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Energy & Income Advisor Live Chat April 2020
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AvatarRoger Conrad
1:56
Greetings everyone and welcome to the April live chat for Energy and Income Investor readers. We've been looking forward to your questions and comments.
1:57
First to review the ground rules, there is no audio. Just type in your questions and we'll answer them as soon as we can in a complete and concise way. There will be a complete transcript of all questions and answers available on the EIA website shortly after we've finished--which will be when all questions in the queue are addressed, as well as email we've received prior to the chat.
1:58
I''m going to start per usual by posting the email questions and answers.
Q. Gentlemen. I need relationship counseling. Why can’t I let bygones be bygones? Why can’t I forgive and forget? My research with you and elsewhere states that Kinder Morgan Inc (NYSE: KMI), the number one gas transporter in USA, is as good a stream of quality safe dividends as you can buy presently...perhaps just a notch behind my beloved CVX, EPD, MMP, and PBA. Why can’t I forget prior debt extravagance, organizational changes, and dividend cuts? I need to increase my position in KMI, but am having trouble. Can I be helped?—David. O.

A. The old saying “fool me once shame on you, fool me twice shame on me” does have some merit in investment markets. For example, since I got into this business in the mid-1980s, you’ve been able to count on big banks precipitating some kind of leverage crisis if left to their own devices. In fact, the temptation in every sector is to over-leverage for growth when times are good, with disastrous consequences when the boom ends.
Where caution stops being rationale is when investors start taking the cycle personal. In Kinder Morgan’s case, you have a guy (Richard Kinder) who founded the company, owns more than 11 percent of the stock and obviously has ultimately called the shots from day one. That makes it easy to place blame when decisions have adverse consequences.

In Kinder Morgan’s case, the big event everyone remembers is the dividend cut announced in late 2015. The context was a crash in energy stocks as oil prices moved toward their early 2015 bottom, which basically shut the company off from outside capital.
1:59
In Kinder Morgan’s case, the big event everyone remembers is the dividend cut announced in late 2015. The context was a crash in energy stocks as oil prices moved toward their early 2015 bottom, which basically shut the company off from outside capital.

Kinder had been paying out the vast majority of its distributable cash flow since merging in the former Kinder Morgan Energy Partners and El Paso Energy Partners. So cutting back that far freed up enough cash to fund all CAPEX without having to access capital markets. And combined with asset sales, the company was also able to reduce its debt sharply the past few years, and ultimately to start raising its dividend again.
The price the company paid for that action was alienating much of its former shareholder base. And I’d argue that’s a big reason why its shares have seemed to run in place for a long time.

On the other hand, the actions taken back in late 2015 combined with strong execution of asset expansion and debt reduction since have also ensured Kinder will be a survivor during the current COVID-19 fallout crisis, which has proven to be far worse already than 2015-16 for the energy business. And that will ensure the company is a midstream leader when the business recovers, and will continue to pay and grow its dividend in the meantime.

That to me is the most important reason for continuing to recommend Kinder Morgan Inc. And while we fully realize that many investors will continue to harbor a grudge against Richard Kinder for company actions in 2015, we intend to continue doing so.
Q. Elliott/Roger: Here is a question I would like to submit for the Live Chat:
Please provide a brief explanation of why you rate Diamondback Energy (NSDQ: FANG) a Hold/Aggressive. I’ve read more favorable analyses (for example Morningstar and Michael Boyd/Energy Income Authority). I respect your opinion and would just like to understand the main reason(s) for your rating. Any explanation you may provide will be appreciated. Thank you.—Clint W.
 
A. First, for disclosure purposes, I personally own Diamondback from the Energen merger. Second, it’s not that we don’t like this company’s properties, management or balance sheet. It’s simply that at this stage of the energy cycle, we want to hold only the highest quality oil and gas producers—mainly what we hold in the Portfolio right now.
 
Diamondback will report earnings on May 4 and we expect them to take a hit from lower prices. That situation isn’t likely to improve until there’s a lasting recovery for energy prices either. But this is a name that’s definitely on our radar for the future, as are its affiliates Rattler Midstream (NSDQ: RTLR) and Viper Energy Partners (NSDQ: VNOM).
 
2:00
Q. Hello Roger and Elliott. Looking forward to this week's Chat. Following are four questions/topics, which I hope I might be able to get your thoughts/insight.
 
