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Energy & Income Advisor Live Chat May 2019
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AvatarRoger Conrad
1:59
Hi everyone. Welcome to this month's EIA webchat. As always there is no audio. There will be a complete transcript of all questions and answers at the conclusion of the chat, which will be after we've answered all the questions in the queue as well as from emails we've received prior. Let's start with a few of those.
Q. Roger. I will be unavailable for the chat tomorrow, but have several questions I'd appreciate being covered.

1. You still like oil services companies even though they have declined to half your buy levels. I can't decide whether they are an ultra cheap bargain or just dead money. How long before they return to former glory?

2. I have done well with an MLP named Enviva (NYSE: EVA) in the wood pellet business. They have a high debt level but keep signing long term contracts in Europe and Japan that suggest the cash flow will be there to support the debt taken on to produce more product. Any opinion?

3. Two things that seem to be a recurring item of concern are the presence of IDRs and the Debt/EBITDA ratios of companies discussed. Would you consider adding that information to you tables for recommended companies?
Thanks as always.—Ken V.

A.Thanks Ken. We still see a great deal of long-term value in the blue chip energy services companies like SLB and HAL, though as you point out we were a bit early
in the current cycle recommending them. There’s also the added element of shale drilling accounting for a rising share of global output, with projects much easier for producers to ramp up and throttle back than conventional wells in response to price signals. That’s added volatility to results from quarter to quarter, which the market is only now catching up to.

On the other hand, the services they provide are absolutely essential, they continue to advance technology and their balance sheets are strong to enough to weather anything. And both HAL and SLB are trading at multi-year lows. Again, we didn’t think owning these stocks would be such an exercise in patience when we initially picked them up. But this isn’t the time we’d think about selling them either.
2:00
Enviva is one we picked up on at a previous MLPA conference. Since that time as you note, it’s proven its low risk business model, even though growth remains constrained by a relatively high cost of equity capital. We track it in our MLP Ratings table as a buy up to 32 for investors who want a reasonably safe stream of high income. I also think the contracts are going to keep coming as Europe and Japan decarbonizes. I do note that Riverstone Holdings and Carlyle Group each own 40.61% of the MLP. That leave open the possibility they’ll move to take it private at some point, particularly after major purchases last month.

We do report debt/EBITDA for MLPs in our quarterly earnings and developments comments on the EIA website. We are currently working on another update and will look at IDRs as well this time. The good news is a number of MLPs no longer have IDRs and the rest are responding to shareholder opinion to at least throttle them back.
Q. Gentlemen. Big picture question for you. I’m retired and living off income from investments. My trouble is I can only find meaningful income from the energy sector, aside from a few telecom stocks--2.5% dividends don’t hack it! My sense is oil and gas are irreplaceable...wind /solar are largely derivatives thereof. I am very much overweight with oil majors / pipes / royalties.  How high a percent would you go with energy in a prudent, responsible portfolio? Thanks--David O.

A. The history of commodities is that nothing is truly irreplaceable. It’s true battery energy storage is still expensive and still not capable of eliminating the intermittency of wind and solar—the wind doesn’t always blow or the sun always shine. But a lot of progress has been made on costs and there’s big money betting storage technology will eventually live up to the hype.

That said, we don’t see any way people won’t be using a lot of oil and especially natural gas for decades to come. In fact, we haven’t seen peak usage for
for either fuel. In fact, any serious effort to cut back greenhouse gases globally will involve a big boost in natural gas usage, and LNG infrastructure is being built now to get it to markets.

Our focus is on wise selection. Not every energy stock or project in the world is a potential winner. But there is a lot more growth to be had in North American shale, especially in places like the Permian Basin of west Texas where regulatory support is strong for development. That’s where we want to concentrate.

As for the super majors, they have two huge advantages when it comes to longevity. First, is global reach, experience and knowledge that enables them to adapt. That includes the ability to dominate renewable energy long-term, as Total SA is already moving rapidly to do in France. The second is balance sheet strength that gives them more financial power than most governments. That’s why they’ll always be a part of my portfolio.
2:01
Q. What is the difference between BHP Group trading symbols “BHP” and “BBL” and which should we buy? Keep up the good work. Don't you wonder if we should take some profits in utilities?—Jack D.

A. As the world’s largest natural resource miner, BHP has securities trading in several major stock markets but mainly in Australia, London and New York. Both BHP and BBL are American Depositary Receipts traded NYSE. The difference is BBL is pegged to the London shares (2 for 1), while BHP is pegged to the Australia traded shares also at a 2-for-1 ratio. Because the British pound and Australian dollars trade at different exchange rates relative to the US dollar, the ADR prices are also difference. But both represent the same ownership and pay the same effective dividends. I suppose one advantage of buying BBL over BHP ADRs is you can own more shares for the same price. Returns should be the same over time—though I note that BHP has a total return of 16.3% over the past 12 months against 11.6% for BBL,
probably the result of GBP volatility due to Brexit.

