JotCast | Energy & Income Advisor Live Chat April 2020 | 4/30/2020

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Energy & Income Advisor Live Chat April 2020

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Michael L

3:32

Any chance we can add to the one half position in SCO before the July futures begin to fall in earnest?

Elliott Gue

3:32

It's a possibility … I just don't see a technical set-up to add right now. With a trading vehicle like SCO you really need to be careful about entry points.

das

3:33

Roger has often recommended Vanguard Intermediate term muni fund as a place to store cash. In today's environment, do you still feel this is a safe haven?

Roger Conrad

3:33

As I answered to an earlier question on Vanguard Intermediate Term Tax-Exempt, my view on this fund as a long-term safe haven hasn't changed--despite obvious turmoil in the municipal bond market.

I do think it's quite possible we'll see a good bit more volatility in the muni market--especially as COVID-19 fallout takes its toll on the financial healthy of many state and local governments. But at the end of the day, this fund has extraordinary diversification and risk management--and that will continue to protect principal and interest come what may.

Arnold S

3:41

Shell announced a 65% dividend cut. I know you don't have a crystal ball, but do you think dividend cuts of this magnitude will be common over the next few months?

Roger Conrad

3:41

I would strongly suggest checking out our Endangered Dividends List--which is a feature of every issue of Energy and Income Advisor and was just updated today with the new issue. Since early March, there have been dividend cuts at literally 40 energy companies in our coverage universes--and our system has been able to pre-warn readers about almost all of them.

There are currently more than 40 names on the list--including several that have already cut once this year. All but a tiny handful of them are rated sells, most for quite a while. And in the issue, we wrote that a dozen of these companies were at serious risk of cutting their payouts sometime in the next couple of weeks.

The good news here is that even the most battered energy companies have rallied sharply off the late March lows. That makes now a great time to unload the weak--and to reinvest the funds into stocks of best in class energy companies that are also selling cheaply, but with no question they'll survive.

Barry J

3:50

Dear Gentlemen:
I noticed that ET’s Risk Profile in your High Yield Target List was changed to “Aggressive” from “Conservative” for the first time in your April 1, 2020 issue of EIA. Did you provide any other notice of your decision in that EIA Issue or subsequent Alerts? I have found nothing.
Thank you.

Roger Conrad

3:50

First off, Energy Transfer is far from the only company that we moved from the "conservative" to the "aggressive" camp this spring. The obvious reason was this unprecedented tsunami that hit the energy business on both the supply and demand side. The resulting stress test has required us to really drill down and scrutinize each company on any possible vulnerability--which inevitably meant that some companies (EPD, KMI etc) stood out as more conservative than others. And we wanted to make those differences clear to readers.

As I've answered several times in this chat, we continue to believe ET will wind up distinguishing itself as resilient--with May 11 as the key date for reporting Q1 results and updating guidance. We continue to recommend the stock in the Portfolio and I wouldn't rule out the company again qualifying as "conservative" even in this environment. But the macro picture has changed and until we do get that certainty on where ET is going, there's just no way we can call it conservative as EPD.

Jon B

3:58

Do you think the distribution cut at Landmark is sufficient to strengthen the company for the long run? Can they make it through a recessionary period?

Roger Conrad

3:58

I think the Landmark Infrastructure Partners' distribution cut (45.6%) was long overdue. The payout consistently exceeded coverage and even with the positive steps taken by management--including attracting financial backing of Brookfield Asset Management--that gap just wasn't closing. And that put pressure on the balance sheet.

I was frankly a little surprised that the move triggered some initial selling of LMRK shares. But this company has finally done what it's needed to do for at least two years--which is to reset the payout so the company can self fund the growth of what is a very low risk franchise. Regarding revenue, there is some risk that consolidation of the former Sprint with T-Mobile could cause less action for some of the cell towers the company holds leases on land underneath. But what owners of renewable energy, wireless towers, billboards etc pay LMRK is only a tiny fraction of their overall costs.

Roger Conrad

3:59

Continuing on Landmark, this is a very low risk business model--and the reduced payout looks sustainable even with COVID-19 fallout.

Arnold S

4:10

I've had trouble keeping up with all the individual stocks (especially selling when advised). Would an ETF such as IXC or FILL be advised for someone like me? The portfolio contains many names that you recommend.

Roger Conrad

4:10

We know we cover a lot of companies in our coverage universes and that it can be difficult to keep up. That's one reason we've simplified the tables for easier reading. The current number of individual names in the Model Portfolio is 17--we also provide instruction on prices to buy them as well as how much to buy.

