You are viewing the chat in desktop mode. Click here to switch to mobile view.
X
Return toEnergy & Income Advisor
Energy & Income Advisor Live Chat April 2020
powered byJotCast
Prev Page View Full Chat Next Page
Jack A.
2:28
Hi Elliot:

The price of oil has been rising recently, and SCO has been falling........ Has your view of SCO as a short term investment changed?.......... And if not, is there a strike price that you think we should add to our position?............... Also, May 15th is the expiration of the June contracts. Speaking generally, since we are in a contago market, would that be a good day to sell?

Thanks.
AvatarElliott Gue
2:28
SCO is short the July contract at the moment, not the June contract. It is scheduled to roll exposure from July to September futures in early June. SO, we have some time before that's an issue for us. We recommended selling half the position in SCO for a big gain a couple of weeks ago (Apr. 21st if memory serves) at around $60. Today it's only trading a few bucks below that in the $55 range. I still see the prospect for July WTI futures to roll don to around $10 to $15/bbl due to ongoing Cushing storage problems. Such a move would push SCO up towards $70. So, for now we continue to recommend that 1/2 position.
Lee O.
2:28
i own trp,it is holding up quite well ,would their storage business be helping .
AvatarRoger Conrad
2:28
TC Energy will announce Q1 results tomorrow, so we'll know a lot more after that. But from what we've seen so far in management guidance and the company's ability to push ahead with long-term plans--including the close of a CAD2.8 bil asset sale yesterday--what we're going to see is confirmation it's navigating this worst of all worlds crisis for the oil and gas business--just as we've seen already in results posted by EPD, Kinder Morgan and ONEOK.

The key is a large diversified business mix of heavily contracted assets--weighted toward creditworthy counterparties and fees rather than volume sensitivity--matched by a strong balance sheet and the ability to fund CAPEX and dividends with operating cash flow. The handful of companies that have those strengths are going to keep paying dividends and positioning to dominate the recovery. And while we have to let the numbers and results guide our decisions, TRP definitely looks like one of them.
Fred
2:33
With all of attention focused on COVID and its subsequent impact on demand, or lack thereof for oil, there isn't a lot of info/discussion about the upcoming November elections.
AvatarElliott Gue
2:33
That's true. Every month Bank of America publishes a survey of global fund managers and one of the questions they ask is along the lines of "What is the biggest risk you see this year?" Back in Jan./Feb. it was the upcoming November US elections...since then, of course, the virus has dominated the headlines. Re energy, I guess the risk many would flag is that a Biden win would result in some sort of 'ban" on fracking. Honestly, I don't see that happening as it would result in much higher energy prices, which isn't going to fly well, especially amid a weak economy. The truth is that there isn't really an alternative to oil … at least not for the next 10 to 20 years.
Terry
2:36
What is your current opinion of Altagas?
AvatarRoger Conrad
2:36
I think all of those conservative moves they made the past couple years are paying off in a big way now. The Q1 results announced by the company today were right in line with what management had been guiding to, including 11% higher EBITDA excluding items--which was backed by 10% higher utility EBITDA on rate increases/cost cuts, and strong performance at the Ridley Island propane export facility. Management affirmed its CAPEX target of as well as EBITDA and earnings targets, and interest expense was lower by 24.7%--the result of successful asset sales and disciplined debt reduction.

