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Energy & Income Advisor Live Chat November 2019
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AvatarRoger Conrad
1:55
Hello everyone and welcome to this month's subscribers-only Energy and Income Advisor live chat. The groundrules as always are first there is no audio. You'll need to type in your questions in the space provided and Elliott and I will respond as soon as we can give a concise and comprehensive answer. There will be a complete transcript of all questions and answers available shortly after we sign off, which will be after we've responded to everything in the chat queue, as well as emails we've received prior to this event.
1:56
We're going to start with a rather long winded answer to an emailed question.
Q. In this week’s issue of Energy and Income Advisor, in the Actively Managed Portfolio, Enlink Midstream LLC (NYSE: ENLC) is shown as a buy under 13, but in the Endangered Dividends List is shown as a hold. Which is it? I'm getting killed owning Antero Midstream (NYSE: AM) in an IRA, so, no tax loss possible - what to do? How about Enable Midstream Partners (NYSE: ENBL) and Western Midstream Partners (NYSE: WES)?—Michael G.

A. We apologize for the error in the Portfolio table. We added EnLink to the Endangered Dividends List and cut the recommendation to hold in the November 1 issue, following management’s decision to suspend quarterly distribution increases. Since then, the midstream company has reported Q3 numbers that were reasonably solid but also a fairly gloomy guidance update, including a projection of a mid-teens drop in volumes if no drilling rigs are deployed in its Oklahoma territory in 2020.
1:57
We highlighted those results in the November 25 issue that posted this week, along with our rationale for the hold recommendation. The price definitely factors in a fairly hefty distribution cut, which management still officially denies is under consideration. We think the primary reason for a reduction would be to self-fund capital spending in 2020, which is currently projected at half the current level.

The drop in the share price following guidance certainly makes that more possible, as accessing capital has now become more difficult. But EnLink’s bonds are not currently trading at distressed prices—the 5-years yield 6.7% to maturity—and that importantly indicates a dividend cut is the worst to expect here.
I have to be honest that this is a midstream that we’re thinking of switching out of at the end of the year. Recovery is not impossible here and in fact with EnLink’s assets and reach is likely when the cycle turns higher. But we might want to focus our resources on other midstreams we see more potential for in 2020.

The same is true for Antero Midstream, which also froze its distribution and was also placed on the Endangered Dividends List in the November 1 issue. We highlighted Antero’s numbers and its dilemma in the November 1 Alert, which is mainly that its parent and major customer Antero Resources (NYSE: AR) faces a big challenge cutting costs enough to sustain oil and gas production guidance, given the steep drop in Appalachian shale prices.

As with EnLink, Midstream’s actual Q3 numbers met expectations. But the trend at Antero Resources strongly hinted management is considering a fairly steep distribution cut to hold in cash, despite its protestations to the contrary in the earnings call.
The partnership’s bonds are selling at depressed but not distressed prices—with the yield to maturity on the January 2028’s at 9.8%. That too suggests a dividend cut would market the bottom in company fortunes. But while recovery is not impossible, this is another stock we’re considering swapping out of for another midstream that’s also cheap but has less risk.

As for Enable Midstream, we highlighted its Q3 results and guidance in the November 25 issue. It too has a large presence in the SCOOP/STACK of central Oklahoma, which as I said is getting a lot of attention for a big drop in drilling rigs in the second half of 2019. But we continue to believe it’s in a far different place than Antero or EnLink for several reasons.

First, there’s still a lot of rig activity where it operates, with management noting 31 expected to be connected to its infrastructure in 2020. The company has multiple customers, a fair portion are on the demand side (utilities) that will continue to pay for capacity even if system
throughputs do decline. Current distribution coverage is strong at 1.4 times. And there’s no balance sheet pressure or challenging access to credit markets, with September 2029 bonds yielding just 4.9% to maturity.

There’s also the strong support of co-general partners Centerpoint Energy (NYSE: CNP) and OG&E Energy (NYSE: OGE). These companies also control 79.24% of the common shares and their primary interest is collecting distributions, same as ordinary unitholders. The highest recommended entry point of 17 looks like a profit target at this point. But we believe Enable is one of the MLPs that will prove its resiliency to investors over the next few quarters, which is the surest spur for an eventual recovery.
1:58
Finally, as we pointed out in the November 25 issue, Western Midstream’s main concern right now and the reason its share price has come down is not its actual Q3 results or even 2020 guidance. It’s lingering uncertainty about what its new general partner and 55.45 percent common unit holder Occidental Petroleum (NYSE: OXY) is going to do with its ownership interest.

