JotCast | Energy & Income Advisor Live Chat September 2019

Return to

Energy & Income Advisor Live Chat September 2019

Prev Page View Full Chat Next Page

Elliott Gue

3:00

I'll look at the portfolio table to make sure that's not a mistake in there but I have a printout of the last issue and we have HAl as a buy under $20 in the Actively Managed Portfolio. We also recently recommended paring HAL exposure in favor of SLB. But basically the answer is yes, a decline in drilling activity will impact HAL. The question is how much of that is already priced into the stock -- in our view a lot is already priced in and, as the largest player in this market, HAL is likely to benefit as small companies exit the business, tightening capacity. We do prefer SLB here on the services side thanks to its higher yield (just under 6%) and exposure to global markets where we have already seen a turn in activity/margins.

Santos

3:07

With all of the new development in the oil and gas infrastructure, the export terminals and new pet chemical plants taking place in the Gulf Coast and other areas, do you have any sense of over building in any area?

Elliott Gue

3:07

I don't see it in oil export terminals yet. The US has been exporting 3+ million bbl/day of oil pretty consistently up from more like 750,000 bbl/day two years ago. I suspect we're bumping up against some export infrastructure constraints still and there may be more appetite for US oil exports in future. On the petchem, there are definitely some pockets of overbuilding but it's also not a static situation -- petchem demand is cyclical so with the global economy in a bit of a soft patch right now there are pockets of oversupply but I am not sure that's the case in a healthier global economy.

Pablo

3:07

Thanks for your reply. Could you elaborate on what the issue is with the Clearwater facility and the need for an evaluation?

Roger Conrad

3:07

Sure. Clearwater has been open for about two years now and so far has failed to meet expected efficiency levels. Veolia the lead developer has taken the position that it has fulfilled its contract and is resisting putting in more effort and capital to boost facility performance. That's basically what we know at this point. Possible outcomes include Veolia relenting for the sake of future business and trying to rectify Clearwater's shortcomings, Antero continuing to run the plant at current levels while taking a sizeable writeoff of the $375 mil invested, or Antero walking away.

Roger Conrad

3:10

Continuing with Antero, the key issue is whether or not the Clearwater situation will prevent Antero Resources from meeting cost cutting guidance on water usage, and therefore having the economics to meet output growth guidance. On the positive side, Antero Midstream management says there will be no impact on cash flows from the Clearwater situation, which makes sense as the facility was only supposed to generate 2.5% of EBITDA next year. But again until there's more clarity, investors should assume dividend risk and we're not advising buying more.

Pablo

3:11

Your thoughts on ET’s deal with SEMG.

Roger Conrad

3:11

First, we did send out "Energy Commentary" to EIA readers on Energy Transfer's purchase of SemGroup on September 25. it's posted on the website under the title "Why We're Still Bullish on Energy Transfer LP."

Roger Conrad

3:15

To continue on Energy Transfer, we believe it may sell some of the assets of SemGroup it's acquiring, including what's in Canada. But the Texas assets are a great fit and the MLP is paying what appears to be a very good price, despite the premium offered to SemGroup's previously very depressed price. I suspect investors have reacted negatively to the deal primarily because they're skeptical of ET Chairman Kelcy Warren. And it's likely ET will focus closely on paying for this purchase the next several months, which may delay the return to distribution growth we've expected. But ET's numbers show clearly that the MLP has turned a corner and this acquisition should be strongly accretive going forward. We like the deal and we like ET at these levels.

Charlie S.

3:19

What is your current outlook on DKL and TGE, given the acquisition in the wings (hold for a higher price?). Also, would it be possible to put a link on the EIA home page for the current High Yield recommendation list...it is difficult to find by checking back into prior alerts and issues...

Roger Conrad

3:19

First, thanks for the suggestion on the High Yield Energy List. As you might have noticed, we just did a revamp of EIA's model portfolio as it appears on the site. High Yield wasn't intended to be a portfolio--though many of the recommendations are in the Actively Managed Portfolio--which is why we didn't put it on the site as that. But we will look into making it a more visible feature if you and other readers want it.

