JotCast | Energy & Income Advisor Live Chat November 2019

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Energy & Income Advisor Live Chat November 2019

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Elliott Gue

2:52

If I had to pick one producer to buy it would be OXY right now. People really hated the OXY/APC deal but they are following through on their plan to sell off assets (they're actually expecting to exceed sales proceed goals and complete the divestments faster than envisioned), and they are holding the line on capital spending -- with oil at or near current levels, I think the market will be surprised at their capacity to generate free cash flow. I think the probability their maintain their current dividend is high, especially if oil holds up as we expect and, on that basis alone, I think OXY is worth $60+. Also, Buffett now nibbling the common stock -- I am NOt a believer in just following Buffett but I do think it's interesting that he sees value in a high-quality beaten down energy name like OXY. SLB is my favorite services firm to buy...strong international leverage, where activity is already improving and the potential catalyst of a deal or JV for their North American business plus a 5.5% yield while you

Victor

2:53

Are you still ok about holding the big names like TOT, RDS.A and XOM?

Roger Conrad

2:53

They're still the safest ways to invest in energy, the main reason being unmatched scale and balance sheet strength. And at this point, they're coming into the time of their CAPEX cycle on production where output is ramping up and spending is dropping, which generates free cash flow. They don't offer the upside leverage of other companies we recommend. But if you're looking for income and/or something to hold for the long haul, the super oils are a great choice.

Hans

2:54

CLB with a price of around 46, you still have its rating at $ 133 is that not a little much with the slowdown of drilling

Elliott Gue

2:54

Ultimately, I think CLB is likely to see a significant recovery from where it's trading now. Their offshore exposure is solid and that's an area that has seen some recovery over the past 4 quarters. Plus I think they fit well with our theme of well designs becoming more technically complex. We'll likely be revising buy targets next month as part of our year-end review.

Hans

2:59

Hal with the slowdown in drilling you had just had half a year ago a rating of 60 now 20 needless to say this is a big RED spot on my portfolio, where do you see HAL go in the future

Elliott Gue

2:59

HAL's exposure to North America and fracturing has been a big headwind for them, which is why we've favored SLB over HAL lately. That said, one bit of advice I was given many years ago is that there's no such thing as "good" or bad news and a stock's reaction to news is more important than the news itself. HAL seemed pretty negative on North America in their last earnings call; yet, the stock popped 6.4% and is up about 11% in the month after that call. This suggests the worst is close to priced in with the stock in the low $20s. Fundamentally, I do think they'll benefit since both SLB and HAL are dramatically reducing fracturing capacity, which should improve margins.

Jeffrey H

3:00

Do you believe KYN is still a good wya to invest in midstream MLPs? Do you think its current dividend is safe?

Roger Conrad

3:00

The Kayne Anderson fund's largest holdings at last count were Enterprise at 13.6%, Energy Transfer at 10.2%, ONEOK at 8.3%, MPLX at 8%, Williams at 8%, Magellan at 6.8% and Plains at 4.8%. That's basically 60% of the portfolio in very large and secure companies. Funds have to distribute that income, which is augmented by leverage at 32.12%. The current yield of 11.4% on the market price is increased by the fact that the fund trades at an 11% discount to NAV. It also provides a double-play on the recovery--as NAV should rise and discount narrow.

Roger Conrad

3:01

At this point, I think the distribution should hold, though I would reiterate that it is better thought of as an aggressive income investment.

Scott K

3:06

Could you please comment on ET vs MPLX for a portfolio that only has one more slot for a midstream MLP investment and that values capital preservation, long term safety of the dividend and dividend growth that keeps up with inflation? Also, I’m sitting on massive losses with AM. Is it time to cut and run, wait until after tax loss season and then sell, or hold because the worst is over?

Roger Conrad

3:06

Antero as I indicated above is a midstream company we might recommend swapping out of by end-year. We're rating it a hold at this time. Of the other two, MPLX has the advantage of growing distributions and lower leverage but Energy Transfer has stronger distribution coverage--1.3 times with free cash flow this year. As for ownership, Energy Transfer is a possible candidate for going private, but I would view that as a potential positive. MPLX as I mentioned earlier is likely to have the Marathon Petroleum ownership question hanging over it into next year--which ET doesn't have. But as i also said earlier in the chat, all the players are on the same page to maximize value.

Mack

3:12

I think I recently read that overall LEI was down 1% for the their month in a row. So...[1] is that correct and [2] if so, is it significant? Thanks.

