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Energy & Income Advisor Live Chat October 2019
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AvatarElliott Gue
4:45
I think both Roger and I have some comments to address this question as it's lengthy and multi-part. Free Cash Flow is essentially operating ccash flow less capital spending while distributable cash flow is operating cash flow less maintenance CAPEX. FCF is a valuable metric but it dostorts the picture for companies that are rapidly growing their asset base. DCF seeks to address that issue by asking the question: "How much cash is left over to fund distributions if the MLP were to stop growing and just maintain its existing assets." In my view, DCF is still the best metric for evaluating MLPs. And, I think that's bascked up by the fact that when you look at a partnership like EPD, it has often paid out way more in distros that it generates in free cash flow yet debt metrics remain under control and the partnership has been largely able to self-fund growth capital spending.
AvatarRoger Conrad
4:46
I've been around long enough in this business to see sectors go out of favor for extended periods of time. And they're definitely a hard sell for readers when they do. Utilities early in the previous decade bear a lot of resemblance to MLPs now, for example, and I remember a lot of people saying there was no hope for them. But the companies that got conservative and cut operating risk and debt while investing in core businesses did recover. Not every MLP will and we have quite a few sells on our list. But the best in class are stronger any way you slice it and this is not the time to abandon them.
4:53
On the subject of moving goal posts, this is again typical of a sector that washes out. But the important thing is that rising coverage ratios, lower debt to EBITDA, rising throughputs and other metrics we look at are very real measures of recovery. And the fact that so many of these best in class MLPs have been financing growth with internal cash flow means the positive trends can continue even if investors continue to shun midstream. Again, not every MLP is improving and we have a lot of sells in our coverage universe. We also can't say when value will be reflected in unit prices at the stronger MLPs. But EPD and others really do meet any definition of buying low.
AvatarElliott Gue
4:54
As for MLP performance. As I indicated earleir on in this chat, while the S&P 500 recently broke to fresh all-time highs, it's only up about 17.5% or so since the end of 2017. For the most part that's been driven by growth stocks as the S&P 500 Value Index -- of which energy is a significant component -- is up just 12.5%. When I lookm at the Actively Managed Portfolio I see  long-recommended names like EPD, CEQP, MMP, PAGP that have returned 12.7%, 55.7%, -0.26%, -3.72% since the end of 2017, Granted, with the exception of CEQP these are returns to write home about but my point is that many of these larger these MLPs are performing in-line with the broader market over this time period when you fact in distributions paid.  Meanwhile, as Roger alluded too, MLPs have been deeply out of favor alongside the entire energy sector and "value" stocks. We've seen this movie before and eventually the pendulum swings back in favor of out-of-favor groups. I think you'll eventually see that with the MLPs.
4:56
Finally, I would say that instituional money is already largely out of the group -- many of the dedicated midstream funds that were set up in the heyday are either out of this market or much smaller in terms of assets under management. We know that insitutional investors are already underweight energy across-the-board. So, I am not too worried about a wholesale sell-off of energy as a group driven by insitutional investors exiting -- they have already done so.
AvatarRoger Conrad
4:57
On the tax issue, we're not CPAs. But as we've told investors over the years in Canadian stocks, your obligation is to file your taxes as accurately as you can. If you believe your brokerage is doing this incorrectly, you're obliged to file them the way you believe they should be. I would also say there's no obligation on your part to stick with a broker that appears to be acting arbitrarily.
4:59
As far as Alaska's pension fund selling all midstream energy assets, I have no information on that. If true, that would seem an odd perspective for such an energy-dependent state. But then again more than 6 million shares traded today of Enterprise Products Partners--any every one of those had a buyer and a seller. Different opinions are what make a market.
5:03
On your private market question, this was a point made by Kinder Morgan Chairman Richard Kinder during the company's Q3 earnings call, in which he indicated several offers had been made for assets. No specifics were given, other than the valuation being paid by Pembina Pipeline (a public company) for Kinder Morgan Canada and the Cochin Pipeline. But private capital does enjoy a pretty low cost of new funds right now as opposed to publicly traded equities. That does happen at certain points in the cycle and you might remember the takeover wave for Canadian income trusts in early 2007. There will come a time when private funds will be more expensive and private market deals will dry up.
In the meantime, private market interest is a pretty good sign savvy players see value, however.
5:08
You're correct that OKE and KMI carry higher valuations right now than EPD or ET, though I would argue that ET is discounted partly because of the distribution cuts. A better comparison might be with MMP, which actually trades at the same enterprise value to EBITDA as KMI. I think it would be a mistake, however, to assume this will always be the case. For example, we could well have a government in a couple years that raises corporate tax rates and thereby provides a huge advantage to MLP structure again. Again, investor tastes change with the wind--what lasts is strong businesses no matter what they're corporate organization.
5:12
Finally, I perfectly understand the temptation to throw in the towel on what's been a chronic underperforming group in an otherwise up trending market. And as I've said, our coverage universes are full of sell recommendations. But when you start talking about "white flags," "dead money," and "throwing in the towel," you're using the language of market bottoms.  It's highly emotional, and only if you're very, very lucky does acting on it bring a desired outcome.
