JotCast | Energy & Income Advisor Live Chat November 2019

Return to

Energy & Income Advisor Live Chat November 2019

Prev Page View Full Chat Next Page

Jim N

4:15

Thoughts on EVA

Roger Conrad

4:15

We continue to rate it a buy on dips to 32 or lower. The partnership successfully upsized a bond offering this month to $550 mil from $450 mil at a slightly better than guidance interest rates--a sign of strength. That followed solid Q3 results, including a 1.2 times coverage ratio. Like CAPL, what's chiefly attractive about Enviva is the wood pellets harvesting and shipping business responds to different key catalysts than North American midstream. And it's been a steady performing business since we first met management at an MLP conference some years ago.

lee

4:20

mmp down today over 2% only news i could find is ceo sees competition with new pipelines opening and wont be earning as much next year. does your bullish view of them include this issue and could it be effecting epd.

Roger Conrad

4:20

I don't think there was anything that happened with Magellan Midstream today that can't be explained by general weakness in MLPs--the Alerian was also down roughly 2%. A Goldman analyst initiated coverage today of the stock as a buy with a 12 month price target of 69. As for pipelines, the company still expects to have new west Texas refined products pipeline and terminal capacity "operational" by mid-2020 and is finding other areas for conservative growth as well. Bottom line is management has gotten conservative but just as in 2014-16, Magellan is ready for what's to come.

ron

4:24

I would hesitate selling ENLC at this price since I hold it in my IRA and get no tax advantage so waiting until next quarter might be the prudent thing to do? Also I believe that there have been a few recent insider stock purchases.

Roger Conrad

4:24

Insiders have added approximately 7% to their holdings of EnLink Midstream over the last six months. On the other hand, the average price of those purchases was about 2.5 times the current price of the shares. Sometimes insiders are as surprised by headwinds as other investors.

Like I said, I see plenty of reason to expect EnLink to eventually recover. But the question to ask--whatever the nature of the account it's held in--is whether or not there's something else that can give us a better return. We're still hashing that out regards EnLink.

Victor

4:26

Elliott, what is your view of the US economy and the stock market overall for 2020? The energy sector has been in a bear market for a long time but the rest of the sectors are doing very well. The fact that oil prices are low are bad for the energy stocks but great for the economy. Do you agree? Money flows to every sector except the energy sector. That's seems to be the case.

Elliott Gue

4:26

I am actually pretty bullish on the stock market right now. As I mentioned earlier on in the chat, my indicator and our 10-point bear market checklist still aren't showing the level of broad-based economic weakness that typically precedes an economic downturn and bear market. We have also seen "value" stocks and small-caps outperform the S&P 500 since the end of summer, which is typically a sign that the market is anticipating a cyclical economic recovery. Lastly, we're getting a few data points, which suggest the weakness in manufacturing -- something we've seen twice before since this bull market started in 2009 -- stabilize and recover. Obviously, I want to keep monitoring the data but, for now, I don't see a recession in the next 12 months, the stock market rarely peaks more than a year before recession and returns in the final 12 months of a bull market are strong (average of 25% since 1937).

Elliott Gue

4:29

As for energy. Yes, low energy prices are, on balance, good for the economy. In particular low and middle income consumers have benefited from the drop in oil prices since 2014 and are benefiting also from the stronger labor market. However, I would say that most energy stocks I monitor (nmainly the higher quality names) aren't pricing in even $50 oil...they're trading as if oil were expected to tumble back to last year's low, which I beliwve is unlikely. Generally, I think oil prices in the $55 to $60 range are comfortable for the US consumer AND would lead to a significant upside re-rating for energy. Turn hasn't happened yet but I do believe it will if my out-of-consensus outlook for crude plays out.

Victor

4:30

Will PDCE recover somewhat from this low?

Elliott Gue

4:30

Long-term I like their buy of SRC Energy -- makes sense to consolidate in Colorado. I am just a little suspicious/worried about regulation in CO at the moment, which is why we're preferred other names with more diversified exposure.

Victor

4:35

Please comment on SHLX. It's been moving sideways for months.

Roger Conrad

4:35

All things considered, Shell Midstream has been a very steady performer, even as the distribution has continued to ratchet higher. We've seen hurricanes have an impact on quarterly results. But debt /EBITDA is consistently modest at 3.6X and coverage was solid in at 1.1X in Q3 despite disruptive weather. The major headwind has been a lack of clarity on what distribution growth looks like after this year--and what parent Royal Dutch Shell is going to do about rising IDRs that are a turnoff for investors. Management flat out refused to provide guidance on either during the Q3 call but the business is still quite solid and performing to expectations.