As for taking profits in utilities, I have laid out a program based largely on valuation levels in Conrad’s Utility Investor, EIA’s sister advisory. Targets are primarily the highest flyers, most not in the model portfolios but some that are. The utility sector is about as strong from a fundamentals standpoint as I’ve seen in 30 plus years of stock picking. But when stocks that have historically traded at mid-teens P/Es start selling for mid-20s P/Es and sub-2% yields, it’s definitely time for caution.
2:02
Q. Hi. I'm in Enterprise Products Partners (NYSE: EPD), Magellan Midstream Partners (NYSE: MMP) and MPLX LP (NYSE: MPLX). I am a resident of the Chicago area. Are distributions from these MLPs taxed as “return of capital'? Example of concern: I buy 100 shares of "MLP" at $40, or $4,000. I receive distributions of $400/yr for 10 years. For tax purposes, is my cost basis now effectively '0', and if I sell, I have a $4,000 capital gain?
Thanks.—Tim D.

A. Your math is basically right. What you’ve left out is return of capital dividends would not be taxable when you receive them, but only when you sell. That’s a pretty big advantage on a time value of money basis. Also, there’s still the opportunity to will MLPs to your heirs and avoid accumulated ROC tax liability altogether with the one-time step up in cost basis, just as occurs with real estate. I would also say that not all distributions paid by MLPs are necessarily ROC.
Q. Hi Roger and Elliott: In your EIA 5/20/19 newsletter you identified 6 companies on your “High Yield Energy Target List”.  However, I did not see any of these 6 companies on your Aggressive or Conservative Income Portfolios in your last CUI Publication.  I subscribe to and enjoy reading both EIA and CUI.

If we had limited funds to invest in dividend producing companies and MLP's, could you please (i) rank in terms of risk (conservative or aggressive) and (ii) the order of your preference the following 6 companies for investing? - AM, ENBL, ET, ENLC, HESM and MPLX?

We need eventually to replace our substantial investment in APU, because that dividend is going to dry up as you know when UGI takes it over in the fall 2019. Thanks. Barry J.
A. Thanks Barry. The coverage universes for Energy and Income Advisor and Conrad’s Utility Investor do overlap on some individual names. But you should view the portfolios as distinctly different entities. CUI is focused on essential service names solely. In EIA, we’re only about energy. We have the Actively Managed Portfolio and this new “High Yield Energy” list of energy stocks paying high dividends we believe are safe and will grow over time. In all likelihood, these Portfolios and lists will not overlap.

That’s a good idea to rate the High Yield Energy List of names by Conservative or Aggressive in the table. We also already provide a range of risk assessment metrics in the coverage universe tables. More important, these names all meet the criteria I highlighted in the current issue of EIA, so they’re all safe enough for an income-focused portfolio.                                                   

Finally, I’ve suggested replacing Amerigas Partners (NYSE: APU) with another high yielding propane
2:03
distributor Suburban Propane Partners (NYSE: SPH). Since I gave that advice, APU has slipped a few points in response to a lower price for UGI—as the offer is primarily in stock—while SPH has ticked up about a buck. But I still think the swap makes sense for income-oriented investors. And Suburban has already subsumed is general partner, meaning any takeover offer would have to come from outside and be at a high enough premium to win unitholders’ acceptance.
Q. Hey guys, thanks for the monthly chat. This article "Schlumberger's (NYSE:SLB) credit rating is lowered by a notch to A+ and rival Halliburton (NYSE:HAL) had its outlook lowered to Negative from Stable at S&P Global, as belt-tightening in the U.S. shale patch means less drilling and fracking work for top oilfield services providers. This might scare some, but I wonder if it’s a sign of a bottom in these stocks? Do you find them even more attractive now?—Eric S

A. Following onto that other pre-chat question concerning these stocks, we still view both SLB and HAL as long-term sector survivors, which in fact increase industry dominance when the cycle is at a low point. The advent of shale as I noted does add an element of quarter-to-quarter volatility. But both companies’ long-term earnings power and balance sheets are very much intact, and creditraters are notorious for downgrading companies when a rebound is already under way. That said, as we noted above, it is likely to take more patience to hold
even these names this year, particularly with so much concern about the potential impact of disruption in trade on global economic growth. But we’re staying with these names and believe readers should as well.
2:04
Q. Please update on Energy Transfer LP (NYSE: ET).--Bud E.