The idea is we've narrowed down all of these coverage universes into a group of the energy companies we believe are the best in class and therefore present the best opportunity to navigate the current worst of all worlds environment, dominate the recovery to generate big capital gains and continue to pay us (in most cases) outsized dividends. They're our best recommendations.

The problem we have with ETFs like IXC, FILL, AMJ, XOP, XLE, DIG etc as alternatives to building a portfolio is that--while they will likely hold stocks we like--they're virtually guaranteed to hold a number of companies for which we see prospects as subpar. And right now that's dangerous, because survival isn't assured.

Roger Conrad

4:13

Continuing on the ETFs question, this is an environment rather where there are going to be a lot of failures and only the best are really worth investing in. I wouldn't rule out recommending an ETF at some point, and in fact we do currently hold the ProShares UltraShort Crude Oil ETF (NYSE: SCO) as a hedge in the Portfolio against lower prices as we boost investment. But again, this is an environment where individual stock picking should get you far and away the best results.

Terry

4:17

Thoughts on CNQ?

Roger Conrad

4:17

Canadian Natural Resources like Suncor is a survivor in the very battered Canadian energy industry. The main reason is balance sheet but also scale and diversification are key strengths. The horrific prices in Alberta (sub-$10 for much of the past month) are going to take their toll on Q2 results. But at the end of the day, they're far worse for CNQ's smaller competitors, which means this company will be in prime position to benefit when there is a recovery.

One other hopeful sign for the big Alberta producers is TC Energy is now pushing ahead with the Keystone XL pipeline, while Enbridge appears on the brink of completing the Line 3 pipeline. That will free a lot of Canadian oil to come south, which should narrow the price differentials in coming years. CNQ and SU are for patient investors only. But they're values.

Jack

4:21

Hi Elliot: Thank you for explaining how the price of SCO is structured. Please let me know if I understand you correctly: From my understanding, SCO should cover their shorts in the July futures contract in early June, and role that over and short the futures contract in September. And if contago continues to exist, that should result in a profit at that point when they role over. Is that correct? Thanks.

Elliott Gue

4:21

Basically yes. It wouldn't result in an immediate profit on the roll, but if September futures were priced at, say, $25 and Julys go off at $15, you would be effectively covering your shorts at $15/bbl and reshorting at $25. If WTI then fell back to $15, you'd make a $10/bbl profit.

David LaRiccia

4:23

About the Saudi oil tanker armada. Will the really be able to unload all of that oil in the U.S. or will the tankers just sit off shore for an extended amount of time? Could they be forced to turn the tankers around to go elsewhere ?

Elliott Gue

4:23

The tankers would likely go wherever the profits are highest. The US has a ton of oil storage relative to most other countries in the world but it's possible the oil might end up in floating storage. We have seen multiple tankers change destinations in recent weeks due to the fast-evolving supply/storage situation.

salvatore

4:24

In reference to rds how will shlx fair now .

Roger Conrad

4:24

I wrote quite a bit on Royal Dutch and its dividend cut answering questions earlier in the chat. Bottom line is I don't think they had to make this move. But now that they have, they will be holding in that much more cash, which means they're that much more conservatively positioned.

The question is will they make a similar move to hold in cash at Shell Midstream? The MLP held its quarterly payout at 46 cents per share for May, same as in February. And though management pulled its 2020 guidance for its coverage ratio on April 2, it also said it would maintain the payout the rest of the year. The business itself is steady and the company that same day closed two drop downs and announced elimination of IDRs.

That would seem to indicate no surprises when SHLX announces Q1 on May 7--though until then there will be some uncertainty. No change in our recommendation Buy<22 at this time.

Lyndon Wright

4:25

Where can we find the July contract price for WTI?

Elliott Gue

4:25

Check the CME's Nymex website https://www.cmegroup.com/company/nymex.html

Hans

4:27

DKL, you have it a sell, why has the stock increased from 10 to 20 over the last month

Elliott Gue

4:27

It's getting dragged higher with the group...a rising tide lifts all boats to some extent. We are worried that they have a troubled parent in Delek USA. We also originally recommended selling it from the portfolio a couple of years ago at well over $30 and now just see better opportunities elsewhere.

Kathy

4:28

Given the current environment of low oil prices and the bottleneck in getting oil out of Canada, what are your thoughts on Suncor Energy (SU)?