Question/Topic 1 - Typically, there would be some correlation between current yield and “risk” of an investment.  When one sees that Kinder Morgan Inc’s yield is always significantly lower than strong/conservatively run MLPs like Enterprise Products Partners (NYSE: EPD) and Magellan Midstream Partners (NYSE: MMP), should one infer that KMI is a more conservative/safe investment than EPD and MMP, in spite of the historical aggressiveness in management style of its de facto owner Richard Kinder?  
 
Question/Topic 2 - Two of your recent points of emphasis have been 1) Quality (“The Name of the Game is High Grading”) and 2) Size (“More Pain Ahead for Smaller Midstream”).  In the midstream area what one midstream of size and quality do you think is most likely to sustain their distribution dividend over the long run? … Well, since we should be diversified, what would be your top four midstreams that would fit this highest likelihood of size, quality and distro safety? (KMI?, EPD?, who else?)
 
Question/Topic 3 - Three of the MLPs I’m holding are EPD, MPLX LP (NYSE: MPLX) and MMP.  I’m holding these three for income, conservatism and long-term modest growth. MMP has the lowest distro coverage of the three. Should I consider swapping out MMP for something else?  Or is MMP still very much toward the top of your list for conservatively run sleep-well-at-night kind of holdings. On the High Yield Energy Target list (my usual “shopping list” for MLPs) three of the 6 companies categorized as “conservative” on this
list are categorized as “aggressive” on the more comprehensive list of coverage of “MLPs and Midstreams” under the portfolio tab of website (MPLX, NS and OKE). Are the 6 on the High Yield Energy Target list truly “conservative” … if so, why would they be listed as aggressive elsewhere on the site. For the 6 conservative HYET list members, which are the most conservative? Where would KMI now fit on your list of “most conservative” midstream?
 
Question/Topic 4 - Have the prospects for ENLC or AM improved in the last 30 days.  The price of AM in particular, seems to have rebounded quite a bit since the last EIA Chat. Thanks so much.--Marty L.
2:01
Hi Marty. Starting with question/topic 1, I’m not certain how “efficient” the market is right now pricing relative risk to midstream energy distributions. As we see more Q1 results reported, this may change. And so far, both Kinder Morgan and Enterprise have reported solid numbers, along with guidance that strongly indicates they’re navigating this worst-case environment for North American energy.
 
But if I had to guess, I’d say the yield differentials between EPD, MMP and KMI probably have more to do with technical factors than fundamentals. For one thing, EPD and MMP are MLPs and therefore are a large part of ETFs and mutual funds where we saw devastating forced liquidations in March. Again, I would say prices are recovering now and the yield differentials are closing as these high quality MLPs demonstrate resilience. And I would expect that to continue as buyers come back.
Moving to Question/Topic 2, the four midstreams in North America that have best demonstrated strength through scale historically are EPD, KMI, MMP and TC Energy (NYSE: TRP). Others deserving mention are ONEOK (NYSE: OKE), Pembina Pipeline (NYSE: PBA), Enbridge Inc (NYSE: ENB) and Williams Companies (NYSE: WMB).
 
The on the a bit less consistent side we have MPLX, Hess Midstream (NYSE: HESM) and Energy Transfer (NYSE: ET). The riskier MLPs we hold right now either in the Portfolio and High Yield Energy List are Enable Midstream (NYSE: ENBL), Crestwood (NYSE: CEQP), Plains GP (NYSE: PAGP) and NuStar LP (NYSE: NS).
 
Thus far this earnings season, we’ve seen EPD, KMI and OKE demonstrate with solid Q1 results and guidance that they’re still on track. We expect the others to do the same in the next few days.
On Question 3, I apologize sincerely if there’s differing information on the site, which should be corrected. But the current “Risk” column for the High Yield Target List should be correct. Feel free to write us directly if you ever spot anything confusing. We do present a lot of information and this will help us to do our job here better.
 
Finally, with regards to AM and ENLC—both of which we recommended selling some weeks ago—we would encourage investors take advantage of the bump in prices to unload. As we’ve pointed out, both have what’s proven to be a fatal flaw in the current environment—that’s running midstream energy systems that are heavily dependent on a single producer.
Antero Resources is still current on its bills, so AM was able to report what appear to be encouraging Q1 results. But when AR’s hedges run off, that will no longer be the case unless gas prices in the Marcellus rebound sharply. Antero is maintaining its current dividend rate at least for now and looks like it will until AR faces a day of reckoning. In contrast, EnLink looks more like a candidate for any distribution cut this spring.
 
