JotCast | Energy & Income Advisor Live Chat October 2019 | 10/29/2019

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Energy & Income Advisor Live Chat October 2019

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Roger Conrad

2:57

I think it will be hard for Pattern Energy to make much further headway until/unless it either resumes regular dividend growth or attracts a real takeover offer. The latter has been a primary catalyst for this year's upside, along with better results that have shored up the dividend. Earnings are expected around November 7. Until then. PEGI is effectively a hold in my view.

Roger Conrad

2:59

Going back to the question on CPLP and DSSI, CPLP is a bulk tanker company, so the dynamic is a bit different from DSSI the fuels tanker. We still should see contraction of supply of ships over the next year, and the company has been successful enough renewing contracts so that the dividend should hold. Q3 earnings are later this week. We view the shares as a hold.

3:08

Q. Roger. I’m seeing continuing good news on Kinder Morgan's (NYSE: KMI) Elba Island LNG export facility. Question: What does increased LNG export activity (Gulf Coast, Elba Island, Cove Point) portend for ocean going LNG carriers such as Teekay LNG Partners (TGP)? Thank you.--John K.

A. It’s definitely positive for that business. So is the increased export activity we’re seeing in Australia and from Africa. The offset is there’s still a glut of shipping capacity. That should diminish as global LNG traffic increases and older ships are retired. And we’ve seen some of that recognized in prices of carriers this year—Teekay LNG is up a little over 36 percent this year.

We track TGP in our MLPs and Midstream coverage universe. Earnings are expected October 31 and we’ll be looking for signs the positive momentum is continuing. For the time being, it’s a hold.

3:18

Q. I think you addressed litigation risk at Oasis Midstream Partners (NYSE: OMP) in one of the earlier live chats. How do you see it now? Cliff W.

A. There’s still the occasional blog post on Mirada Energy lawsuit, which still officially alleges Oasis owes $100 million in damages related to control over property in the Wild Basin area of the Williston Basin. Mirada is a minority owner of the reserve and charges in the case that it can remove Oasis as operator.

Our view has been that the ongoing negotiations between the parties will produce a settlement well south of the $100 million, before the case goes to court. The parties have already pushed the trial date, which is a good indication this is the preferred outcome. And if the case did go to trial, most observers say Oasis would be favored to win.

The more important issue for the MLP is whether its major customer and general partner Oasis Petroleum (NYSE: OAS) can follow through on drilling plans needed to drive future throughputs.

We’ll get a much better idea of that when the two companies announce Q3 results and update guidance on November 5. We expect to see numbers and news similarly positive to what was delivered in Q2. Meanwhile, Oasis shares at these levels reflect expectations that shouldn’t be too difficult to beat

John C

3:24

- Entering retirement I am seeking to shift my portfolio to more income focus. would like to see more in the way of bond recommendations -- Individual bands or Bond funds/ETFs. And your outlook re: bonds in general.

- please comment on EPD status and outlook after latest earnings report

thanks

Roger Conrad

3:24

Our view is this is a seller's market for bonds. That is, it's a great time for corporations to issue new debt, but actually a very tough time for individual investors to find anything worth buying. As I noted answering an earlier question about bonds, our rule is never to buy anything you wouldn't want to own the common shares of. We want bonds of companies that are getting stronger as underlying businesses, and can therefore gain ground relative to other bonds. That limits both credit risk and interest rate risk. We're on the lookout for bonds that qualify and we will look to provide recommendations in future. At this point, however, we definitely favor equities for income investors.

Roger Conrad

3:25

To finish your question, I commented on Enterprise's Q3 results earlier in the chat in some detail. But the key point is the number and guidance were solid, the dividend is very well covered at 1.7 times and the company is executing on projects serving the US energy export business. This is still the blue chip of the sector and very much a strong recommendation for even the most risk averse.

Andy Z

3:31

Hi Roger and Elliott - thanks as always for these chats. I look forward to them every month. If you address this question already, please disregard. Yesterday Yieldcos across the board sold off with Clearway (CWEN) dropping 11%. I understand CWEN has a good bit of exposure to PG&E and that would explain them, but why NEP? Which, if I understand correctly, bought the debt at it's facility that sells to PG&E so it could access the funds. And why did Atlantica (AY) seel off 4%+? They have no exposure to PG&E.

Thanks again for everything. I appreciate all the money you've both made me over the years.

Roger Conrad

3:31

The selling was in reaction to the possibility that the PG&E bankruptcy exit may be delayed past June 2020--the date the company must meet to be part of the state wildfire insurance fund going forward. And when there's a selloff in a sector, discrimination is in short supply among investors.

