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Energy & Income Advisor Live Chat October 2019
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AvatarRoger Conrad
1:59
Hello everyone and welcome to this month's subscribers only Energy and Income Advisor live chat. We look forward to taking your questions and as always will keep this chat open so long as there are questions in the queue, as well as from emails received previously.
2:01
The ground rules are simply type in your questions and we'll answer them as soon as we can. If you have to leave during the chat, there will be a written transcript of all questions and answers posted on the EIA website shortly after we finish up. We will also send you a link to access when it's ready.
I'd like to get started with a couple of emailed questions.
Q. In your June 2017 web chat you said that UBTI is not a problem in an IRA unless you hold a large number of units.  In the Enterprise Products Partners (NYSE: EPD) website section on frequent questions under K1 tax information they say "UBTI also includes gains on the sale of publicly traded partnership units".  If that is true it might be easy to have more than $1,000 in UBTI when you sell your units.—Frank D.

A. Frank, I believe this refers to unrelated business taxable income generating by Enterprise itself, should it sell shares of another publicly traded MLP it might own. Also, Enterprise has frequently posted “negative” UBTI, which would then be subtracted from whatever positive UBTI is generated across your portfolio.

We don’t claim to be tax professionals. Also, the details of MLPs’ yearly taxes can vary widely from year to year, so it’s hard to generalize. But our information is still that only a very large portfolio of certain MLPs that generate a lot of UBTI would come anywhere close to the $1,
2:02
Q. Please comment on Enterprise’s earnings miss. It seems a much larger miss than recent reports.—Lee O.

A. The miss talk is around headline numbers really says more about the commentators than the company’s health. Mainly, though they have to report GAAP earnings per share, the relevant numbers for Enterprise’s profitability are distributable cash flow and free cash flow. In fact, because they include a number of non-recurring and highly variable factors such as mark-to-market gains and losses, they can actually present a highly misleading picture.

As for revenue, it’s affected by the cost of products that pass through certain assets and is dollar for dollar offset in expenses. It’s useful as a gauge of how expensive certain products are. But there is no impact on actual cash flows or the health of the company.

The big story for Enterprise was the cash flow numbers, the system throughputs, new project progress and new backlog were all very much in line with guidance and actually pretty robust.
That’s especially impressive in light of the slowing shale drilling activity we’ve seen. And it shows that management has successfully pivoted the company toward taking advantage of rising US energy exports, especially crude oil and natural gas liquids like ethane.

I would still like to see Enterprise increase distribution growth for 2020, which they appear to be considering. But this was a pretty solid report. And 1.7 times distribution coverage allows them to fund growth without selling new equity as well provides the possibility for distribution growth.
Frank
2:08
Thoughts on refiners?  Thanx
AvatarElliott Gue
2:08
Refiners aren't out favorite area in energy. The group has had a near-perfect set-up in recent years in that oil (their key raw material) has been flat or falling in price and the US refiners have also benefited from wide differentials (cheap US crude vis a vis international competitors). However, with US oil exports growing and pipelines from the Permian to the US Gulf Coast going into service Those US oil discounts are fading. I think the bigger names like VLO will be OK, but there are better opportunities in other parts of energy.
Jerry J.
2:14
Conflicting messages…
WSJ 10/22 “CHV sees BOOM”
WSJ 10/21 “Prospect of Pres. Warren” who states “And I will ban fracking—everywhere.” With a further note “A spokeswoman for Elizabeth Warren’s presidential campaign said that motivating investors to move money from the oil-and-gas business is the aim”.