Bottom line: Don’t mistake a bounce for signs of real strength. The challenges that knocked these companies down initially are still there. The next time they go down, they might well never get back up. And in any case, why tie up money in midstreams that may not survive the next year when much safer companies are still so cheap.
2:02
Q. Hi Elliott. I'm trying to understand how SCO works. Is the price of SCO determined by the change in future oil prices 2 months out? If so, wouldn't it be a good idea in a contango market to sell USO on the date of expiration of the front month's contract, because the following day the futures contract 2 months out would be at a higher price? What's wrong, if anything, with my thinking? Thanks for your sage advice.—Jack A.
 
A. Jack, if you look at a split adjusted price graph for USO, you’ll see it doesn’t work out that way—USO by the way reverse split 1-for-8 with an x-dividend date of April 29. What happened earlier this month, for example, is USO’s price actually hung up until the futures expiration, at which time near-term price pressures triggered by oversupply concerns moved to the May contract and the price cratered.
Also, for the record, we’re recommending buying energy stocks now, not the commodity. In fact, the model portfolio still has a one-half position in the ProShares UltraShort Crude Oil ETF (NYSE: SCO) as a hedge of sorts for our advice to accumulate shares of battered best in class energy stocks. We took a fairly large profit on the other half as pointed out in the April 21 Alert “Locking in Gains.”
Q. Considering the probability of a mid to late 2020 upward trend/recovery in oil prices, what and when, is a good way to start nibbling to take advantage of this trend? What specific long, ETFs and stocks would you recommend to take advantage of this upswing, especially, if you are also hedged against a further decrease in oil prices? Thanks—Fred W.

A. Fred, this is pretty much the advice we’ve been giving in the past several issues of Energy and Income Advisor. And our top targets are the stocks in the Model Portfolio and High Yield Energy List. The Model Portfolio not only recommends what to buy and where (prices) but also how much in the context of our model.

We strongly advise readers who haven’t already to start picking up shares of the stocks we recommend, which despite recent strength are still very cheap. And as I said answering the previous question, we also do maintain a small position in the ETF SCO as a hedge.
Q. Gentlemen. I’m retired, and need income, SAFE, reliable income. I will be doubling my TRP position. Was thinking, why not do that with TC Pipelines (NYSE: TCP) instead? TRP with growth (someday), TCP for an income kicker now! 50/50 for the best of both worlds. Pure natural gas play...8 big bore NG pipes. FERC concerns should be behind it. Wouldn’t think conversion issues would be of concern. Maybe with my 20-year life expectancy you’d advise just TRP and forget TCP. Thoughts?—David O.
 
A. We’ve had a pretty consistent buy rating on TC Pipelines for income, dating back to the distribution cut in May 2018. That 35% cut was made as reaction to the FERC action you spoke of, which eliminated a favorable tax provision for regulated pipeline companies. As you say, that’s now in TC’s past and there appear to be few if any real risks to the current distribution rate. On the other hand, it is hard to see any real upside catalysts either and management seems to have basically orphaned this thing the past couple year
2:03
I would say if the only concern is high yield, TC Pipelines does provide it. But TC Energy is where management’s heart is—the MLP is only going to be run for its benefit, which may include a buyout of the remaining shares of TCP it doesn’t control already. That might not be bad from a price of 33 or so. But I think all in all TRP is the better proposition—and there’s also merit in diversifying outside the same family of companies.
 
Q. Hi Elliott and Conrad. These are very turbulent times for our health and the health of the oil sector. Would be please if you would respond to the following question on live web chat for 30 April? This is a wonderful service, which makes your advisory service one of the best. Here are my questions:
 
1. OIL (ETN symbol) closed 21 April and liquidated. Is this a harbinger that other ETNs will also close or are there some that will survive?
 
2. Will U.S. oil companies get a government bailout? If they do will they be subjected to the same CARES ACT limitations regarding buybacks and dividends?  
 
3. If oil production cuts start in May thus driving up the price of crude and at least some states start to open for business by June 1 will this be the bottom for crude and perhaps the market in general? 
 
4. Will XOM eventually have to reduce its dividend since XOM had to borrow funds to pay for the current dividend?
Thank you--Charles H.
 
A.Charles, thanks for those kind words. These are definitely turbulent times and they may be with us for a while. That means a lot of opportunity but also danger—40 distribution cuts since early March is a pretty astounding number.
 