My view is Altagas will continue to focus on low risk investments and debt reduction this year. That probably means no dividend increases in 2020, but these results confirm this company's long-run recovery is still on track. And we continue to rate shares a buy at USD15 or lower.
Fred
2:37
If the Dems manage to secure the Presidency, House and Senate come November, (God Forbid), what can we do to hedge against the probability of a huge crash in the oil related sector after the election, and, would it happen immediately right after the election, or, would it take much longer to play out after the initial shock?
AvatarElliott Gue
2:37
…I answered  some of that in the chat above. But, I suspect that any changes would take time to play out. In poll after poll I have seen people "say" they want clean energy/fracking bans  but when you ask them the question "How much are you willing to pay for that," the polls show the answer is usually less than $100 per year. So, I think that the risk of a very rapid change in energy policy, which would by definition cause a major spike in energy prices and economic weakness, is low.
Jon B
2:41
Hi. Thanks for the chat. Altagas seems to be in decent shape after keeping their outlook unchanged this morning. Anything in their financials or future operations that causes you concern? If not, why do you suppose the market is valuing the company at just about 14x expected earnings for the year.
AvatarRoger Conrad
2:41
Well Jon as you can tell from the answer I just gave a previous question on Altagas, I think their Q1 results confirm things are pretty much on track. What I could also have said is that this would not have been the case right now, had management not turned the company upside down the past few years buying the former WGL and selling much of its riskier midstream assets to cut debt. But what they have now is pretty much regulated utilities and contracted midstream like the Ridley Island propane export facility--which has something like an 8 day advantage over Gulf Coast NGL exports as far as reaching Asian markets.

The stock has actually outperformed many utilities and especially midstream companies this year--and that's despite the fact that the Canadian dollar has dropped from 76 to barely 70 US cents. This stock is priced in and pays dividends in loonies converted to US dollars.
AvatarRoger Conrad
2:43
Continuing on Altagas, I think the stock is undervalued relative to these strengths. The yield is less than 6%--high for a utility but very low for a midstream. I think the big moves they made last year have made some logical investors for the company wary of buying it. The only cure for that is going to be posting solid results. But in the meantime, this is a good time to pick up positions if you're a conservative income seeker. Again, those were nice Q1 results, frankly better than I expected.
Mack
2:44
Could you explain how SCO is structured.  Is July the only contract it's based on?  Is it always based on the contract two months ahead?  And when it flips from one expiring contract to a future dated one, how does that affect SCO's price?  Also... since it's based on the contract two months ahead, does that explain why it doesn't always precisely track the price of spot oil that we see quoted on CNBC etc.  Thanks.
AvatarElliott Gue
2:44
Basically, SCO is structured to roll every other month. The last roll was from the May contract to July and that happened in early April (if memory serves it's over the first 5 business days of the month). That's one reason the price of SCO doesn't track the front-month oil futures price quoted on CNBC, etc. The other is leveraged ETF tracking error, which I explained in this video on youtube: and this one: . At this time, because of the shape of the oil futures curve, the "roll" itself involves covering shorts on oil at low prices and re-shorting at higher prices (in effect, it's a positive when the curve is in contango). Ultimately, I expect that as we approach June futures expiration, you will see the price of July futures begin to sell off as the market rolls forward expectations for a Cushing glut.
Frank
2:49
Thoughts on Blackstone buy into ET
AvatarRoger Conrad
2:49
At the very least, a company that traditionally has made savvy investments sees value in Energy Transfer LP--which of course we do as well. The company reports its Q1 on May 11, but management has already backed its dividend staging in late March that it's "supported" by "underlying long-term stable cash flows." And I expect to see numbers that more or less back that up--as this is a large and diversified company that's significantly cut operating risk and debt the past few years.

Anytime you see a deep pocketed private capital firm taking such a big stake you have to think takeover possibilities. And Kelcy Warren--who owns almost 10% himself--has talked a lot about the market not correctly valuing ET. I think a successful LBO would have to offer something in the mid-teens to win over enough investors. That's well above the current price. Most probably, however, ET stays independent and emerges as a winner in the recovery.
Mack
2:53
Surprisingly, DKL announced a payout increase and the stock price took off big time.  Have you changed your view of DKL at all?  I thought it was a gutsy move to increase the payout.
AvatarElliott Gue
2:53
My concerns remain the parent Delek USA, which has significant exposure to refineries which have weak to marginal profitability at current commodity prices. DK is also attempting to fend off a hostile takeover by CVR (Icahn controlled) and owns 85% of DKL. So multiple risks in DKL we think...weak parent, potential for Icahn to buy DK (and DKL) with a good deal of uncertainty as to what that would actually mean for the MLP. My guess is that DK/DKL are trying to boost the price of the stock to strengthen their takeover defense but I still have my concerns with the underlying fundamentals.
Sohel
2:57
Your updated view on RDS after dividend cut? Were you anticipating such a massive cut? Many retirees, myself included took a big haircut on retirement income.
AvatarRoger Conrad
2:57
Our belief is the super majors as a group have enough balance sheet strength to keep paying their current level of dividends despite current price challenges. They're simply in a different league from the rest of the industry in that regard. And while Chevron and ExxonMobil won't report until tomorrow, both have made it clear so far they don't intend to cut. So did BP earlier, despite a more leveraged situation.