Yours thoughts.

jj.
AvatarElliott Gue
2:14
I'm not big on mixing politics with investing. You read a lot of politically driven articles in the mainstream media (and from a lot of other financial newsletters out there) because politics are emotionally charged and that's more exciting. Certainly it's more exciting than me writing an article banging on about shale supply and global oil demand growth. However, I've never seen anyone make money out of a political investment narrative. In this case, banning fracking would cause oil prices (and by extension gasoline prices) to skyrocket and that would push the US economy into recession (almost guaranteed). I just don't see any politician doing that. Plus, even if she is the nominee and does get elected, she probably wouldn't have the support in Congress to follow through on that threat. Lastly, I think that the low weighting of energy in the S&P suggests that anyone who was going to sell energy stocks due to concerns like that has probably already done so.
McMack
2:15
These are the times that try MLP investors souls.  We have all watched as the market prices for solid MLPs with good management, solid businesses, strong balance sheets, rising cash flow, and steadily increasing divs/payouts, go nowhere.  Or worse, go down.  Since Jan 2018 prices of DKL, EPD, and KMI are flat even as divs have gone up.  MMP is down 14%, MPLX is down 24%, and SHLX is down 33% again even as payouts have been significantly raised. Meanwhile, two non-energy stocks I own (thankfully!) have zoomed up: VISA by +49% and MASTERCARD by a whopping 70%.

As we all know, MLPs are irrationally undervalued but the market can stay irrational longer than I can stay solvent.  So, at what point does one throw in the towel and move on?  Don't we have to begin to ponder that question?

You guys are the best at what you do.  If you can't figure this out, then nobody can.
AvatarElliott Gue
2:23
Thanks for the kind comments. It's frustrating indeed to watch stocks perform well as businesses and go nowhere in the stock market. However, I would point out a few points. First, the S&P 500 is up 17.9% since the end of 2017 (almost 2 years ago) and EPD is up 13.7% including dividends while DKL is up about 22% and KMI up 21.5% or so. So, while these names aren't exactly on fire, they're also not losing money and they're not finishing up the track either. They're perfoming in-line with a market that's really been flattish since the end of 2017. My point is that when we see a situation where an MLP's fundamental story has been impaired, we do recommend selling it but when it's just a matter of the group being out of favor, it pays to be patient...Compared to the market as a whole, these larger MLPs and mistreamers aren't underperfporming the market much and the yields are even more attractive than was the case 2 years ago.
AvatarRoger Conrad
2:21
Q. Gentlemen: I am really concerned. Five months ago you first presented your “High Yield Energy Target List”. I placed substantial positions in 5 of them based upon your recommendations. None of my purchase prices came even close to your maximum proposed purchase ceiling. But all of them are down, some quite sharply. I am just blown away. Please advise.

Also, you indicate that Kinder intends to raise its dividend by 20% from $1.00/yr. to $1.20/yr. in April of 2020.  What really is the likelihood of that occurring? And why is the investing community not jumping all over the stock if that is a good probability?  With a purchase price of $20/share, a $1.20 dividend would yield 6%.  Is not that pretty good?—Barry J.

A. Kinder’s plan to raise dividends next year is the basically part three of what they announced roughly two years ago. The first installment in 2018 faced a fair amount of skepticism they’d follow through but they did boost from 12.5 cents to 20 cents per share. This year’s boost to 25 cents was
2:22
I think more anticipated and less doubted.

Management could change its mind and pull the plug on their third promised boost for 2020. But they definitely have the resources to follow through. Q3 distributable cash flow, for example, covered the current payout by a 2-to-1 margin even as debt to EBITDA was on target at 4.5 times.

And cash flow is likely to get a big boost in Q4 and going forward from the opening of the Gulf Coast Express pipeline bringing natural gas from west to east Texas, as well as the startup of the first unit at the Elba Island LNG export facility. The first unit will provide 70 percent of the anticipated cash flow from the project, which will ramp up the next several quarters as the other units come into service.
I suspect rather than skepticism about the dividend, Kinder shares are hanging in the low 20s because of concerns about the midstream sector in general and possibly future profit from the shrinking CO2 division. And it may be we won’t see significant upside until these worries are answered. In the meantime, you’re absolutely correct about the stock being attractive at its current price and with that anticipated yield. I would point out, however, that 6 percent plus is pretty much in line with other best in class US midstream companies. Enterprise for example yields about 6.6 percent currently, Magellan Midstream is at 6.4 percent and Williams is at 6.5 percent.