I won't repeat what I said about Clearway, Atlantica and NextEra Energy Partners earlier in the chat. But suffice to say these latest events pose no risk to current dividends for any of them. Nor are they are they a risk to dividend growth at either AY or NEP. They could force Clearway to postpone raising its dividend back to the old rate. But with the bankruptcy judge now pushing a mediated settlement between all parties, that risk may be overstated. I still don't care to own PG&E but these yieldcos certainly are still worth holding--as well as buying below our recommended entry points.

Roger Conrad

3:45

Q. Hi. Just curious; let's say I am an energy company (the 'parent') with a lot of 'pipe' assets. I want to monetize those assets by spinning them off. I could form a separate C Corp, or I could 'drop' them into a MLP. Are there particular tax advantages from the perspective of the parent to employ the MLP structure as opposed to a C-Corp?—Timothy D.

A. Definitely. There’s also the very real advantage of keeping control over the assets through holding a general partner interest, even if more than a majority of limited partner units are sold to the public. What’s become more debatable is if dropping assets to an MLP will fetch a better price than selling C-Corp shares to the public will—and in fact the conventional wisdom now seems to be that C-Corps will always be favored over MLPs.

My view is the jury is still very much out on that, the weakness in Antero Midstream Corp since its merger/conversion earlier this year being a prime example. Keeping the MLP structure may not have provided a better result

But it’s clear the primary driver of returns has been the company’s relationship with its parent and major customer Antero Resources (NYSE: AR). Corporate structure has at most been a secondary or even tertiary concern.

My guess is the underlying premise of your question is really how can we spot a situation where management is likely to convert an MLP into a C-Corp, with the assumption it would be negative for current unit holders? The answer is we can identify MLPs where such action might make sense. But at the end of the day, the partnership structure gives GP’s a lot of leeway to make decisions behind closed doors.

What we can say, however, is if the underlying business is solid then a roll-up merger or corporate conversion is likely going to be designed to be accretive to shareholder value—at least from current prices. Only if the underlying business is weakening is there potential for a roll-up/conversion to be destructive.

3:59

Q. I’m curious if y’all had any micro-commentary on the trading price of Tallgrass Energy LP (NYSE: TGE), given the buyout offer at $19.50. It was trading above, presumably in anticipation of a higher price. Now it’s below that level. I'm simply unfamiliar with scenarios like this. Did I miss some news or is this not out of the ordinary volatility?

Also, thank you for reorganizing the Portfolios in EIA. I never quite grasped the logic of which name went where and sometimes was frustrated hunting one down. Seems much more intuitive now.—Steven O.

A.Thank you. I’m happy you like the simplification steps we’ve taken. Before the Blackstone offer, Tallgrass shares were in a tailspin because of growing concerns they’d be unable to recontract certain long-haul pipeline assets. That remains a major concern and at least one major research house has forecast a $14 to $15 per unit price for the partnership should the offer be rescinded.

When Blackstone made its move, there was a strong belief in the marketplace that this was simply an opening bid. That view gained credence when a number of shareholders alleged management was conflicted by the fact Blackstone had agreed to pay them a significantly higher price for their shares, when it made its initial investment.

Since then, however, Blackstone hasn’t budged in its offer. In fact, it’s intimated it may pull the offer entirely if shareholders don’t comply. That’s actually pushed Tallgrass shares back below the $19.50 per share offer price.

Our view is this deal is likely to close but that there’s limited upside from here. Moreover, there’s considerable downside risk in the unlikely event there is no merger.

Cliff W.

4:04

Question for livechat: any thoughts on energy shipping cos like TGP or GLOP? Up sharply recently. Like the sector or specific stocks and if so, why or why not? thx

Elliott Gue

4:04

The tanker stocks -- oil and refined products tankers -- have received a boost due to a pickup in Chinese imports and US sanctions on a Chinese shipper, which ahs helped remove some of the longer term capacity glut. TGP got a boost the other day when it announced a resolution to the sanctions issue facing a Chinese-based joint venture partner. My problem with the tankers here is that I'm not sure recent gains in tanker rates are durable -- The supply glut has been gradually shrinking in recent years but the recent surge in these stocks already reflects that and then some. It's a group I've looked at a lot over the past few weeks given the surge in the stocks but not yet ready to recommend any of the names for thee reasons.

Eric F

4:06

I’ve been out of REITs for some time but looking to pickup some maybe, are there any you recommend? Or are they sky high just like residential?

Roger Conrad

4:06

The REIT sector has changed quite a bit over the years and now includes a wide range of businesses besides the traditional residential, retail and office buildings. That's brought new opportunities as well as risks and made it more important than ever to analyze REITs on an individual basis. We currently publish a periodic "REIT Sheet" with analysis of 70 companies. It's currently part of Deep Dive Investing, though we have thought about offering it separately as well.