So why did Royal Dutch cut, when the underlying numbers behind the Q1 top an bottom line and balance sheet would have supported payments? One reason we've had the company on the Endangered Dividends List is its heavy exposure to global LNG--a good thing long-term but the market is clearly under pressure and management has leveraged its future to the fuel with the BG purchase. The price crash, for example, could make it more difficult to meet asset sale/debt reduction targets this year.
Fred
2:57
Also, if that were the case, I would imagine GREEN energy would be the place to be.
AvatarElliott Gue
2:57
Many of the prominent green investments are close to uninvestable (ex. TSLA). The way we've looked to plan Green energy is two-fold in EIA -- buy the companies that own green energy facilities (Roger has mentioned several) and also via names like Texas Instruments (TXN) that sell components needed to build electric cars, smart grids, etc.
AvatarRoger Conrad
3:02
Continuing with Royal Dutch, management's statement regarding the cut is it made the move because it doesn't know how long the current crisis will last and that it doesn't know what's on the other side. Fair enough. But that's the case for every business. And the magnitude of the cut (66%) suggests instead that management is realigning priorities as much as responding to the current environment.
3:04
Those new priorities for Royal Dutch evidently don't value their traditional shareholder base as much. And that's showing up in the pounding shares are taking today. Our view is this company is in an elite group that will survive even this worst case environment and emerge to dominate the other side. But this cut does make this stock a lot less attractive in our eyes and I would say vindicates our focus on other companies like XOM.
Sohel
3:11
Request update on PAGP  - safe from further dividend cuts? Same request/question for ET?
AvatarRoger Conrad
3:11
The Plains All-America family announced a 50% distribution cut at both PAA and PAGP earlier this month, which we commented on in issue of EIA before the one that just posted today. Basically, Plains is more volume sensitive that our other midstream names, and that's likely to hurt this year. The cut reflects this and should also allow the company to self fund CAPEX and the remaining distribution.

We don't like cuts. But this one made sense given the environment, and as we've seen with Plains--at least since the company went conservative a few years ago--they won't hesitate to restore the payout when conditions do improve. And that's one reason we're sticking with it.

I answered a couple questions about ET earlier. The big date as I said is May 11, when they release Q1 numbers. We expect the same steadiness we've already seen in other midstreams, though what we see then will be key to what to expect the rest of the year.
Jack
3:17
Hi Elliot:   If we are near fill in storage capacity, why is the price of WTI near term and in future contracts increasing?  Is this a temporary blip?  I can't understand if last month's contract hit negative and perhaps the real price was about $10, why WTI is increasing in price currently.  Thanks.
AvatarElliott Gue
3:17
I think we will see further dips in oil futures for delivery over the next 2 to 3 months. Some of the chatter re: the recent rally is that May 1 (tomorrow) the OPEC+ cuts officially go into effect plus we've had some US shut-ins (wells taken off production due to low prices) and yesterday's EIA report showed some stabilization in demand at low levels. I tent to think optimism is misplaced over the next 2 to 3 months and what we're seeing is an oversold bounce in June/July futures.
Sohel
3:17
TOT was and I believe still is one of your favorites. What is your outlook on dividend sustainability?  Same question about CVX.
AvatarRoger Conrad
3:17
Chevron reports Q1 tomorrow and Total will on May 5--and we'll a lot more to say after they do. CVX gave us reason to hope for a good result when it declared the same $1.29 per share dividend yesterday. Total is next slated to declare dividends on May 5.

Obviously, a lot of people are looking closely at both companies following Royal Dutch's deep dividend cut today. That also goes for XOM and BP and all four are lower today despite a good day for oil. But what we've said about these companies over and again is still true; They have balance sheets as strong as most countries and if any companies have what it takes to navigate this worst of all worlds for energy it's them.

