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Energy & Income Advisor Live Chat September 2019
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AvatarRoger Conrad
4:21
The truly amazing thing about Pembina—which is also an Actively Managed Portfolio member—is that it’s been able to grow this fast and finance so conservatively even as much of the Canadian energy sector has crashed down around it. And because it pays dividends in and is priced in Canadian dollars, there’s long-term upside for US investors from the currency as well, with the loony at less than 75 US cents currently.

Pembina has been a recommendation of mine since I founded and wrote the Canadian Edge publication for our former publisher early in the previous decade. And it remains a strong one now up to our buy target of 38.
Hans
4:28
SLB rating in the model portfolio is also much higher compared to the active managed portfolio incase of both HAL and SLb should someone hold on to those two since their ratings have been drastically reduced
AvatarElliott Gue
4:28
I still like SLB and HAL here as long-term holdings. SLB is preferred for 3 reasons. 1. SLB has more international exposure and that business has already turned 2. That SLB dividend is nice to collect even if the company basically marches in place and I think it's safe. 3. SLB has a new CEO and I think he's going to announce a number of new ventures and strategic initatives this autumn that could form solid intermediate term upside catalysts for the stock. Don't be surprised if he decides to sell or JV SLB's entire North American business eventually if the company isn't able to earn a better return there.
Jon B
4:30
Just a request/suggestion: it would help readers identify your highest conviction positions if your portfolio tables listed the value for each position and ordered positions from highest to lowest value. Actual position values differ significantly on a percentage basis.
AvatarElliott Gue
4:30
That's a good suggestion. I'll discuss with roger and our web team.
AvatarRoger Conrad
4:31
Q. What should I do with Antero Midstream Corp (NYSE: AM)? HELP!--Jerry M.

A. At this point, just hold what you have. Antero Midstream and its parent Antero Resources (NYSE: AR) are very well run companies with a strong track record of delivering on guidance, but which are being challenged by weak natural gas prices in Appalachia. Management described a way forward when announcing second quarter numbers last month that was heavy on cost cutting, especially when it comes to water supplies. And hitting those in late October/early November when Q3 results are announced will be key.