Overall, I would say REITs are expensive. But again, with so many to choose from now across business lines and in fact international borders, there are also some real opportunities. One I'm liking more and more these days is actually a Canadian REIT I've tracked now for 15 years plus: RioCan REIT (TSX: REI-U, OTC: RIOCF) but there are a number in the US as well yielding as much as 8%.

Phil B.

4:11

With climate change concerns increasingly in the news, we are seeing more and more initiatives to pressurise fossil fuel companies (FFC) in ways that are likely eventually to impact their share prices. FFC will be required within the next couple of years to include financial risk assessments relating to potential stranded assets in their annual reports, more and more large pension funds are moving to divest their FFC holdings, and lawsuits such as that in New York state against XOM are cropping up. Do you feel that such pressures are having an impact on FFC share prices at the present time? What about the near to intermediate term future? How, in fact, could one determine that climate change concerns are impacting share prices?

Elliott Gue

4:11

I don't know that there's any direct way to quantify the impact. However, we do know that institutional investors are already heavily underweight energy stocks based on data points like Bank of America's Fund Manager's Survey. And, of course, we also know that energy is approaching 30 year lows in terms of its weighting within the S&P 500 and that institutional investors are generally selling value groups (of which energy is the largest). However, with institutional investors already largely underweight energy, it's likely that the concerns you mention are already priced into the stocks to some extent. I would also say that I see no sign that climate change concerns are having a real impact on oil demand -- after all, US gasoline demand has been running at or close to all-time seasonal highs in recent weeks and Chinese imports appear to be picking up. When all is said and done, I think the risks to energy stocks and energy demand from climate change is modest and largely priced into the group on a short to in

Ron

4:11

I know that you have said in the past that concerns about the midstream sector have impacted the price action for these shares but do you see any near term event or catalyst that might these perceptions?

Roger Conrad

4:13

The most likely one is a meaningful rebound in oil and natural gas prices, or else some evidence that midstream throughputs aren't about to dry up completely. That could happen as soon as this earnings season. Longer term, though, I think a lot depends on investors differentiating again between the best
midstreams and the long line of zombies still around from the IPO boom earlier this decade.

Brian B

4:15

Do you have a price level for WTI in the back of your mind where many of your current recommendations would need a serious reevaluation?

Elliott Gue

4:15

Hedge funds are extremely bearish on oil base don the data we see in the weekly commitment of trader's report. And, we know from datapoints like the Bank of America Fund manager's survey that institutional investors are largely underweight energy. So, I don't think that most of these stocks are "pricing in" current oil prices in the mid-$50s level. Thus, if oil prices were to simply march in place into the first half of 2020 I think you could see an upside re-rating to the group because the market seems braced for a significant decline in oil prices (which we believe is unlikely). I would say that should oil drop to the low $40s and stay there for a time, we'd need to examine our recommendation in some producers and services names. However, that's just not our base case for crude.

Roger Conrad

4:16

Continuing on that midstream catalysts answer, the most important thing is for companies to continue growing as businesses. The best in class no longer depend on issuing equity, which means they can keep doing so even if investors continue to avoid the sector. Market history shows that sooner or later, great value is recognized and patient investors are rewarded. The nice thing about midstream is still that you get a dividend while you wait.

Ed

4:19

Any updates on MRO and OXY

Elliott Gue

4:19

Both names report in early November so there's not much company-specific news to go on. I think that the company-specific driver for OXy will be management's comments regarding the ongoing integration of the Anadarko assets. Again, though, the bar of expectations on this deal is set pretty low so I think the market will respond positively to any signs that managements targets for cost reductions and asset disposals is on track. Then, of course, for both stocks it's all about sentiment toward oil -- the biggest driver for oil prices over the past few years has really been sentiment and, in particular, when everyone is bearish about oil, it's been a good time to buy oil. If oil prices remain healthy as we expect, I think that will be an upside catalyst for OXY/MRO and everything else in the sector.

Ron

4:24

How concern are you regarding the constant and ongoing attack regarding carbon producing energy companies. I realize Congress will not immediately pull the plug on these companies but it seems to me there is tremendous societal headwinds and these companies could be diminished by a thousand cuts as oppose to legislation banning carbon producers

Elliott Gue

4:24

I think there are two different dimensions to this. First, there's the "narrative" out there that fossil fuels are dying, that electric vehicles are on the rise and that EVs will supplant oil within 10 years. Second, there's the reality -- EVs haven't proven particularly popular and even in countries like Norway where they have gained some scale, they're having little discernable impact on fossil fuel demand. The technology just isn't there yet in terms of range or speed of recharging. And EVs bring their own host of problems such as cobalt supply issues. If anything I think concerns about the future of fossil fuels are overblown. When this is an issue, I think we'll see it in the data and I just don't see it yet.