Roger Conrad

3:23

Turning to Delek Logistics Partners, I don't believe there's any current publicly announced takeover offer. We continue to believe its crude oil logistics business is solid and rate shares a buy under 28 in our MLPs and Midstream coverage universe. We believe we'll continue to see at least mid to low distribution growth, though we're somewhat cautious above our current buy target. As for Tallgrass, we rate it hold. Not much has happened since we reported on the Blackstone offer a couple weeks ago in the EIA issue. We expect a slightly higher offer than the current $19.50.

Charlie S.

3:24

My last questions about DKL and TGE may have been inadvertently sent, but I wanted to add..."Thank you both for your insights, clear explanations, recommendations and hard work on our behalf!"

Roger Conrad

3:24

Thank you for reading Charlie.

Santos

3:27

Do you see LNG exports ever getting to the level that it tightens up the U.S. NG prices?

Elliott Gue

3:27

In short, no, I don't. The sheer scale of US natgas reserves, including fields that can be profitably produced at very low prices and associated gas production from oil wells, will make it very difficult for prices to rise sustainably without a dramatic production response.

Santos

3:29

Could you please comment on WMB’s future as you see it.

Roger Conrad

3:29

We're still rating Williams Companies a buy up to 28 in our MLPs and Midstream coverage universe. We believe we'll see another 4 cents per share boost in the quarterly dividend early next year, as the company continues to execute on its new projects and operate existing assets well. It definitely helps that many of its primary midstream customers are end users like utilities, and therefore basically not cyclical. The biggest challenge now is simply getting regulatory approvals for several nat gas pipelines that are currently stalled. We believe there may be some light at the end of the tunnel for a project to ship gas to New York City. But the most likely prognosis for Williams is steady growth--recent insider buying is also bullish.

Roger Conrad

3:41

Q. The Zacks recent on-line commentary on Occidental Petroleum (NYSE: OXY) presents a bleak outlook in contrast to your positive assessment. Based on their analysis, I'd want to sell my recent purchase. I'm not because of the trust I have with you folks. Your take? Thanks.--John R.

A. Zacks actually has a 12-month price target of $49 per share for Occidental, which would imply a total return of more than 15 percent from the current price including the dividend. There are also a couple of other research houses that rate OXY a hold but have targets in the mid-50s—again not a bad return.

Again the big issues with OXY are if it can successfully integrate the Anadarko assets and execute planned asset sales. We believe the company is doing that now and that its progress will show up in third quarter results due out in early November. And from these levels, the bar of expectations is pretty low and not hard to beat.

3:44

Q. Hi Roger. I'm a big investor in pipelines and liquid/gas energy, as I've been one of your subscribers, starting at your old company. It comes to mind that renewable energy generation, wind & solar, have been growing through the years and the costs of manufacture and installation keeps dropping, and the installed base is getting close to a meaningful contribution to our energy needs - I've been a long time investor in NextEra Energy Partners (NYSE: NEP).

It occurred to me that the enormous investment already made, and to be made, in pipeline and other infrastructure for liquids and gases might be vulnerable in 10, maybe 15 but most certainly 20 years from now from renewables, and if so, the market often recognizes this vulnerabilities early, which would (could) adversely impact the billions of dollars of investment in that type of fixed infrastructure. We're seeing a transformation we've never seen in our lifetime, except the energy independence being provided by fracking. What to do? Maybe, tighten up on

pipeline investment criteria - this is where you and Elliot are so good.

I'm involved in the gear industry, and many or most which now go into transportation, but this industry is facing no new transmission programs, now that many or most new transmissions are 8-10 speed, and new investment is now going into renewables, which need far less gears, and no gasoline. Investment in wind power gear boxes is growing but won't and can't replace the volume of autos and trucks. Fortunately I'm an old guy so the gear situation won't affect me much, but the pipeline situation could be very negative, once that gets into the investment industry's thinking.