Robert P.
5:19
Good afternoon Roger/ Elliott, always look forward to your live chats. Pipeline companies that are exceeding earnings and profits, covering distributions by a wide margin are using excess cash flow to fund growth projects. Which as I understand, means they do not have to go to the various wall street institutions for loans to finance a big portion of these projects. With this said, could it be possible that these big wall street guys are not really recommending these successful companies because of self funding their projects and not using them for finance? Secondly, once investors buy and see how successful the companies are, investors won't churn them. Seems wall street makes their money on churning and lending. Trying to understand why pipelines are not appreciating in value.  Have a great night.
AvatarRoger Conrad
5:19
Yes Wall Street firms like their fees--they spurred an IPO boom in MLPs five years ago and now they're doing their level best to convince companies to roll it back. If you look back at what Elliott and I have said since oil broke under $100 five plus years ago, you'll see we've had quite a few sells but have been pretty steadfast with the best in class--and we've come back to a few like ET and PAA/PAGP that have gotten their houses in order.
AvatarRoger Conrad
5:19
We've definitely expected to see more recognition of value by this time given the progress made. But I think midstream companies and MLPs are just going to have to keep proving themselves--and Q3 earnings reporting season is another good opportunity.
5:21
In the meantime, it's hard to over emphasize just how important self funding is right now and what a 180 degree change it is from where we were in 2014, when even the best in class depended on outside capital.
5:24
These are 30 year assets being financed basically with cash on hand. That's like asking home buyers to purchase houses without mortgages. I recognize a lot of investors have become nervous about buying anything connected to fossil fuels. But a even the most bullish case for renewables from the Energy Information Administration (45% wind and solar) will require a huge increase in natural gas usage by 2050. it's emotional and it's frustrating that it's the market mood on midstream. But again, investor preferences are fleeting so long as underlying businesses stay strong. And in this case, companies are getting stronger despite investors shunning them.
Andrew
5:32
Hi Roger, I've searched the chat a couple of times now, and I don't see you're earlier comments on NEP or AY. Can you comment on NEP's debt? They seem to be resorting to a lot of 'creative financing' to get the deals done. As I read things, a lot of these are going to convert to shares at some point.  And Can you comment on AY's growth? I'm clear on what NEP and TERP have in their pipeline, but not AY's pipeline?  Thanks so much for all you do!
AvatarRoger Conrad
5:32
My apologies. I think that response was in a couple emails I answered earlier today. Sorry you had to look to find that out.

Regarding NextEra Energy Partners, the biggest strength of their balance sheet is they're controlled and supported by NextEra Energy (A- from S&P), the largest wind and solar company in the US and biggest electric utility in Florida. Other than that, I think the financings they've done have been complex but also pretty straightforward, involving transparent arrangements that basically allow it to avoid accessing public equity and debt markets and instead pay off borrowings with long-term contracted cash flow. And because revenues and expenses are so predictable, they're able to offer a 5-year runway on dividend growth.
AvatarRoger Conrad
5:33
Continuing on the yieldcos--which are tracked in depth by EIA's sister advisor Conrad's Utility Investor--my only problem with NEP is price. But with these results, I am considering raising out highest recommended entry point to 50.
5:35
As for Atlantica Yield, it will announce Q3 results on November 7 as will its sponsor/parent Algonquin Power & Utilities. Atlantica will also announce another dividend increase at that time. The company's growth trajectory is very similar to NEP's and is tied to support of Algonquin. Again, I intend to review everything when the numbers come out but at this point, AY again looks like a buy under 24.
5:37
Finally, TerraForm Power has the same relationship with sponsor Brookfield Renewable Partners. It announces in mid-November at the same time as BEP, though I don't expect another distribution boost until February. But there is a steady pipeline of new projects to boost cash flow going forward--under long-term contracts.
5:38
Bottom line is the yieldco model has proven itself. The primary consideration is what price to pay for new investment.
Mark
5:43
I am a long term energy investor and a huge fan of what you do. I am also very late to this chat but if it hasn't areal been covered I would be interested in you thoughts on the drop of one of our flagship MLPs EDP. I was especially concerned about the big dropping revenue. The stock in approaching a low not seen since Feb1 . What are your thoughts
AvatarRoger Conrad
5:43
Revenue is not a real concern for Enterprise and other midstream companies because it includes the cost of energy that moves through certain asset--and it's matched dollar for dollar as an expense. Rather, cash flow is the metric you want to watch and it as once again strong, covering the distribution 1.7 times and allowing Enterprise to fund the equity part of capital spending with cash flow.  I think a lot of people jumped on CEO Jim Teague's statement about 2018 being a peak year for output growth as bearish. But he didn't say actual output and in any case this company is very well set up for rising US energy exports--a trend with very long legs.