I think at this point, we have to acknowledge risk to the dividend at Antero Midstream. And the next declaration scheduled for October 16 will tell us a lot about whether the Anteros are indeed meeting guidance. The silver lining as I’ve said is investor expectations are very, very low at this point and the current price does reflect a sizeable dividend cut.
That’s enough to convince me to recommend holding, though to also warn against the temptation to double down. There’s still a lot we won’t know until earnings are announced and dividends declared. And as much bad news as the shares already reflect, it’s always possible it will get worse.
Ed
4:40
Do you have a dream price list for EIA anywhere on the website?
AvatarRoger Conrad
4:40
We don't currently but it is probably time to update. For readers who are unfamiliar with the concept, a "dream buy" price is a level so low that it would only be reached under extreme market conditions. The idea is so long as companies are resilient as businesses, buying at those levels virtually locks in a windfall gain. I don't think we need to tell you guys that we've certainly had them in the energy space--so when we do update the Dream buys list you're going to find a number of companies that are already there. But it's definitely worth pointing out again. Thanks for the suggestion.
Ken in Phoenix
4:50
I have been a subscriber for more than 10 years (predating your current service). I certainly have gotten an education on the energy business. For newer subscribers, here is a quick trip down memory lane...
I have held PBA and BEP for a decade. Thank you very much!    I made a lot of money on Seadrill (you got me in and then out in time!) but was killed on LINE (a real tragedy - not your fault). I have held on to KMI, and it has come back nicely. Ironically, the best and worst investment of the last decade came from you on the same day (10/5/12). I was creamed on POOSF (A wipeout on what fortunately was a small investment) and held on to a large investment in STB through thick and thin so that in the end it was the most profitable investment of my life. I have tried various services over the last decade and more, but you two guys are the most reliable - not always right, but very sound advice. Thank you and thank you for these chats.
AvatarRoger Conrad
4:50
Thanks Ken!
AvatarElliott Gue
4:51
Ken, thank you for those kind words about the services over the years. We really do appreciate it.
Our customer service manager, Sherry, just pointed out to me today that Energy & Income Advisor turns 7 today.
Charles
5:00
If you have spoken to it yet can you tell us what your LEI’s are saying
AvatarElliott Gue
5:00
Sure, I can. Basically, it's important to understand that recessions represent broad-based and persistent weakness in the economy. I look at LEI in three basic ways to signal elevatrd risk of recession: 1. The year-over-year change in LEI drops below 0%; 2. 3 of the past 6 monthly readings on LEI are 0 or negative 3. The 6 month LEI diffusion index is below 45%. So, here's the current set-up: 1. YOY change in LEI is still positive so this signal hasn't triggered; 2. LEI MOM has triggered since we have seen 3 of the last 6 months 0 or negative and 3. LEI Diffusion Index is at 60%+ so that's not yet a triggered signal. Thus, all told, LEI still does not show elevated risk of recession over the next 6 to 12 months. Historically, the SPX rarely peaks more than 12 months ahead of a recession (it has only happened once since 1937). Moreover, we are seeing some (still tentative) signs that the current US economic soft patch is ending (including that the economic surprise indexes are rising and we've seen some improv
AvatarElliott Gue
5:01
improvement in market breadth since August). All told, it's a pretty constructive picture that suggests new highs ahead.
AvatarRoger Conrad
5:01
Q. The “side deal” from Blackrock to Tallgrass Energy LP (NYSE: TGE) management seems an outrageous breach of fiduciary duty, promising executives they could sell shares at $26.25 even if share price 'just happened" to fall?  But I thought I read that somehow this is legal. Thoughts?—Cliff W.

A. What management has said is that the “side letter” was a matter of public record when Blackrock first made its initial investment in Tallgrass last spring. But I couldn’t agree more that this is precisely the kind of less-than-up front arrangement that’s helped give MLPs a bad name the past few years.

It must be said that Tallgrass had been encountering some headwinds recontracting two of its long haul pipelines. Concern it would have to take a big price cut was one factor weighing on the shares, with another being general selling of MLPs due to fear of lower oil and natural gas prices reducing output.
Still Blackstone did strike at a moment of maximum weakness. And promising executives a selling price that was actually a premium to what it paid for its initial stake did pretty much guarantee the bid would be considered friendly.

In the previous issue of EIA as well as earlier in this chat, we expressed the opinion that Tallgrass’ ordinary unitholders would probably wind up with an offer somewhere between $20 and $21. Blackstone has since agreed to a “standstill,” under which it will not acquire any additional shares without the consent of a “conflicts committee,” though it retains the right to make another proposal to unitholders.