Just a thought and observation. I'd appreciate your insight but you might also consider using my question and your answer(s) in your next talk, as your subscribers need to be sensitive to these changes and your recommendations for navigating in these increasingly turbulent waters.—Michael G.

A. Thanks Michael for your thoughts. I hadn’t really considered the gear sector, but obviously there is a massive energy transition in progress that’s affecting multiple sectors. The first part has involved scaling up wind and solar, bringing down costs. But the biggest piece of that has been switching from coal to mostly natural gas, which is the reason for pipeline infrastructure being built.

At this point, I would argue there’s still demonstrated heavy demand for new oil and gas pipelines, at least in some parts of the world. Consolidated Edison (NYSE: ED), for example, is no longer able to convert customers from heating oil/propane to natural gas because proposed pipelines to NYC remain blocked. There are also still huge barriers to a fully renewable energy electricity system (storage technology and costs), as well as to mass deployment of electric vehicles.

I think the trend is definitely toward development of a cleaner energy economy. But I also think it’s wise not to anticipate too much regarding what the winning and losing technologies will be. For example, wind and solar are intermittent sources of energy and battery technology is still not sufficiently effective or cheap enough to change that on a large enough scale to make any difference. Also, carbon capture technology could become economic enough for natural gas to be effectively carbon neutral before batteries are effective and cheap enough for mass deployment. In that case, existing gas pipelines would remain in heavy demand for many years to come.

I don’t mean to say these aren’t real concerns for investors, especially long term. And this is a question I’ll certainly answer in next week’s chat. But I think the midstream sector is also pricing in a lot of bad news right now, and at a time when the best in class have been turning the corner for at least a year.

3:45

Depending on what the winning technologies are, it’s possible the pipeline network loses value over time—and in fact more than 1,000 institutional investors are already divesting fossil fuel investments, including pipelines. But this is still a world using more oil and gas each year. And while there’s a lot of money to be made in wind and solar, cheap associated nat gas is likely to keep its place, especially as coal and nuclear continue to shut down. Anyway great topic and thanks again for the email.

3:58

Q. Why don’t you start a new “universe” that pulls together alternative (non fossil-fuel) companies…for those of us who have sworn off coal and petro but respect your analyses?—Dave R.

A. Thanks for the suggestion. We do cover many renewable energy adopters and a handful of technology firms already in Conrad’s Utility Investor, which is our advisory that focuses on the electricity and essential services side of things. The adopters include regulated utilities as well as yieldcos, which are basically high yielding contract power producers.

As for EIA, we obviously don’t agree with the idea that all companies dealing with fossil fuels are a bad investment. In fact, we argue that natural gas adoption in electricity especially is really the key to meeting greenhouse gas reduction goals as it replaces coal-fired electricity. And certainly, we’ve seen the benefit of US hydraulic fracturing this month, as the world shrugged off an attack that at least temporarily idled half of Saudi Arabian oil production. That’s

an outcome I certainly couldn’t have imagined even five years ago.

But we do recommend a handful of renewable energy names in the Actively Managed Portfolio of EIA. Those include Brookfield Renewable Energy Partners (TSX: BEP-U, NYSE: BEP), which operates a growing global portfolio of contracted hydro, wind and solar. Northland Power (TSX: NPI, OTC: NPIFF) is focused on offshore wind development.

Companies like these are not just “clean energy” plays. They’re actually good investments from an earnings and dividend growth standpoint. That’s a stark contrast to most “renewable energy” companies, which are still a lot longer on hype than substance—a formula for disaster when this bull market finally does take a breather.

BobD

4:02

First, thank you both for your great analysis of the energy space and for doing these calls. My question is about renewable energy. I see it, along with natural gas energy as being the areas of growth. For renewable energy, several of the best are above your price targets (NEP, BEP, PEGI). Do you see any other plays in renewables for investing in now?