I think Total is particularly underrated as a low cost producer, as well as for its growth in electricity and solar. That division is still nowhere close to being as important as E&P. But the growth will offset at a time when refining is also weak. And the company continues to make acquisitions--always a sign of strength.
AvatarRoger Conrad
3:18
Finishing up with CVX and TOT--again we're going to take our cues from what the companies report in Q1 and guide to. But Royal Dutch's actions notwithstanding, we're comfortable continuing to recommend both. Note that XOM is in the model portfolio.
Mr. G
3:22
In some of your earlier communications, many of the companies were switched from "HOLD" to "SELL", which, it turns out, was near their bottoms, as they have risen nicely since then. However in Bull/Bear, you're suggesting that the last drop was just the beginning, and this rise will evolve into a much greater drop in energy values, so, should we be considering this rise as a good time to move out of the market, both in energy and other areas? Mohamed El-Erian and Gary Shilling are expecting a frightening drop, as I think is Elliot in Bull/Bear. Should we be protecting our powder, by putting it into cash
AvatarElliott Gue
3:22
It's important to remember that energy stocks reflect intermediate to long-term energy fundamentals while oil futures (and SCO) reflect fundamentals for oil in the delivery month. At this time, I believe we could see further downside in oil itself (hence the SCO hedge recommendation in EIA) though energy stocks are, on the whole, well supported by strengthening longer term fundamentals. A second, related point is that when you see a rally in any sector off an extreme low, shakier stocks will usually rally the fastest initially (I think that's what we're seeing in some of these smaller names). We still aren't interested in buying anything that's not positioned to weather a few more months of very weak oil prices...starting in February and early March we began "high-grading" the EIA portfolios to focus on the most bulletproof names and we're still happy with that positioning...we may also look to recommend adding to some of these high quality names on weakness.
Fred
3:23
Do you expect t add back to your SCO position and, how many shares and approx timefram?
AvatarElliott Gue
3:23
We have a 25 unit position recommended in EIA as a hedge, having taken off half the position. We are pretty comfortable with that holding for now and are more inclined to take profits on SCO on a future spike that to add to the position here.
Mack
3:26
How risky are CEQP, HESM and SHLX right now?
AvatarRoger Conrad
3:26
Crestwood announces Q1 results May 5, Hess Midstream May 7 and Shell Midstream May 7. Those will be important days for CEQP and SHLX in particular as they've pulled guidance for now. Hess on the other hand has already announced a dividend increase and released a detailed guidance update in mid-March, so we have a much better idea of what to expect--though notably both CEQP and SHLX announced distributions this month that held the current rate level.

We currently hold Hess and Crestwood in our model portfolio--Hess also in the High Yield Energy List. Of the three, we consider Hess the safest at this time, as much for the fact they've held to guidance so far. CEQP appears more sensitive to the risk of decreased volumes. But from this price level it's not hard to imagine a major earnings and guidance beat.

Again, until we have actual results and guidance updates, we have to consider all three as considerably riskier than say EPD, KMI or OKE, which have updated us. But our advice is to stay.
Michael L
3:29
I agree with your assumption that we are in a Bear market rally, and are likely to retest previous lows. Does it therefore make sense to put on limit orders somewhat above the late March lows for stocks like XOM TRP, etc.?  What would have to happen in the market to make this a bad idea?
AvatarElliott Gue
3:29
In EIA's sister publication, Deep Dive Investing, I like to look at historically analogous market environments to provide a sort of blueprint for the future. Historically, bear markets consist of 3 phases -- gradual deterioration, panic and resignation. In this cycle, due to the nature of the recent economic "hard stop," we skipped the gradual deterioration phase straight to the panic phase, which happened in March. Historically the market does make new lows in the final phase pf the bear market as investors wrestle with the reality of the recession,; however, not all stocks follow the broader indices to new lows. In short, because the sector is already so sold out, I tend to believe many energy stocks could hold above their March lows even if the S&P 500 makes a new low. In order for the "buy the dip" strategy you outlined in your question to fail, my broader market outlook would have to be completely wrong.
Connecting…