At this point, it still looks like a sale is in the cards for Occidental to cut debt taken on with the acquisition of the former Anadarko. The key uncertainties are who it will sell to and at what price? But from Western’s point of view, the only important question is what the company’s drilling plans are for the Anadarko assets, which its assets serve. And at least at this point, that doesn’t appear to be a real concern, as Western brings $1.7 billion in new projects on stream next year and cuts CAPEX by an estimated 20-30%.
Our view recommending these shares has been that worries surrounding the ownership question are overblown. Not only does Occidental’s road to full recovery lead through developing the Anadarko assets, but Western is rapidly branching out to third party business as well. Despite the elevated common unit yield, the company has good access to debt capital with the August 2028 bonds yielding just 5.202 percent to maturity. And with the reduced CAPEX and projected cash flow growth, 2019 free cash flow will cover Western’s payout by a 1.3 to 1 margin.

As with Enable, our buy target of 30 for Western looks more like a profit taking target than an entry point currently. But we also believe this company will prove its resilience next year. And as likely answers to the ownership question inevitably comes into focus, the huge headwind this poses to the shares will subside.
On a final note, we realize tax loss selling season is meaningless for IRA investors from the point of view of beneficial tax writeoffs. But we do believe it’s useful from the point of view of resetting your portfolio.

The midstream companies I’ve answered you about in this response are obviously all under water, and in fact are among our least successful recommendations this year. And all of them still encounter greater challenges to recovery than blue chips like Enterprise Products Partners (NYSE: EPD).

Bottom line is none of them worked out as we’d hoped this year, either because as the premise for recommending them eroded or they encountered something beyond their control as businesses. We’ve given them time to prove their worth. Over the next few weeks, we’ll be deciding whether we want to give them more.
1:59
Q. Please comment on EnLink Midstream LLC (NYSE: ENLC) and its prospects. I would especially like an explanation regarding these two comments in your last issue of EIA, mainly the hold recommendation in the High Yield Energy Target writeup and the buy recommendation in the Actively Managed Portfolio-Thanks Dick G.

A. Once again, we apologize for the error in the Portfolio table. The recommendation is hold for the reasons I highlighted answering the previous question. And again, EnLink is a company we’re in the process of re-evaluating to see if we want to give it more time, or else cut loose in favor of something we like better.
2:04
Q. Roger and Elliott. In Conrad’s Utility Investor you identify your recommended stock purchases as either “Conservative” or “Aggressive”.  In your May 2019 issue of EIA you recommended a Antero Midstream, Enable Midstream, Energy Transfer LP (NYSE: ET), EnLink and MPLX LP (NYSE: MPLX) with no description of “Conservative” or “Aggressive.”  For those of us who have purchased these stocks in reliance on your recommendations, can you please do so now so that we may know what we type that we have bought? Thank you.—Barry J.

A. Hi Barry, we do not currently separate companies on that basis in our various coverage universes in Energy and Income Advisor. I appreciate the suggestion to do so in future
2:05
As for how we would rate these companies now, I would start by saying that these are midstream companies, not regulated utilities. And as we’ve seen up close and personal the last five years plus since oil broke under $100 a barrel, the midstream energy business is exposed to cyclical pressures, no matter how fee-based their contracts are.

That said, risks are certainly not evenly spread across the sector, a very important fact we pointed out in the November 25 EIA issue. So on that basis, I can give you a breakdown of the MLPs you list from riskiest to safest.
Antero Midstream and EnLink Midstream are on the highest risk end due to narrower distribution coverage, higher leverage and a higher cost of debt capital and dependence on a smaller number of challenged oil and gas producers. Enable and MPLX would be in the middle, though for different reasons. Enable’s focus on Oklahoma slightly elevates its risk, though as we said above it appears to be in much better shape there than for example EnLink.