Mark
5:44
I am always encouraged and gratefully by your chats and your insights and depth of understanding of the energy space and the performance of your model portfolio members . On the other side I am seem to living in a realm of deteriorating value as my overall EIA portfolio of about 10-12 companies is down significantly for the year and several by very large percentages... eg SLB, HAL, OXY, MRO, and WPX. Have there been times in the past where you have seen large difference between company strengths and performance fundamentals and market value and if so what were the triggers that brought the two into closer alignment. What do you think will occur going forward. Thanks for all you do. Mark
AvatarElliott Gue
5:44
I see two likely catalysts (there are probably others, these are just the two I see as most relevant right now). 1. More confidence in the oil outlook -- the consensus is eyeing the risk of a massive H1 2020 oil supply glut caused by continued growth in US shale output and start-ups in BZ and Norway. I think shale growth is slowing more than the market thinks and that Saudi will be willing to cut production for 6 to 12 months to offset the temporary surge from the BZ/Norway crude. If I'm right, oil is headed higher given the current hedge fund positioning in the Commitment of traders Reports. 2. I think we're seeing the early stages of a rotation out of growth stocks and into value -- it's a nascent trend but growth is near record expensive relative to value and value tends to perform well as the market anticipates a cyclical rebound for the recent soft patch. As a leading Value sector, Energy benefits from this shift immensely.
AvatarRoger Conrad
5:44
Bottom line is these were good numbers and guidance was in balance solid. And as we've pointed out earlier in the chat, the shares are still up double digits for this year, even after trending lower with the midstream sector since early August.
Andrew
5:47
Circling back to ENLC, OMP, & AM. The market is pricing in big cuts, but experience has shown, the share price almost always drops more after the cut. Given that ENLC and AM both held their distributions steady, they must see that cutting the dist. will not help their share price. I realize you have no crystal ball that tells all, but assuming they don’t need to cut the distribution, do you think they will? Or will they adopt a model closer to Crestwood’s, which is to keep the dist. steady for years to build up coverage? I for one wouldn’t be too upset to forgo increases to keep collecting 15% per year.

Also, I saw that AM decided to forgo an increase in favor of a unit buy back, the idea being it would result in higher dist. coverage, higher DCF per unit, and more retained cash. Do you think that is a better way to return capital to investors since growing the dist. hasn’t helped raise the unit price.
AvatarRoger Conrad
5:47
Buying back shares at these prices is definitely accretive for any of these companies. And as you point out, it improves coverage and therefore distribution safety. As I said earlier in the chat, Antero Midstream did report its Q3 results after the close today. We haven't had a real opportunity to focus on them obviously. And there will be a lot more detail at the earnings call tomorrow. But from what I can see, it looks like they intend to adopt the Crestwood model as you put it.
AvatarRoger Conrad
5:49
As you say, the current price certainly implies a big distribution cut is nearly inevitable. But at the same time, it's pretty clear to me that pessimism is really strong in midstream and Antero--though a corporation not an MLP--has been dragged down with it. It wouldn't be difficult to imagine a positive surprise here and as I said the Q3 numbers seemed to be generally in line at AM as well as Antero Resources.
Andrew
5:56
Thanks so much again for the chance to ask questions. You two are so great to do this every month.  Last question from me. Roger a couple of chats ago, I asked Roger about reinvesting dividends/distributions and your answer was a resounding, YES keep doing it.  With most large brokers going to $0 trades (mine is one) does it make sense now to collect all the div/dist. we get each month and choose which of our holdings to put that money toward.  

This question assumes, I would be reinvesting everything I collect and putting it toward other recommended stocks.  For example. I own PEGI which is way above your price target. So is HASI (Hannon Anderson), but Atlantica and Pembina are below your buy under price. Would it make sense to not buy more of PEGI and HASI, which you DON’T recommend we buy more of at this price, and to use it to buy more of AY and PBA which you DO think are worthy of new money?  Or do you still feel reinvesting is still the smartest way to grow wealth?  

Given I get thousands a month in d
AvatarRoger Conrad
5:56
The move to zero commissions--coupled with what I've heard will soon be ability to buy fractional shares at most brokerages--does increase options for reinvesting dividends. Doing so through a broker does simplify your accounting, and if you're investing through an IRA you avoid taxes when you sell as well, which most individual company DRIP plans don't allow.
AvatarRoger Conrad
5:56
Manually reinvesting does also give you the ability to not buy when a stock trades higher than a good entry point. And I fully agree many of our favorite stocks have really run up--a first world problem to be sure but reinvesting would not be as effective as buying low.
5:59
The one thing I would say you lose by manually reinvesting is it requires making a conscious decision to do so. One thing I've liked over the years about my DRIPs is they're automatic no matter what my emotions are. Some brokers do, however, set up automatic reinvestment for you.
6:00
Either way you go, I think its a good discipline wherever we are in the market cycle.
6:02
Well that's all we have in the queue as well as emails for this month. We'd like to thank everyone who participated. The questions as always have given us a lot to think about.
If for any reason your question wasn't answered, please feel free to write us at service@capitalisttimes.com
6:03
We look forward to our next chat. Happy Halloween everyone!
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