As for the High Yield Energy List, at last count 7 of our 10 holdings are underwater. That’s obviously not what we’d hoped for when we launched this by popular demand.
One major factor in this disappointing performance has simply been the timing of the launch. Since the May 22 launch date, the Alerian MLP Infrastructure Index is down about 12.5 percent including distributions. We believed at the time that our selections were quite cheap on a valuation basis. But obviously, they’ve become even cheaper in the face of investor concerns about energy prices and the pace of shale drilling activity, as precursors for lower throughputs and cash flows for midstream companies.

The worst performers by far are companies that depend entirely or almost completely on a single oil and gas producer. That includes Antero Midstream (NYSE: AM) and EnLink Midstream LLC (NYSE: ENLC), as well as Oasis Midstream Partners (NYSE: OMP). All three are pricing in fairly large dividend cuts right now because of concerns their primary customers are about to pull in their horns.
Also, MPLX (NYSE: MPLX) is facing some concerns that activist investor Elliott Management’s move on general partner Marathon Petroleum (NYSE: MPC) will negatively affect shareholder value. And Enable Midstream (NYSE: ENBL) is hit by concerns about a slowdown in Oklahoma drilling.

I think we’re going to get a lot of answers over the next week or so for these companies as well as the rest of the High Yield Energy List. If there is real deterioration, we will cut our losses and move on. But a lot is priced in already and Q2 was actually pretty solid for all of them. And I continue to believe investors aren’t giving enough weight to the fact that these companies have been getting a lot more conservative over the past five years and therefore able to stand up against headwinds that would have blown them over in 2014.
Bottom line is I still believe in this concept of buying high yield energy stocks for income as well as potential appreciation long term. And I think the screen we devised is still pretty solid. So while it’s possible we may weed one or even two or three out, we believe this group has considerable upside despite our poor start.
Brian B
2:25
I would be interested in any credit risk analysis of higher yielding corp bonds in the energy sector.  Do you sometimes do this or would you consider it?
AvatarRoger Conrad
2:25
We do look at bond prices of energy companies as a matter of course, especially when we own the equities. I would say the general rule, though, is we don't want to recommend anything we wouldn't also want to own the common stock of, regardless of how attractive the yield to maturity might be. That means the credit analysis is much the same whether we're looking for equity or bonds.
AvatarRoger Conrad
2:26
Continuing that, I would not rule out a list of bonds at some point. We do have a High Yield Energy List of equities as I discussed answering an earlier question.
2:27
It hasn't done as well as we'd hoped, though the bonds of these companies have performed similarly.
Alan R.
2:30
What are your thoughts on KMI and EPD earnings reports?  Thanks
AvatarRoger Conrad
2:30
We thought they were quite good as I've noted in answering questions earlier in the chat. Both had superb distribution coverage (KMI 2X, EPD 1.7K) and executed on capital spending in relatively conservative projects--with the equity portion entirely funded by internally generated cash flows. We'd like to see EPD take up dividend growth a notch. But these companies' strong Q3 results are a testament to their strengths as well as the benefits of operating a diversified midstream business that doesn't depend on a handful of customers or projects. They're keepers.
Lee B.
2:34
My largest position, EPD is best in class in every way....IMHO! Yet I get a bit nervous when price action doesn’t confirm that. Guess I’m just looking from reassurance from you guys!
AvatarElliott Gue
2:34
Over the long-haul, EPD has definitely been a consistent wealth builder and management is the most respected in the space. I think the biggest headwind for the MLP space remains that the energy sector remains out of favor. There are many reasons for this including, of course, the big bear market in oil from 2014. However, I think one often overlooked factor is that energy is a cyclical "value" group in a market that's heavily favored growth in recent years. Now, the Russell 1000 Growth Index is trading at the highest valuation premium to the Russell 1000 Value Index since 2000. Over the past 20 years we've been through several cycles of this -- value outperforming from 2000-06 and underperforming after the Great Recession -- and eventually the pendulum will swing back in value's favor. In fact, we're beginning to see that underway in recent weeks. It's tough to be patient but I believe if a stock is holding up well and performing well fundamentally, eventually value will out in the stock market.
Joe McD
2:36
Mr. Conrad: How do rate ATGFF? Are  you still positive on CWEN?