Our view on question one is Wall Street always produces to demand. There could well be more oil ETN closures. But so long as people want to be on oil, there will be vehicles to do it. I addressed a question on USO and the ProShares funds as vehicles to bet on oil prices that appear to be alive and well. And they’re our preferred ways to do it—though again we’re not recommending anyone go long oil prices right now.
 
If they should close, however, we’ll get our full money back and invest in another vehicle. The greater concern with these vehicles is always getting the price swing right.
 
Our answer to the second question is don’t count on it and certainly don’t bet on it. There will definitely be survivors from this industry shakeout/debacle and the most likely are the best of the biggest—whether we’re talking about producers, midstream or services companies. And these companies are cheap and worthy of purchase now.
 
I think we can count on the Trump administration to help the sector as it can. I don’t think a bill passed from Congress is likely, given the House of Representatives leadership has an ambivalent view of the industry. That would rule out the kind of assistance that would hamstring a company’s ability to pay dividends. But the better way to look at this would be that any energy company that really needed federal money would not likely be able to afford to pay a dividend in any case.
 
2:04
Regards question three, we continue to believe the production cuts are wildly inadequate to right the current supply/demand unbalance in global oil markets. That can only happen when demand reaches a real bottom and starts to recover.
 
We do believe that will happen and the improved performance of energy stocks is a likely harbinger of an eventual recovery. Also, longer term, these cutbacks in CAPEX are likely to trigger a supply shortage, though that’s years off. But we’re not in the camp that something magical is going to start happening in May.
 
Finally, we don’t believe ExxonMobil will cut its dividend this cycle. The company will announce Q1 earnings on May 1 before the market opens. But it’s already rendered a verdict on its payout this spring, paying the same 87 cents per share per quarter of the previous five quarters.
 
As for the “borrowing to pay the dividend” charge we see so often, what that really means is the sum of ExxonMobil’s capital spending and dividend exceeds its operating cash flow. The company generated $5.4 billion in free cash flow in 2019 after $24 bil in CAPEX. That was less than the $14.7 bil it paid out in dividends.
 
But one could also say that the company had $15 bil in operating cash flow left over after paying dividends, which funded about 63% of CAPEX—leaving the rest to be financed by a combination of new debt and equity. That’s actually a pretty solid funding ratio. I would expect it to drop this year given what’s going on with oil prices. But let’s also remember this company has a AA credit rating and has bonds maturing in April 2051 that yield just 3% to maturity. That’s very low cost capital and pretty much refutes any suggestion there’s any credit market pressure on this company.
 
Q. Hi Elliott. Will the decrease in U.S. oil production due to low prices be enough to compensate for the oil in tankers headed our way from Saudi Arabia, such that our storage capacity may not become full when these ships arrive? If storage capacity is not full, I could see WTI not decreasing (and SCO not increasing) as much as you're predicting. Thanks--Jack A.
 
A. Again our view is that this is much more of a demand crisis for oil prices than a supply crisis. And until the impact of COVID-19 fallout starts to reverse, the supply cuts as announced by OPEC+ and companies here are going to be chasing the reduction in usage.
 
It’s going to reverse at some point—every commodity cycle eventually hits a bottom as low prices encourage demand, reduce output and discourage use of alternatives. But the supply situation remains acute at this time and will continue to affect commodity prices. And that’s why we continue to favor energy stocks as the way to play the recovery.
Q. Do you expect a further fall in oil and S&P stocks after this "false" rally? Thanks—Larry.
 
A. Our view remains that what we’re seeing now for the stock market is much more likely to prove to be a bear market rally than part of a “V” shaped recovery. That’s informed by the fact that this would literally be the first time in at least the Post World War II period we saw such a recovery from such a deep drop, as well as the fact that we don’t at this point know the full damage COVID-19 fallout will have on the global economy.
 
We’re not going to be dogmatic in our positioning here. And there is currently a lot of internal discussion at our firm about what would make us change that positioning to something more bullish.
2:05
Also, as I’ve noted answering some of these questions, we have been recommending investors take measured positions in best in class companies on dips, especially when they’ve reached what we call Dream Prices. These are levels that would only be hit under extreme conditions such as those we’ve been experiencing. But if you buy when they do, you’ve historically been almost guaranteed a windfall—provided the underlying businesses remained solid.
 
We revisit Dream Buys for our Model Portfolio and High Yield Energy List in the upcoming issue of Energy and Income Advisor. And as you’ll see, despite big moves recently, quite a few are still trading under their Dream prices.
 
