priced into CNP is overdone.

5:33

OKE and MMP has recently updated very favorable guidance in the midst of this environment. If they are anywhere close to their updated guidance these stocks would be a bargain. Do you believe these updates are appropriately stressed to come to their conclusions?

Roger Conrad

5:33

I agree that if these companies meet their recent solid guidance, they will prove their resiliency. When that's reflected in share prices and we see a strong rebound likely depends on what happens to oil prices. And that could take a while. But the guidance updates really just confirms what we already knew about the underlying strength of these companies' franchises. Obviously, we have to pay attention to what comes next. But at this point, there's no reason to doubt management is making the right moves to stay strong and keep paying dividends throughout this sector meltdown.

5:39

You had recommended KYN as a closed end fund. Now down 74%. Any thoughts of this Fund

Roger Conrad

5:39

Obviously, that one hasn't worked out. We had recommended taking a look at closed end funds holding MLPs and midstream companies for two reasons. First, we believed (and still do) that the best in class of this sector are very cheap and will head a lot higher in coming years if they can prove resiliency now. Second, these funds (including KYN) traded at discounts to net asset value.

Though we've always said we preferred owning individual shares, our view was we could get a double boost in the relatively near term from rising share prices and a closing discount. What's happened instead is falling share prices, which forced fund managers to liquidate to get back into compliance with leverage restrictions. That's forced dividend cuts as well.

At this point, KYN has taken steps to stay viable, but with no dividend, we still believe its better to hold individual stocks.

5:41

I know you have mentioned previously the political debate about the elimination of fracking. That could cause oil to increase to 100/barrel and you didn't see that happening. I agree,however, I am more concerned that the constant tightening of regulations from the New Green platform could ultimately lead to the same results because of extra costs and regulations that will slowly make U.S. energy production no longer economical or viable. Also, it is frightening to think that one country could manipulate the price of oil to the extent that it could bankrupt an entire U.S. industry. Comments.

Elliott Gue

5:41

I don't think Saudi Arabia (or Russia) can manipulate the price of oil enough for long enough to bankrupt the US energy industry -- the damage they would do tho their own economies would likely dwarf any potential benefits. Re: tightening regulations, it is a risk but again one way or the other higher regulations = higher energy costs and that's not much of a vote-getter.

salvatore

5:41

Do you think we should be dialing in some super low dream prices on the best energy stocks here for when or if we retest the lows. Your thoughts

Elliott Gue

5:41

Yes...But not yet. I want to see some signs the cycle is bottoming and then I know Roger and I both are going to be there with a shopping list and Dream buys.

Mack

5:42

If you think oil is going down to the $10 - $15 range, wouldn't something like DUG be a good hedge for MLP holdings?

Elliott Gue

5:42

DUG's main holdings are the super oil --XOM, CVX, etc -- which we think will see the least downside from lower oil prices. We think SCO is a cleaner hedge.

Guest

5:43

Gents, what are your thoughts on VET at the moment?

Roger Conrad

5:43

I think it's a well run oil and gas producer with great global assets and a decent balance sheet (no debt maturities until 2024) that's currently caught in the buzz saw of plunging global oil and gas prices. I believe it's done what it needs to survive, as communicated with the dividend cut and guidance update March 15. But I don't see a lot of optimism for the stock this year. We will continue to track it in the Canada and Australia coverage universe on the EIA website.

nolan01@verizon.net

5:47

Your thoughts on AY and AES

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