As for MPLX, the only real risk there is what general partner Marathon Petroleum winds up doing with its ownership stake. But it’s worth pointing out that whatever Elliott Management and others push Marathon management to do, their primary motivation is to maximize shareholder value of MPLX. There are no IDRs here for Marathon—its only stake in the 62.94% ownership interest. And MPLX not only has strong distribution coverage and no real leverage worries but a lot of room to streamline assets to increase profitability. We still rate it buy.
Finally, of your list, we would rate Energy Transfer the least risky. There are also no IDRs to deal with, distribution coverage is very strong, debt leverage is greatly reduced the past couple years and there are four new projects coming on stream to lift 2020 cash flow. We highlighted Q3 earnings and bullish guidance in the November 25 EIA and reiterate our buy recommendation of 16 or lower.
Michael L
2:11
Thanks Roger and Elliott for hosting these chats. Roger has mentioned several times recently that he anticipates recommending a sale of a couple of positions, presumably Antero and Enlink. If you would confirm the positions you expect to exit today, it will give all of us more time to reflect upon your thoughts and make personal decisions about tax loss selling before the end of the year. Also, because I have not seen significant news on any of the high-yield positions since there third-quarter report, I would appreciate some elaboration on why you would choose to sell now, at what is likely to be at or near the bottom. Finally, any thought you might have on which stocks to redeploy funds from the sales would also be appreciated. Happy Thanksgiving!
AvatarRoger Conrad
2:11
Michael. I mentioned EnLink and Antero in answering the question above as being under review for potential sale--as we adjust the portfolio to what we truly want to own going into what we think will be a sector recovery year in 2020. But really, everything in the portfolios is being put through the same wringer--winners and losers--as we really want to be in the best possible position for what comes next.

I can certainly appreciate what you're saying about wanting to know our thinking in advance of December 31 and we will make our decisions and convey them to you with that in mind.
Victor
2:16
In your last report you mentioned that major financial institutions are pushing the industry to reduce carbon dioxide emissions Who are they? That's beyond ridiculous. Do people know that if the atmosphere is represented by a 20,000 seat stadium, the CO2 that we generate would only occupy 4 seats?
AvatarRoger Conrad
2:16
A month or so ago is was well upwards of 1,000. At this point, most of them are European rather than US or Canadian--which is really the most important thing for North American oil and gas companies. But I think the industry recognizes the push by governments and now financial institutions to "decarbonize" isn't going away--and you see companies addressing that, the super majors like Chevron and ExxonMobil being the most prominent.
AvatarRoger Conrad
2:22
Staying on the decarbonization issue, the big question is what exactly does it mean? I think the assumption it's a disaster for the energy business is severely misguided. For one thing, the trend is for more usage and therefore production and transportation of natural gas on a global basis. Also, reducing methane released from pipelines costs money but also increases efficiency--just like more effective use of frac water does. Bottom line is this is something to watch but is a potential money maker for companies that act smart.
Victor
2:26
If US shale production growth is likely to slow sharply in 2020, what will the impact be on CLR and DVN? They are barely recovering from the lows of October.
AvatarElliott Gue
2:26
Generally, slowing shale production growth is good for the industry. First, the most important headwind for oil in recent years has been 1 million bbl/day + growth in US oil production, which alone has been more than enough to satisfy all of the growth in global demand and then some. Thus, the risk was that any rally in oil would quickly be short-circuited by excess US output growth. That's no longer the case -- slower US oil production growth will likely keep oil prices above $50/bbl generally in coming years and, at that price, better producers like CLR can make significant profits, returns and free cash flow. I think there's just an almost insane disconnect (the biggest I've seen in my career) between stock market valuations for producers and their positive fundamentals.
AvatarRoger Conrad
2:30
Q. Do you think any of the weakness in the MLP sector has to do with the belief that the tax benefits for MLPs (tax deferment of distributions) might get eliminated in a future tax code change?—Rick P.

A. As we said in the November 25 issue of EIA, our view is the primary headwind for midstream is the fear of a big drop off in US shale production reducing system throughputs and forcing renegotiation of fees. That in turn is a risk to revenue, cash flow and ultimately distributions.

I don’t think a lot people are paying attention to the possibility of a future tax bill taking away tax status of MLPs. Some adverse change is certainly possible, depending on control of the White House and Congress following the 2020 elections. But it seems more likely that we’d see a boost in overall corporate and individual income tax rates and that could actually make MLPs more attractive, especially for higher income investors.
Mary
2:31
Hey guys how come I'm not getting emails about upcoming chats, alerts, new issues or actually anything any more?
AvatarElliott Gue
2:31
I am sorry to hear that. I am not sure why you're not getting them but you certainly should be. If you drop our customer service manager an e-mail at service@capitalisttimes.com, she can look into it and resolve any problems. Or give us a call on the toll free line if you prefer. Again, sorry to hear that but I'm sure Sherry can fix any issues.
Victor
2:31
Do you still consider EPD as  a top performer?
AvatarElliott Gue
2:32
EPD is still arguably the single hoighest quality MLP in our coverage universe. Strong distribution converage, leverage to some of the most promising energy trends, no IDRs (actually among the first big MLPs to eliminate IDRs) and a top-notch management team. Historically buying weakness in EPD has been a good move.
Barry J
2:35
Gentlemen:
On page 10 of your EIA 11/24 Issue you alerted us to focus on the best names and “prune out midstream companies that…aren’t really measuring up…” And on page 13 you counseled us about “too many US midstream companies” with “consolidation likely to come from imploding the weak…”