A. We thought first quarter results earlier this month confirmed this MLP’s recovery plan is still very much on track. Management may still elect to hold the current distribution rate this year to devote more cash to strengthen the balance sheet. But this MLP is bringing new assets on line on time and budget, generating new cash flows at an even better rate than previous guidance. Distribution coverage of 2.07 times left $856 million of spare cash to fund CAPEX and debt reduction and the company stayed on track for its EBITDA target of $10.7 bil for 2019.

Most encouraging, Energy Transfer’s new projects are mostly in areas where they enjoy regulatory support. That includes some big projects in Texas expected to come on line later this year, as well as an optimization project in the Bakken.
And the company has reached the critical mass needed to partner with super oil majors, the energy sector’s most reliable counterparties that are also becoming the biggest investors in US shale. That’s pretty good assurance it will be able to continue building LNG infrastructure as well, even if the US/China trade dispute interrupts shipments for a prolonged period.

Circling back to concerns raised by a couple of questions I’ve answered already, Energy Transfer still has a large amount of debt to refinance or pay off the next decade or so. But debt to EBITDA has been cut dramatically to 3.82 times, well below what’s needed to support an investment grade credit rating. And there are no IDRs following the merger of the former Energy Transfer Equity and Energy Transfer Partners. All are reasons why ET is a member of our High Yield Energy list and a buy up to 15.
Q. You and Elliott touted Occidental Petroleum (NYSE: OXY) in an online session quite a while back. I bought some and it appreciated nicely before sliding back into the 60’s. I know this all can shake out in a number of ways but I’d like your take on this company as it stands today. Will it succeed or not with its bid for Anadarko Petroleum (NYSE: APC)? Also I don’t see how OXY shareholders derive much benefit if Berkshire gets involved. I don’t have a long-term window for this stuff anymore. I’ll look forward to hearing from you. Thanks as always.—Ray S.

A. Ray, obviously Occidental’s situation has changed this year with what now appears to be a successful bid for Anadarko, beating out an offer from Chevron Corp (NYSEL CVX) without the cost of a real bidding war. That was in large part the result of getting Berkshire involved, which apparently convinced Chevron it would have to pay a lot more to win than management was willing to.
I agree that Berkshire’s track record with this sort of transaction tends to benefit its investors a lot more than the company it’s investing in. And while hard information on the negotiations is scarce, it seems likely that Occidental may have bet so aggressively because it saw itself as a possible target unless it bulked up. That appears to be how Carl Icahn sees it in light of the lawsuit he announced today.

Occidental shares have come down quite a bit since it started to get really aggressive bidding for Anadarko a couple months ago. But there is definitely long-term logic to this deal, which has its share of skeptics but does confer huge potential scale advantages in the Permian Basin—arguably the world’s hottest oil and gas play now. The sale of certain assets such as African LNG properties to Total SA (Paris: FP, NYSE: TOT) and the Berkshire investment does reduce the cost of the deal, as well as its focus. And at Occidental’s current price, the combination will be a takeover target in its own right—
AvatarElliott Gue
2:05
Good afternoon everyone. Looking forward to your questions this afternoon.
AvatarRoger Conrad
2:05
with Chevron not inconceivably as a potential suitor.

It’s true that until this deal closes and Occidental proves the economics that the stock is likely to lag. Also, despite mounting evidence of tightening global oil supplies, US/China trade tensions have raised fears of slower growth and slackening demand, which are now weighing on oil stocks even more than the commodity itself.

It’s hard to tell investors who have already been so patient with energy stocks that they must be a while longer, particularly when things seemed to be moving in the right direction and have since reversed. But that’s how we see it with Occidental, as well as for other high quality energy stocks that are lagging once again.
Ok that's everything we received before the chat.
mary
2:06
why did you recommend selling keyera?
AvatarRoger Conrad
2:07
We recommended taking a tax loss from our initial entry point. The company itself is quite solid and we track it in the International Coverage Universe on the EIA website.
I like the new liquids pipeline in Alberta. Dividend is also safe and likely to grow as the company adds assets.
Andrew
2:12
Hi Roger and Elliott.  Thanks so much for holding these chats every month.  For a while the thesis on Dominion (D) has been the 6-8% EPS growth and 8-10% dividend growth. (D) said they could sustain both for a few more years at least. Now they're lowering EPS to about 5% and Div growth to 2.5%. Does that change your opinion or lower your price? A near 5% div & div growth is good a investment, but they're lowering div growth to get the payout ratio down and reduce leverage. Obviously someone (rating agency, major investors, management) is concerned about those.