Roger Conrad

4:35

On the call, management also asked investors to "be patient just a little bit longer until we can give you that holistic strategy." We're willing to do that and are keeping SHLX at buy at 22 or lower.

4:48

Q. Why the selling pressure on USD Partners (NYSE: USDP)? Seems like it is the safest MLP that is left, no matter what happens to the oil price, or anti-fracking laws, and since no more pipelines are likely to be built in western Canada, and since the CAPEX for this oil has already been spent.--Henry T.

A. I think the big problem USD Partners has now is it basically can’t issue more equity with a yield of nearly 16%. That makes it very hard to grow at anything faster than a true snail’s pace. And with distributable cash flow shrinking 9% in Q3, coverage has shrunk to just 1.04 times. The big challenge is renewing a customer whose commitments expire next year.

You’re right to point out the lack of pipeline capacity coming out of Canada as a big plus. That’s now being at least partly offset, however, by production curtailment in Alberta to support pricing. And given its small size, it’s tough for USDP to offset.

The assets are good and business should remain steady long-term, even if/when new pipelines are built. But it looks increasingly like a dividend cut is the best way to assure sustainability. I suspect management will resist taking that step as long as it can. But if you’re looking for why USDP is weak, that’s the reason. We currently rate it hold.

4:51

Q. How much concern is there with lawsuits and FBI investigation.
Thanks, Bud E.

A. Bud. I hope I answered this question to your satisfaction earlier in the chat. To reiterate without being redundant, we don’t see the investigation as a major threat or even headwind for Energy Transfer LP. They’re not the main target, the Mariner Pipeline is clearly needed and Pennsylvania is sitting on applications for permits to expand it—which indicates the opposite of a company getting special favors by trying to buy influence.

Victor

4:56

As you mentioned on your report MRO has good fundamentals. When looking at the chart do you see some consolidation at this level?

Roger Conrad

4:56

That's always a possibility and certainly there is some strong "industrial logic" behind consolidation in the oil and natural gas production sector, just as there is for midstream. What may be holding it back is some combination of a generally high cost of capital in the industry, the fact that the stock price of acquirers is summarily punished whenever a deal is announced and the general downturn in the industry--which raises the expectation that you might get a better price by waiting to bid.

Roger Conrad

4:56

Our rule for takeover targets has always been to stick to what you'd want to own if no deal ever materialized. There are certainly a lot of cheap, high quality energy stocks now. Our view is they are worth buying on the expectation they'll stay independent. And if there is a merger, enjoy the bonus.

Andrew

5:08

I know you've touched on the overhang for MPLX, but what is Elliot asking Marathon to do? C-Corp conversions are a mixed bag, only ONEOK has really thrived since it converted. Even Williams, which on paper should have thrived along with ONEOK, hasn't seen a bump. And a conversion would trigger a tax liability for a lot of investors. So what is their goal to 'unlock value?"

Roger Conrad

5:08

The proposal that's been made publicly available calls for spinning off Marathon's 62.94% common unit ownership of MPLX to its shareholders and converting the MLP to a corporation. The effective sacking of MPC's CEO earlier this month and decision to sell the fuels distribution unit Speedway has raised further uncertainty about what might happen. And apparently Elliott Management nearly doubled its stake in MPC in Q3, which means it's not going away.

Roger Conrad

5:08

I can't tell you for certain what's going to happen here. What I can say is whatever happens to MPLX will directly affect the value of what Elliott Management owns--so our interests are effectively conjoined. There will be no discounted buyback of MPLX into MPC.

I agree totally that the record of corporate conversions is quite mixed and for every ONEOK there are several Hi-Crushes. The planned conversion of Hess Midstream from MLP to corporation is apparently structured to be tax neutral to shareholders, so conversions don't necessarily hurt. But the devil is in the details.

Bottom line is conversions for many MLPs made as little sense as becoming MLPs did in the first place. There doesn't appear to be compelling logic to compelling logic to convert MLPX. But I do think if one happens, odds favor it being constructive, especially from MPLX' current price.

ron

5:12

Does KMI have as favorable outlook and buy recommendation as EPD?

Roger Conrad

5:12

Yes. They had solid Q3 results as we pointed out in the November 1 issue of EIA. Since then, the Canadian Competition Bureau has approved the sale of Kinder Morgan Canada to Pembina Pipeline and the company has successfully started up the third unit of the Elba Island LNG export facility. Distribution coverage is strong and there's another sizable dividend increase coming early next year. Our buy target remains 22.