At this point, however, our macro view is this is a normal bear market rally—animated somewhat from previous bear rallies by the fact that so much money is sloshing around in ETFs controlled by relatively few strategies. That means eventually the bad news of this recession is going to catch up to share prices. And more than anything else, it calls for patient investing.
 
 
Victor
2:08
Elliott,

CLR used to correlate with oil prices. Recently the company had a big move up while oil prices continued to drop. Why is that? And do you see a real uptrend on CLR, would you add to a position at this time?
Thanks.
AvatarElliott Gue
2:14
Energy stocks are correlated with expectations for longer term oil prices not the front month oil futures contract. That's because a producer like CLR sells oil every month of the year, not just in June/July when the next 2 months contracts are due to be delivered. If I look at the WTI futures curves today and a month ago, virtually all of the "drop" in oil prices is concentrated over the next few months. In addition, I think the outlook for oil over the next 2 to 3 months is super bearish but it's actually improving if we look over the 6 to 12 month period - -supply is coming down and demand should recover looking out toward the end of this year and in early 2021. I think CLR is OK, though I prefer other names in the model portfolio like CXO, which are in a better position to weather 3 to 4 months of weak oil prices.
Victor
2:16
Hi Roger,

VANGUARD INTERMED TERM TAX EXEMPT INV (VWITX) was a good place to park cash but it got affected with the rest of the market. It did recover somewhat. How do you feel about this one and why did it drop so much? Thanks.
AvatarRoger Conrad
2:16
It's still a very high quality fund that reduces risk with diversification by holding nearly 10,000 individual bonds--the vast majority rated at least A and most higher. The fund is also protected from interest rate volatility by holding short to intermediate term paper.

NAV took a hit when COVID-19 fallout threw the bond market into turmoil. The recovery since the Fed flooded the markets with liquidity in late March has partly reversed--as it's become clear state and local budgets are being stretched by actions to control the virus and apparently following comments of some politicians that mass muni bankruptcies might be allowed.

My view is that's a very low probability outcome and that this fund will continue to prove its worth as a safe haven investment.
Victor
2:17
Hi Elliott,

We are seeing a rally in oil stocks while oil continues to drop. Is this a temporary thing? Do you see more upside on MRO, FANG and DVN from these levels? Do you believe that these companies will survive?
Thanks.
AvatarElliott Gue
2:17
I covered this in a prior answer but basically, imagine you're standing on top of a mountain looking across a deep valley to another even higher mountain. The contour of the Earth is basically the price of oil -- we still have a few months slog through the valley. But energy stocks are forward looking -- they're trading based on looking through the valley to the recovery on the other side. FANG is my favorite of the 3 you mentioned given their reserves and hedge position.
Victor
2:22
Roger, 

Please provide your opinion on D and EPD. Would you still hold a position on D or sell with a small gain? Would you add more EPD to an existing position? Thanks
AvatarRoger Conrad
2:22
I like both of these companies as long-term investments. Enterprise announced Q1 numbers yesterday that pretty much affirmed that it's one of the handful of North American midstream companies that can navigate this worst of all worlds energy market, while paying its distribution and positioning to dominate in the eventual recovery. We have more analysis in the new issue of Energy and Income Advisor, which posted about 2 hours ago.

As for Dominion, the company will announce earnings May 5. But from all indications--management guidance as well as Q1 results and guidance from other electric utilities--it's also holding up well in this crisis.

Both of these stocks could retreat on another bear market downleg. But I would be using that as a time to buy, rather than a risk to guard against. These are the kind of companies conservative investors need to own.
Victor
2:23
Elliott,

We are learning more about the coronavirus and now we see that it was not as deadly as it was once thought it was. Except for the vulnerable population (age, preconditions, etc) this virus is almost a non-event. The media have been trying to create a lot of hype but now we see that their predictions were way off. The market has been on a steady uptrend for several weeks, almost like a V shape recovery. Is it possible that the market sentiment has changed due to failed early predictions? Do you believe that the recovery is real?

Please provide your thoughts.
AvatarElliott Gue
2:23
I agree with your view re: the virus. However, the problem is that the virus didn't cause 30 million+ Americans to lose their jobs over the last 6 weeks, the government's "containment" isues -- maoinly at the state and local level -- have drivn the ecinomy into a recession. From what I have seen, the plans to reopen the economy are not aggressive to say the least -- allowing restaurants to reopen but at 25% - 50% of capacity....my point is that it's hard to see a V-shaped economic recovery regardless of the actual outlook for the coronavirus outbreak because governments seem very reluctant to relax lockdown measures.
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