Roger Conrad

4:02

Two names you might want to look at are yieldcos Atlantica Yield (NSDQ: AY) below 24 and Clearway Energy (NYSE: CWEN) up to 18. Of the two, Atlantica is the more secure, thanks to a very supportive sponsor in Algonquin Power & Utilities . Clearway is the more aggressive, as it waits on PG&E to come out of Chapter 11 and freeing up cash being held at CWEN power plants selling it power. That will enable the company to restore the quarterly dividend to 33.1 cents per share from the current 20 cents. Both are Portfolio recommendations of EIA's sister advisory CUI.

Ron

4:05

Just a comment on your alert of 9/25/19 concerning ET. I've been waiting for an opportunity to make a purchase. I appreciate your continuing updates when company conditions change.

Roger Conrad

4:05

Thanks Ron. I feel like we've been pounding the table for many of these names for quite a while now but I've also been around investing long enough to know we sometimes have to be a lot more patient than we expect. That was the case with utilities in the early '00s following the Enron meltdown and it's the case for midstream and MLPs in the current lower for longer energy price environment. But ET really looks like a steal at these levels.

Santos

4:09

CXO seems to be flat lined at 70, any thoughts on where it might be in a year?

Roger Conrad

4:09

We'd really be surprised if it weren't a lot higher--after all it was north of $100 a share as recently as late July. The issue here is a lot of investors didn't like the company's free cash flow projections the last time it reported earnings, and were second guessing CAPEX plans. We'll see at the end of next month if that's still the prevailing opinion, or if Concho is able to post results that cause investors to rethink. But we like the assets, operations and the balance sheet as well. And we also think investors are too bearish on oil prices, which we think should hold this range.

Roger Conrad

4:09

Those should all be upside catalysts for Concho in coming months.

Ricky

4:13

Could you give us your thoughts on PAGP? Thanks

Roger Conrad

4:13

We think the Plains family definitively turned the corner as a business more than a year ago, as it cut the distribution, brought new pipelines into service in Texas and streamlined the supply and logistics business. We think we''ll see another double-digit dividend increase at both PAA and PAGP next spring. We believe recent share price weakness is likely due to OXY's sale of its holdings in Plains to raise cash and should prove temporary. Meantime, both PAA and PAGP are buys.

4:16

Any updated thoughts on Roan Resources & Riviera Resources that came out of Linn Energy?

Elliott Gue

4:16

These are names I've looked at in quite some time. Generally, though, in this environment I'd rather own producers with free cash flow or at least a shot at generating free cash flow over the next few years. On the services side, I really like SLB over virtually any other name out there due to its international exposure.

4:20

I like to have a few shorts in my portfolio as hedges. Any recommendations? I assume that a Sell rating doesn't necessarily make a good short candidate. Comment? Thanks.

Elliott Gue

4:20

We've been looking at the refiners for some potential short ideas...especially inland refiners like HFC. Not sure the timing is quite right yet, but I think it's a vulnerable area. Also, is still think there's a fair amount of hype in some of the alternative energy names like FSLR and, of course, TSLA. The latter is a little difficult to short but we did trade it successfully in an options portfolio for EIA sister publication Deep Dive Investing -- basically we were selling calls on TSLA and benefited as the stock fell in the first 6 months of the year. We've been out of the name for a bit but I have been looking for an opportunity to re-enter. I suspect TSLA will eventually end up in bankruptcy court.

Roger Conrad

4:21

Q. How about Pembina Pipeline’s (TSX: PPL, NYSE: PBA) announcement about $1.5 billion re-financing/financing. Looks like they will finance their 50 percent of the plastic complex at 2.56%. Brilliant!—John S.

A. I agree fully. And we still really like their proposed acquisition of Kinder Morgan Canada (TSX: KML, OTC: KMLGF) and Kinder’s share of the Cochin Pipeline in the US, which was announced in late August. The Federal Energy Regulatory Commission’s decision this week to delay ruling on the Jordan Cove LNG export project until February 2020 is just the latest sign this facility may never get built. But the beauty of Pembina is it has so many ways to grow the business with a consistent track record of bringing fully contracted projects on stream ahead of schedule and under budget.

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