What's happened is I think management has gotten a bit more conservative with midstream projects since buying in Dominion Midstream and acquiring SCANA. The biggest ongoing uncertainty is the Atlantic Coast Pipeline, which has been held up by a court decision not allowing crossing the Appalachian Trail. They've appealed to the Supreme Court. I don't see even a worst case here as a threat to dividends and guidance. I do think the value proposition has s
AvatarRoger Conrad
2:13
shifted a bit to safety from growth. But this is still a deeply discounted utility stock and we're maintaining a buy up to 80. I also think the growth projections could be conservative, if there's a better than expected decision on the pipeline.
jim
2:16
I am in the LEI web site but can't locate the graph you use.
AvatarElliott Gue
2:16
We actually download the data to create that chart from the Bloomberg terminal and it includes all revisions to prior month's data...you won't find the exact graph we use for LEI (the MOM change) on the Conference Board's website. You can, however, see the last 6 months of LEI monthly changes in a table Conference Board releases every month. Just go here: https://www.conference-board.org/data/bcicountry.cfm?cid=1 then click under where it says download PDFs "Technical Notes." You'll find the MOM changes on page 4.
Arnold S
2:23
For Buckeye Partners would you sell shares at market price or set a limit order for 41 or 42?  Do you think  there is any chance that a better offer will come in? Thanks
AvatarRoger Conrad
2:23
This offer is all cash ($41.50 per share) so your decision to hold or sell should depend on how close the market price is to that offer price. At a price over $41, my view is the additional appreciation to the offer price plus distributions to be paid to close aren't worth taking even the small risk regulators unexpectedly reject the deal or IFM can't finance it. As for a higher offer for BPL, I think the odds are low given the big premium this one has to the pre-offer price, and more important BPL's weak Q1 results and likelihood of a downgrade to junk if it remains a standalone entity.
AvatarRoger Conrad
2:25
A limit order to sell at 41 isn't a bad idea. Note however that when I advised selling the price was pretty close to 42.
Hans
2:29
Elliott & Roger,
I hope you can bring us up to date as to WHAT is happening to oil.
CXO for example now is at 96 and it is almost no matter what you buy in the production or midstream oil business the stock goes down.
They keep talking about trade problems and oversupply perhaps you can tell us what the real reason is.
Thank you
AvatarElliott Gue
2:29
Crude oil looks pretty solid from a fundamental perspective. In particular the curve is still in pretty hefty backwardation here, which is a sign of near-term tightness in supply demand. I don't think there's been any significant change in the outlook since the May 7th issue "Oil: It's Not Octiber 2018." That said, WTI is down about 14% from its late April highs and I see 2 major drivers: 1. The broader risk-off trade that's infected global markets since early May due to concerns about US/China and trade and 2. A string of higher-than expected US inventory builds.
AvatarElliott Gue
2:29
Looking at these 2 rationales: 1. I am not  in the recession/bear market camp as the economic and market indicators I follow just aren't consistent with what we typically see near a market top. I do believe we could see more downside in the stock market (as we've really only seen about a 5% pullback to date) and that might spill over into oil short term but with oil fundamentals will dominate over holding periods of 1 to 3 months and ultimately I think the tight supply/demand balance for crude will push prices higher again. Rationale #2: I am not concerned about US oil inventory builds for a number of reasons -- I wrote about them in the May 7th issue of EIA and also recorded a couple of videos regarding inventories available here: and here:
2:34
Wiuth regard to the energy/oil stocks. Over the intermediate to long-term, energy stocks follow the commodity (oil). It's always been that way and there's an old saw that the most expensive words in finance are "This time it's different." However, in the short term there can be wide deviations in performance between oil and energy stocks and that's been the case in recent months. I think that reflects, in part, investor fatigue -- the view that the extreme volatility in oil over the past 5 years makes it tough to forecast earnings and, therefore, makes it difficult to invest in energy stocks. Over the long haul, however, if you look at a stock like Marathon Oil, they're hitting all their free cash flow targets and over the next two years I see them generating some $1.5 billion in FCF with oil around the current level. That's REAL cash that they can use to pay a dividend, buy back stock and pay back what's left of their debt. Of course, sentiment dominates the short run, but we do believe stocks like MRO that
....can generate free cash flow will be rewarded over the longer haul.
Michael L
2:35
Hi Roger,

I am a little worried about Con. Comm's ability to survive to the bonds maturity date.
Are you still pretty comfortable that the company will be liquid when the bonds mature? Thanks
AvatarRoger Conrad
2:35
Eliminating the dividend did free up a lot of cash to cut debt and there are no significant debt maturities before these bonds of October 2022 must be paid off or rolled over. Also, Frontier's sale of some copper wire assets announced today shows there's still a market for them. That said, these are junk rated bonds and CNSL is still shedding revenue like every other smaller telecom. I think they're fairly priced in the low 90s (yield to maturity 9.1% approx). But I'm not complacent about this position either.
RBB
2:35
Thanks for the YouTube reference. Have earmarked the two references and will review them after the webinar. . . Thanks again.
AvatarRoger Conrad
2:35
I will recommend a sale if, for example, the rate of revenue declines accelerates later this year.
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