Herm

4:26

Is this a reasonable time to add to shares like MRO? The economy is still growing and the stock seems to be at a discount to its peers.

Elliott Gue

4:26

We like the producers here and I think we may be seeing some early signs of life in the group. At a minimum, the oil producers seem "sold out" and reflecting a very bearish outlook for crude, that's unlikely to be realized. What I would like to see is a little bit more upside momentum -- a break higher on the charts -- before getting more aggressive adding to our recommended position sizes there. As I said a few issue sago though, that 7.5% yield in OXY isn't a bad little paycheck while you wait in a world where the 10-year yields less than 2%

Brian B

4:31

I didn't see AR on your lists. What are your thoughts here? I see they had a nice bounce today.

Roger Conrad

4:31

Antero Resources and Antero Midstream both reported Q3 results this afternoon. And while we haven't had time obviously to do a thorough analysis, it appears to be at a minimum far less bad than some had feared--especially following the announcement that the Clearwater wastewater treatment facility would be idled for subpar performance.

The key to the report at both companies was always going to be cost cutting/ And progress in line with the plan announced at the Q2 earnings call appears to be on track. Distribution coverage in Q3 was improved at 1.1 times with debt to EBITDA 3.3X.

Roger Conrad

4:31

We'll see more details in the conference call tomorrow and will share our analysis with you in the coming days. Both Anteros should still be considered holds at this time--though as you point out we don't currently track AR in our producers coverage universe.

James D

4:36

I'm wondering if you have any updates on NBLX. It seems like the Williams Company rumor has faded. What do you think is next for nblx?

Elliott Gue

4:36

We recommended selling the name due to regulatory uncertainty in Colorado and a slower pace of drilling in the State. The MLP continues to raise its payout and the 1.4x coverage in comfortable; however, coverage has been declining and if that trend continues they're going to have to slow the pace of distribution increases. I don't know of any significant recent regulatory developments but we still think these risks mean that there are better opportunities in other MLPs

Elliott Gue

4:37

A question from E-mail: MLP’s
At what point do we just come to grips that we have it wrong? The markets have been telling us these assets are impaired for more than five years.
Now EPD, the highest quality bellwether takes the entire space down. It seems like now there is an emerging focus on true free cash flow v distributable cash flow, which is what we always learned about in corporate finance 101. Why or why shouldn’t that be the focus for MLP’s?

Why does it appear the goal posts for this space keep moving. Coverage ratios up significantly, debt to ebitda trending down, record DCF for The likes of EPD, ET and MPLX and no reward from the market?

The last week not withstanding there has been literally no “sell” ratings any where on the street.  What gives ?
Hearing firsthand that UBTI is being applied to MLPs in tax deferred accounts upon the sale of the security even when the K-1 has a negative for UBTI.  Looks like they are treating the ordinary recapture as UBTI and withholding taxes. I am told UBS started this in 2018 and Morgan Stanley is starting it in 2019.  Any insights as to the change in why institutions are starting to do this?
Also hearing more pension funds including Alaska are selling all public midstream assets die the volatility and higher correlation to equity mallets. Any insights?

Why does the private market carry a higher valuation multiple than the public markets in the Midstream space?

Why do OKE and KMI carry better valuation metrics than ET and EPD? I may be wrong but there is not a significant difference in the businesses other than C corp structure.  Why are the c corps holding up better?  Financial market bigotry?

Is the market telling us it’s just over for hydrocarbon assets?

Been waiting patiently for the mean reversion and after five years is it just time to call this asset class what it is, dead money?

Looks like the market is at again today, ET at 2 times coverage is selling off again (down to 12.26) as is EPD, WES, and TRGP. What is going to take for you guys to admit when your wrong about something? What would that look like? What would you need to see to waive the white flag?
I have been invested in these things since 2006 and I think I am finally throwing it the towel.
Looking for some last minute wisdom as to why I shouldn’t.

Roger Conrad

4:42

There's no question MLPs have trended lower since early August, the primary reason being concerns that softer oil and gas prices would crimp oil and gas production and therefore throughputs in midstream assets. On the other hand, despite that Enterprise has returned a pretty solid 14.2% since the beginning of the year. And as I've pointed out in answers earlier in the chat, Enterprise's Q3 results were quite solid, both in terms of free cash flow and distributable cash flow.

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