Andrew

5:18

You mentioned ET as the least risky of the High Yield Stocks, but don't you think ET suffers from the "Kinder Affect?" That is, investor haven't forgiven KMI for saying they were planning to raise the dividend 10% and 4 weeks later cut it by 75%. ET is clearly run with Kelsey Warren's interest first, everyone else's second. The deal he got before the Williams break up shows how far he'll go to protect himself over everyone else. I don't really trust him to do right by investors, but I trust you guys, so your opinion would be appreciated.

Roger Conrad

5:18

I think you can trust executives to act in their best interest. And when one of them owns 9.59% of the common units of a company--as Mr. Warren does--his interest is aligned with yours. I agree that there's a Kinder effect of sorts at Energy Transfer. In fact, the entire MLP sector has suffered from reputational damage the past several years, precisely because of abuse of IDRs etc. There is a chance ET does go private as I mentioned earlier and certainly its cheap with enterprise value 8.9 times trailing 12 months EBITDA. But if there is one, it will have to be approved by the 90% plus of shareholders who aren't Kelcy Warren. And with ET at $31.5 bil in market cap it will be expensive.

Roger Conrad

5:18

I also think it would require paying a pretty big premium.

barry

5:21

For those of us who kept UGI after it acquired your previously long recommended APU and did not sell, can you give us your assessment (long term and short term) of the wisdom of continuing to hold its shares?

Roger Conrad

5:21

Despite the big drop since the Amerigas merger closed, I think UGI is still a solid company. I continue to track it in Conrad's Utility Investor though not in Energy and Income Advisor. There was apparently a reaction to an "earnings miss" in Q4 (end Sept 30), which was silly considering the money earning quarters are Q1 (end Dec 31) and Q2 (end March 31). And I think the shares are trading now at a good price for purchase--though more for reliable growth than income as the yield is low.

Jon B

5:32

Hi, can you explain the different leverage measures (covenant, ratings agency, etc) used by ET. Some look better than others. Why the discrepancy? Also, are you concerned that management doesn't seem too intent on reducing debt? Thanks.

Roger Conrad

5:32

I actually think they've made great progress improving their credit metrics, which is why both S&P and Fitch rate their BBB- credit rating outlook as "stable"--a huge improvement from past years. Also as I pointed out, they're now generating enough free cash flow after all CAPEX to cover the payout by 1.3 times.

Roger Conrad

5:32

The decision to buy SemGroup will add to debt as are the 4 major projects coming on stream by early 2020. But the added cash flows will improve debt metrics again, as well reduced CAPEX. As for measures of debt, we just use a straight net debt to EBITDA for our analysis.

Andrew

5:40

Thank you both for all the work you do. I so appreciate not only the chats, but all the hard work you put in for us, the readers. I'm perplexed by the general sell off of strong MLPs. PAA/PAGP is well over 8% despite growing it's distribution, lowering leverage and increasing their dist. coverage. Same with MPLX at over 10% - that's crazy for this strong a company. What is going to be the catalyst for the unit price to go up it strong growth, high/growing yield and lower leverage won't move the needle.

Roger Conrad

5:40

I don't think a lot of people are differentiating these days between individual MLPs. And in fact, I think what we're seeing now is pretty much wholesale unloading of all MLPs as well as all but a small handful of midstreams. Again, the catalyst is the growing belief that US shale production is about to drop sharply, which will mean lower throughputs, revenue, cash flow and ultimately distributions for MLPs. But while that is a risk for many, a number are going to prove resiliency the next few quarters and when they do the investor dollars are going to come back--just as is the case every time a sector/market melts and down and inevitably recovers. If it happened for utilities post 2001-02 Enron, it will happen for already healthy midstream companies.

Hans

5:44

Market new highs, but oil supply up 3.6 ml barrels and nothing but RED in my EIA portfolio some down 2 to 3% when is this going to stop!!!

Roger Conrad

5:44

Energy is the laggard in this market. Again, the US shale industry is going to have to prove its resiliency the next several quarters. We think the companies we like will and will then recover.

Jim N

5:45

A long time ago you followed AG Growth International.

5:49

Do you have any input regarding Ag Growth now?

Roger Conrad

5:49

It's not one I've covered on a regular basis but it is still succeeding as it was when I did back in the Canadian Edge days. Returns have been higher on the Canadian market than in US dollar terms due to currency concerns. But Q3 was again solid despite the negative impact of US trade policies on US farmers. They haven't changed the dividend since 2010 but they live within their means and have steadily expanded the market for their products over the years. I think it's still a good one.

Connecting…

Your current subscriptions

None

E-mail Address	Chat Owner	Status	Remove

Enter your email address to be notified when Sherry Roberts hosts a chat