Elliott Gue

3:12

LEI was down 0.1% in October, 0.2% in September and August. It's up 0.3% year-over-year. In EIA sister publication Deep Dive Investing we publish a Bear Market Checklist comprised of 10 indicators, which tend to signal ahead of a US economic downturn. One of the most important components is LEI, which has a long history of providing useful signals on the health of the economy dating back to the 1950s. Here's how we evaluate monthly changes in LEI. Step 1: look at the last 6 monthly readings on LEI (sequential changes). If 3 or more of the last six monthly readings are unchanged or negative that signals heightened recession risk. Step 2: When step 1 "triggers," look at the LEI diffusion indicator (which tells us how broad-based the economic weakness is) and if the 6 month moving average of diffusion is less than 45%, then that confirms the signal in LEI. Here's the problem -- Step 1 has triggered but Step 2 has NOT because, while manufacturing components in LEI are a drag on the index, the consumer has been r

Elliott Gue

3:13

rock solid. So, we don't see recession in 2020 and that's one reason we've remained bullish on the broader market.

Mark

3:14

Hello Roger and Elliott Could you comment on the FBI investigation into the permit granting process for Energy Transfers Mariner East pipeline. What downside risk is there from here for ET and our unit price. Thanks for all you do Mark

Roger Conrad

3:14

As we discussed in the November 25 issue, I don't think this is a major risk for Energy Transfer. First, it's clearly not the target of the investigation--that's the current Democratic administration in Pennsylvania. Second, Mariner East was clearly a needed piece of infrastructure, demonstrated by the fact that ET is trying to win permits to expand. Modifications for these are currently actually frozen at the state level, so a shakeup in the process may not be a bad thing for Mariner. As with all other midstreams, ET is going to have to prove its resilience the next few quarters to see a real unit price recovery. We think the numbers and guidance definitely point that way and though the FBI case sounds scary it won't derail that.

Brian B

3:22

I hold some Unit Corp 2021 bonds. Have you by chance kept up with their exchange offer? Have any advice as to making the exchange for the senior 2024 bonds or an opinion as to their asset valuation?

Roger Conrad

3:22

The fact the shares have broken well under $1 and the 2021s trade at just 50 cents on the dollar (yield to maturity 64%) is a pretty good sign the market expects an eventual bankruptcy filing. In fact, S&P stated it expects to declare a "selective default" when the exchange is concluded. And clearly, offering to swap a bond with a coupon yield of 6.625% for longer dated paper paying 10% and 7% is never done from a position of strength. There's also some obvious resistance to the swap, demonstrated by the fact the offer has been extended.

Roger Conrad

3:22

The real question is whether there's any reason to expect a better performance from a relatively small energy company generating negative free cash flow in a year that's going to be challenging even for far stronger companies? And we have certainly things go from bad to worse for a number of energy bondholders in this position (Vanguard Natural Resources, Linn Energy). We don't track this one. But if this were my money I'd be taking the loss and moving on.

Jeffrey H

3:30

Dear Roger/Eliot, Many thanks for another opportunity to pick your brains. In late August, you suggested that K-1 adverse investors might consider getting midstream MLP exposure by investing in KYN, which held many good companies. I took your advice and spld out of several of your recommended K-1 midstreams and immediately put the money in KYN (keeping, of course, EPD which I had bought on your recommendation at its nadir in early 2016). My accountant was killing me with the cost of K-1 form preparation -- such an expense is not a major consideration if a person has very large positions in these stocks but it can eat significantly into the distribution returns of an investor with a few hundred shares. I executed my transactions on 26 August, Since that date, KYN is down 8.7%, while MMP is down 10%, MPLX 15.5%, and ENLC 32.6%. I am not sure what to make of this. At the time of your recommendation, you pointed out that KYN had the risk of high leverage and had cut its dividend in early 2019. (more)

Roger Conrad

3:30

I think part of the reason for the Kayne Anderson fund outperformance (actually -6.2% including distributions since August 26) is that it also holds non-MLP midstreams like ONEOK that have performed substantially better (6.2% return) over that time. That's been partly offset by a slight widening of the discount of the market price to NAV. As I said earlier in the chat, my view is the distribution should hold--for one thing as you point out it's less than it was at the beginning of the year but also the top 7 holdings I listed above are in no danger of cutting payouts.

Roger Conrad

3:30

Obviously, we'd like to see the fund go up but it is still a good choice for investors who want to own a basket of midstream and thereby avoid the K-1s--though also forgo the tax advantages.

Eric

3:30

Does the structure of ETNs based on the AMZI index impact the top 5 holdings, EPD, ET, MMP, MPLX and PAA? Lately, with these 5 MLPs doing better than the other smaller cap MLPs in the AMZI, these 5 MLPs need to be sold to get back to a maximum 10% weighting for each MLP every time AMZI is rebalanced. Between AMLP, AMJ and a few smaller ETNs, that's over $11 billion in ETNs requiring rebalancing and selling of the 5 top MLPs. That trend will only reverse once the smaller cap MLPs begin to outperform the 5 largest MLPs. Do you think there is much impact from AMZI rebalancing on these top 5 MLPs and if so, when will the smaller cap MLPs begin to outperform the 5 largest MLPs?