That in our view increases the odds of an improved offer in the coming weeks. And it’s reason enough to hold onto Tallgrass shares if you own them. But the lesson here once again is how important it is to take ownership structure into account when it comes to MLPs.
5:02
For example, there’s no chance of a Tallgrass-style potential conflict of interest with Enterprise Products Partners (NYSE: EPD), Energy Transfer LP (NYSE: ET), Magellan Midstream Partners (NYSE: MMP), NuStar Energy LP (NYSE: NS) Suburban Propane Partners (NYSE: SPH) and other MLPs that have swallowed their general partners and eliminated incentive distribution rights. Neither is any group of shareholders more equal than another with energy companies and MLPs that are organized as C-Corps.
jim
5:06
WHY IS MPLX CRASHING, AND WHERE IS IT GOING.  I AM LATE, AND BET YOU ADDRESSED ALREADY
AvatarRoger Conrad
5:06
We have addressed MPLX extensively in the chat. But to recap, shares appear to be under pressure for two reasons. First is general weakness in the MLP space as oil prices return to where they were prior to the attack on the Saudi oilfields earlier this month. The second appears to be concern about Elliott Management's latest attempt to storm the castle at general partner Marathon Petroleum. Paul Singer's group last attempted this back in 2016 and the result was some streamlining including the MLPX/Andeavor merger that closed in July. Demands this time are the same as then: Split into three separate companies and convert MPLX to a C-Corp to "increase the investor base."
AvatarRoger Conrad
5:14
Continuing on MPLX, the first is a legitimate reason for selling. The second is not. The purpose for Elliott making a move is to try to increase shareholder value. if MPLX loses value because of its efforts then it loses money. Marathon would also face challenges rolling up MPLX, as it's already carrying $33 bil in debt. And in any case, Elliott's proposal is to spin off MPLX as a new company, rather than fold it in. Bottom line is we don't see anything happening here that's actually destructive of shareholder value. And we intend to stick with MPLX as it continues to report solid numbers. By the way, shares are down just 0.6% this month--so crashing may be too strong a word.
5:28
Q. After doing a check on my portfolio I notice I am down on PBF.  What is your take on this stock?--Howard F.

A. PBF Energy (NYSE: PBF) isn’t actually in our EIA coverage universe. But we have made recent comments about US refiners advising caution, due to concerns about refined products spreads in the current environment. The two most important pricing differentials for PBF are western Canada and the Bakken Basin. These have both tightened sharply since spring.

The company will offset some of that negative impact because it completed this year’s needed facility maintenance back in April. Investments then have also improved efficiency, which should offset at least a portion of the margin weakness. Also, the price of RINs (renewable fuel credits) is expected to stay under 30 cents for the rest of 2019, keeping costs down.

In addition to the outlook for refining spreads, shares are also likely being held back by the need to permanently fund a major acquisition, which has stretched PBF’s balance sheet. The
fact there’s some insider buying is a positive. But the financing needs coupled with weak market outlook make us cautious on this name at this point in the cycle.
5:41
. I’ve been a subscriber for many years and would like to see you cover BP Midstream Partners (NYSE: BPMP). Does it fit your criteria for our High Yield Energy Target List? Would you rate it buy, hold or sell?--Lyndon W.

A. Actually, we’ve now added BP Midstream Partners to our MLPs and Midstream coverage universe, with initial advice of buy at 15 or below.

Our High Yield Energy List companies are chosen by how they stack up on five criteria: (1) Yield of 7 percent or higher, (2) Strong and rising distribution coverage, (3) Consistent progress stabilizing and preferably reducing leverage, as measured by the debt-to-EBITDA ratio, (4) Manageable needs to raise new capital over the next 24 months, for CAPEX as well as refinancing existing debt, (5) Ownership structure that discourages changes in structure.
BP Midstream yields nearly 9 percent at its current price and has strong distribution coverage (1.25 times in Q2) that’s also rising (distributable cash flow up 20 percent over the last 12 months). The company’s primary balance sheet strength draws from its parent BP Pls (NYSE: BP), which rates A- with a positive outlook from S&P. But there is a rising pool of free cash flow, which should hold down the need to raise outside capital other than for drop downs from the parent.

The big question is BP’s long-term intent for BP Midstream. But at least for now, unitholders are protected by the super oil’s need to cut debt, the primary means being continued asset sales including dropdowns of remaining midstream infrastructure to the MLP. Overall, I would say BP Midstream is definitely a candidate for the High Yield Energy List, though at this point I think the current lineup more attractive.
6:00
Well that's all we have in the queue as well as from emails received prior to the chat. We'd like to thank all of you who participated. Per usual, you've given us a lot of food for thought and we truly appreciate your suggestions for future issues of EIA. As a reminder, be on the lookout for a new issue of EIA posted in the next couple days. Our focus is on energy technology and we update developments at Portfolio holdings as well.
6:01
If you have any questions we didn't answer, please send them to service@capitalisttimes.com. Good-bye everyone!
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