Roger Conrad

4:28

I have pretty much the same view on Suncor as I do on Canadian Natural Resources. It's a survivor--which we should see in Q1 results announced May 5. It's operating in a terrible environment in which many competitors may not stay solvent. And it figures to be in the winner's circle when the industry recovers--particularly if Line 3 and Keystone XL make it into operation the next few years as appears increasingly likely. Like CNQ, SU is a stock for patient investors only and another bear market downleg takes all of these stocks lower. But SU like CNQ has weathered bad environments before.

Hans

4:30

What about WPX several brokers have this as a buy

Elliott Gue

4:30

It's a well run company but they're small and they only have around half their 2020 output hedged...we just see better opportunities in high grade names like CXO.

Fred

4:32

WHAT IMMEDIATE IMPACT ON OIL WOULD WE SEE IF THE u.s Government steps in to help certain companies with a combo of Bridge loans in return for some orm of owbership?

Elliott Gue

4:32

I don't see much impact on oil prices from that. it would probably be a positive for some oil stocks. Theoretically, to the extent such a move would allow troubled companies to stay in business, it might increase supply and be a slight headwind for oil prices.

Paul

4:34

Can you comment on SPH. Thanks!

Roger Conrad

4:34

There's not much to report here at this time, and it's unlikely there will be until May 7 when the company reports its fiscal Q2 results. If I had to guess I would say that management was challenged to align costs to demand in a relatively mild winter. But importantly, the propane distributor has defended its payout--declaring another 60 cents per unit quarterly disbursement on April 23. Operations appear to be uninterrupted as propane distribution has been declared an essential service and employees appear to have remained relatively healthy. And since FYQ1 earnings and guidance, the company was able to refinance a $500 mil credit facility on favorable terms. That all points to a stable result, as does the recovery rally in Suburban's bond prices.

Again, I want to see results before I declare SPH is is good shape. But based on what we know and with the stock priced to yield upwards of 15%, I think potential rewards from holding on more than offset potential risks.

Fred

4:35

If that were to happen, would it also have an impact on some of our larger oil companies, ie, CVX, XOM, etc atc, and woul it impacte their near term stock prices, eurger up or down?

Elliott Gue

4:35

It really depends how government aid is structured … CVX and XOM don't really need money so I doubt they'd take advantage of those loans. Also both are likely to benefit from carnage elsewhere in the sector because it will allow them to buy up energy assets on the cheap.

martyR

4:40

You guys are doing a great job. With all the changes taking place in the market. It becomes more important to keep the charts and tables up to date with all the data that has to be crunched. I know the subject has been broached several times in the past and In order to make it easier for the tribe to follow, I was wondering if you could make some modifications that would make it easier to read and interpret what is happening. One would be to put dates (month, day, year) on each one of the charts or tables that is published and if there is a revision made that the date be changed and the specific change be identified either by italics, bolding, or other similar technique such as color. Other than proofreading to correct wrong information i.e. aggressive versus conservative, etc. this definitely would be a great start in helping us analyze the information and not having to go back to see what it was before and know that this is what has been changed and whether the change affects our current investment approach

Roger Conrad

4:40

Thanks Marty. I know we've talked about making some of these changes before and I apologize for anything we're still not doing.

I will say that we now update all of the website tables at the time we post a new issue--so everything you're seeing now is our current advice on every stock, which is as of the issue date--in this case April 30. Total returns information in the Portfolio is of course always changing--so the best we can do in the issues is a snapshot.

The suggestion to better annotate advice changes (and ratings changes as well) in tables is a good one. We'll see what we can do. Anything that changes in our Portfolios, however, will be discussed thoroughly with reasons why in the regular issue text--and in Alerts in between issues if needed. Thanks again for your suggestions and comments!

ron

4:50

What is the long term future for shares like MRO and WPX? With losses for the E& P stocks is there any merit to wait out this cycle?

Roger Conrad

4:50

In our view, the better way to look at your question is why stay with a stock that has worse odds of being a long-term winner when pretty much every energy company out there is for the taking, including the best in class.

We made a number of sells in the portfolio earlier this year before oil really cracked that consolidated us into the companies we think have the best opportunities to navigate this crisis, dominate the recovery and (preferably) pay us to hold them with generous dividends. The other side of that was basically putting sells out on most everything else. That's more or less still the advice now.

There will be a time when we want to revisit Marathon and WPX et al. And we believe both will make it. But at this point, our view is best in class is where we want to be with energy stocks--they're about as cheap as we're likely to see them even after the recovery. And any energy company with a significant blemish is at risk to a big time decline if we get another bear market downleg.

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