Elliott Gue

3:30

There is likely some impact. However, I think it's more of an on the margin effect rather than a major driver; after all, EPD and MMP have handily outperformed the Alerian MLP Index this year (by roughly 15% points each) even though they would be seeing some rebalancing pressure as they're both constantly bumping up against that 10% threshold. More broadly, I would say that over the past few years we've seen passive money come out of the MLPs; in my view that's a long-term positive as it reduces distortions cause by issues such as investors chasing yield factors and it also means there will likely be more returns to MLP stock-picking in future.

Elliott Gue

3:35

As for the small vs. large-cap MLP issue, I think this is actually part of a larger dynamic. Simply put, investors buy large caps when they are worried about the economy and/or cautious about a particular sector. They favor small caps usually during cyclical upturns and when they're bullish on a group/sentiment is positive. For example, the Russell 2000 Index outperformed the S&P 500 in 2016 by a 2-to-1 margin as the US economy recovered from a "soft patch" in 2015-16. From mid-summer 2018 through the end of August this year, and has retaken the leadership role since then. My point is that the small-cap/large cap question is really this: When will sentiment toward MLps and energy stocks improve from the extreme pessimism apparent today?" My view is that the consensus is bearish oil, anticipating a 2020 glut and, therefore, is also cautious energy stocks and MLPs. I think the consensus is overly pessimistic as slower US oil production growth and a disciplined OPEC...

3:36

...coupled with an economic recovery into 2020 will keep oil prices near current lrevels or higher. If my outlook is correct, I think you'll have scope for an improvement in sentiment toward the group and more of a rotation out of large anmd into smaller cap names in the first half of 2020. Sorry for the long-winded answer.

3:43

If you are suggesting a possible sell recommendation for AM and ENLC then it appears you believe the possibility of ANY recovery is problematic. Both companies have recently stated an improvements in distribution coverage as well as their balance sheet. In addition, they have made tremendous progress in achieving their cost cutting goals. At these price levels why would you sell unless you think these companies are going under.

Roger Conrad

3:43

Again, let me reiterate that Elliott and I have not made any final decisions about any end-year moves for the Actively Managed Portfolio or even the High Yield Energy List. You're correct pointing (as I did answering the first question in this chat) that Q3 numbers weren't bad even for Antero and EnLink. And I've pointed out evidence elsewhere in the chat that as bad their shares have performed, their bonds have actually been fairly steady, which should ensure access to debt capital.

The reason we would sell would be that we see better places to put our money going into what we believe will be a recovery year for the sector--not because we saw no hope of recovery ever for them in particular.

Frank

3:44

Thoughts on CAQPL, PLS

Roger Conrad

3:44

Hi Frank. I'm not sure what company you're asking about. Not finding anything with that symbol.

Brian B

3:56

At what price is GLOP a buy even assuming a 25% div cut?

Roger Conrad

3:56

I think any true buy signal for GasLog Partners would have to start with operating results. The Q3 coverage ratio certainty wasn't bad at 1.3X, particularly as it included a notable dry docking of a vessel. and management is still guiding toward growth this year. On the other hand, the fact management didn't sell shares this year even under the at-the-market plan is a pretty clear sign the equity market is cut off. And though management professes to be bullish about the LNG tanker market, the drop downs from GasLog appear to be expensive and there are upcoming recharters.

Roger Conrad

3:56

The big drop in the share price this month does make GLOP more interesting. But at a new low today, I don't think anyone should be in a rush to jump in.

Sreve

4:02

Does OMP fall into the group led by such as AM and WES?

Roger Conrad

4:02

Not at this point. The main similarity is with Antero, which is dependent on a single company Antero Resources. Oasis Midstream Partners, however, has far superior distribution coverage at 1.9X and third party volumes in the key Bighorn play are up to 32%. Oasis Petroleum is still its biggest customer and general partner. And while that company is still on track with production targets, it did recently see its "borrowing base" reduced by lenders. That should not affect guidance. But it is something we're keeping an eye on with OMP.

Mack

4:05

OMP is down aprx. 10% since early Nov., even after a decent earns report. Do you still consider OMP one of your "best names?"

Roger Conrad

4:05

I think like every other midstream company, it's going to have to prove its resilience over the next year. The biggest risk it won't is if Oasis Petroleum has trouble meeting its output targets. But again, Q3 results were stronger and guidance issued less than three weeks ago was even more bullish for growth of volumes, distribution coverage and distributions--which are still targeted for 20% growth. If OMP can stay on track for even half of that the next couple years, its shares are going to be a big winner, particularly off a 12.7% yield.

Frank

4:11

CAPL Sorry

Roger Conrad

4:11

We still rate it a buy up to 18. The distribution isn't growing but assets and cash flows are stable. The biggest news is Couche-Tard has sold its general partner interest and IDRs to Joe Topper, CrossAmerica's founder. That follows what were generally solid Q3 results for the fuels distributor, with coverage rising to 1.42X for the period and 1.14X for the trailing 12 months. We've found this segment to be solid when other midstream companies are challenged and that appears to be the case now.

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