Thanks
AvatarRoger Conrad
2:36
If the latest round of California wildfires delays PG&E's exit from bankruptcy, Clearway shareholders will likely have to wait until sometime in 2021 to see dividends restored to their pre-cut level--as cash flow will remain at the facility level for power plants selling to PG&E. But the contracts will continue to be honored however PG&E exits, and in fact the company is likely to get the opportunity to sell for solar as the state works toward ambitious renewable energy goals. I think the recent drop in the shares more than reflects the risk of a delayed bankruptcy exit for PG&E--which actually may not happen. The bankruptcy judge this week, for example, called for mediation to settle between the parties. That's a pretty good sign the state wants a deal, and the sooner one happens the better for CWEN.
AvatarRoger Conrad
2:38
Continuing on CWEN, we continue to rate it a buy. As for Altagas, we have Q3 results tomorrow. I'm not expecting any surprises. The company continues to be successful with asset sales and the propane export facility in BC appears to be running well. The WGL utility unit also just issued some low cost debt. Recovery is going to take time, but this company appears to be on the right track.
James D
2:38
Gents, what's your take the latest from SLB and HAL?
AvatarElliott Gue
2:38
I will have more to say in the next EIA issue due out this week. However, I think 2 things are worth noting. 1. HAL and SLB both were pretty downbeat in terms of market commentary but the stocks rose -- when a stock reacts well to bad news it's usually a sign that the market has already priced in the worst. 2. I think generally we are seeing increased signs that there's an international spending recovery underway 3. Shale is a MESS right now, which is bullish oil because these companies clearly aren't boosting their CAPEX to increase output and I think you'll see US oil production respond to that shift over time.
AvatarElliott Gue
2:38
Ok, that was actually 3 things
Bud E
2:45
Articles about many planning LNG facilities while long term leases are more difficult to establish. How is ET doing on it's planned facility.
AvatarRoger Conrad
2:45
Energy Transfer LP will report Q3 earnings on November 6, and we'll likely  have more detailed guidance then for its various projects. The SemGroup acquisition figures to be the most important topic. But I'm expecting to see another strong report for distribution coverage that will put the company on the verge of returning to regular payout increases. Regards the Lake Charles LNG export facility, they're in a 50-50 partnership with Royal Dutch Shell. There's yet to be a final investment decision but there is what management describes as a "framework" for one. Whether this project comes on stream in the next couple years, somewhat later or never, it won't affect ET's solid outlook and current numbers, however.
Arnold S
2:50
I have 2 stocks to ask about....    DSSI was a spinoff from CPLP if I remember correctly.  It has been as high as $16.60 lately.  Is this a sell candidate?  It would be nice to book a profit in something energy related.        My other question is about ENLC.  It hit an all-time low recently.  Is there a dream buy price on this one or should it be avoided?   Thanks, A
AvatarRoger Conrad
2:50
I think we stick with EnLink for now but as a hold rather than a buy or double down candidate. The results are out November 7 for Q3 and from the drop in the share price, people are expecting a major negative impact on cash flows from slowing drilling activity in Oklahoma--as well as former parent Devon Energy pulling in its horns. There's obviously been some impact from these events, just as we saw in Q2 results. On the other hand, there's also a lot of room to beat expectations. Hold.
AvatarRoger Conrad
2:54
Continuing with Arnold's question on Diamond S Shipping, shares are up about 36% since CPLP spun off its liquids tanker business and merged it with that company. That's certainly encouraging and reflects improved environment for tankers, as higher fuel standards force retirement of older ships. I think DSSI has some nice tailwinds behind it. But the fact is the shares don't pay a dividend at this time. Investors who need a yield should look elsewhere.
Arnold S
2:54
Hi & thanks for doing the web chat.
AvatarRoger Conrad
2:54
Thank you for tuning in!
Eric F.
2:57
I’m up 64% on PEGI , do I keep going? I’m up 38% on DSSI and down 35% on CPLP.  I do like the div from CPLP but I don’t think DSSI has a div, should I keep holding both?
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