Which are (i) the midstream companies you recommend “pruning” and (ii) the ones “likely to implode?”

Thank you for your wise counsel.
AvatarRoger Conrad
2:35
Hi Barry. Like we said earlier in the chat answering a question, Elliott and I are in the process of putting pretty much every recommendation through the ringer--as well as the rest of the coverage universes--to ensure we're positioned for what we believe will be a sector recovery year in 2020. The list of swaps is likely to include midstream companies.

That said, we don't want to give the impression that even the worst performers in the current portfolio lineup are in the imploding camp, or a candidate to be the next Sanchez Midstream. We chose them with care and they've encountered headwinds that may make other midstreams etc better choices.
Phil Plant
2:39
Do you have any  updates on EPD distribution coverage and potential distribution growth rates?
AvatarRoger Conrad
2:39
Phil, Enterprise is indicating at this time they're going to keep growing the payout at a low single digit annualized rate with quarterly boosts. it's a rate of increase that enables them to basically self fund an aggressive capital spending plan the next several years, with a focus on facilitating energy exports and it's closely tied to super majors in Texas.

They certainly have the wherewithal to increase that to a more historically "normal" growth rate of mid-single digits, and they've indicated at times that's what they'd prefer to do.
AvatarRoger Conrad
2:40
But in any case, EPD is a compelling value proposition in our view with a yield of nearly 7%, even at a low single digit growth rate.
Lee
2:42
As I review the past few years it’s clear the better results in my energy portfolio came from alternative energy plays. BEP, NEP, et al, have outperformed the carbon related stocks, even though I’ve stuck with best in class, EPD, MMP, KMI, ET.
do you expect this trend to continue, and should one consider overweighting alternative energy?
AvatarElliott Gue
2:42
We've been very, very selective when it comes to picking alternative energy investments in Energy & Income Advisor because the group is so over-hyped and there are so many dangerous companis there. That's why we've focused on names like NEP, BEP over the more widely touted alternative energy plays like First Solar and even Tesla. I think a ton of money will be lost in alternative energy stocks over the next 5 years in part because there's so much hype about, for example, electric cars these days. There will also be opportunities to profit in alt energy and we'll continue to strive to pick names that are valued on real fundamentals and not hype. However, I would be very careful about buying some of the widely touted alt energy picks out there.   As for fossil fuel companies, as I said earlier in the chat, I've never seen a bigger disconnect in my career between underlying fundamentals and valuations/sentiment and I think a lot of investors will be surprised how well traditional energy companies perform over th
Victor
2:43
ENBL has been in a steady downtrend since August of last year but you had positive comments on your last report. At what point do you expect a reversal?
AvatarRoger Conrad
2:43
As I answered earlier in the chat, the important thing with Enable is the business still looks very sound from the standpoint of rigs operating in their territory, distribution coverage, leverage and the support of major owners Centerpoint and OG&E. It looks like they're going to have to prove their resilience in the next few quarters to investors for shares to recovery. But if they do as we expect, we will see a very strong upside reversal.
Eric
2:48
Although EPD has no IDRs, it still has a GP. How much does the presence of a GP, or the absence in the case of MMP, impact the willingness of generalists to invest in EPD or MMP?
AvatarRoger Conrad
2:48
I think their structure as MLPs is definitely an impediment for some large investors/institutions. Importantly, judging from recent comments, management appears to see more advantage in keeping the MLP structure than converting to a C-Corp--one of which being not having a point in time where "cash taxes will be a drag." And in fact as we've pointed out, structure is by far a secondary concern for cost of capital/investor returns to business strength, if it's one at all.
Buddy
2:52
Elliott,  This is tax bounce season and there are plenty of tax bounce candidates in the very depressed energy sector.  Could you name a couple of your favorite energy stocks for a tax bounce?  (Mine are SLB, FLR and OXY.)
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