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Energy & Income Advisor Live Chat August 2020
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AvatarRoger Conrad
1:54
Hello everyone and welcome to this month's Energy and Income Advisor live chat.
1:56
Ground rules are the same. There is no audio. Type in your questions and Elliott and I will get to them in order received as soon as we can. We will send you a link to a published transcript of the entire Q&A shortly after this chat concludes, which will be after everything in the queue is answered and posted, as well as answers to questions we received prior to the chat. The transcript will also be posted on the Energy and Income Advisor website, which also archives all previous chats.
1:57
Per usual, we'll start today by posting answers to questions received via email.
Q. The authors of the article “What Could The Election Mean For MLPs/Midstream And Energy?” from Alerian say there will be little impact if any on existing pipelines from the results in the November election. Also, they say the courts and Congress have more impact than anything the President can do. And they make a point of how little attention is being focused on energy Issues during the election campaigns. I would be interested on your opinion on the possible change in leadership and on the article’s points in general.

Also, Williams Companies (NYSE: WMB) has announced a goal of 56% reductions in greenhouse as emissions by 2030. Okay, is this goal realistic or for the election campaign with the "Goal" quietly fading away after the election is over? If the "Goal" is realistic and doable and can be achieved then Williams would be transforming itself? What’s your opinion?—Christopher.
A. We agree that North American oil and natural gas pipelines now in operation will remain critical to a functioning US economy next year, regardless of who is president. And if we learned anything these past four years, it’s that the action on what pipelines get built—and which are at risk to closure—is in the courts, where opponents have never been better funded and able to act almost anywhere and at any time.
 
Presidents do affect permitting of projects. And arguably, a prospective Biden administration would be less sympathetic to new pipelines. Also, in cases where the courts may require new permits to keep existing pipelines open—such as the Dakota Access Pipeline and possibly the Line 3 pipeline—they may be less likely to grant them if asked.
We think it’s also reasonable to assume that new wind and solar would have an easier time getting permitted. That includes the large number of offshore wind projects on the Atlantic Coast that the Trump Administration has effectively stalled by requiring another round of environmental impact statements. And depending on the composition of the US Congress, we could see an extension of tax credits for wind and solar as well.
 
That means more competition for gas. But to the extent any pipeline assets come off line or are not built, those in operation will be that much more needed and valuable, particularly when the US economy eventually gets back on its feet and demand for energy picks up steam again.
1:58
In fact, the blackouts in California this summer appear to be causing even that state to reassess the decision to rapidly phase out natural gas-fired power plants—which require pipelines to get needed fuel. And the spike in North American natural gas prices this month shows how quickly the supply/demand equation can shift when conditions change.
 
In any case, pipeline politics have been very tough the past four years so it’s highly debatable that they would be much tougher under new administration, even if you assume (I don’t) that Biden if elected will renege on a campaign promise not to try to ban hydraulic fracturing. And the large, diversified and financially strong midstream companies we’ve been talking about in Energy and Income Advisor have learned to cope with these conditions. Despite Covid-19 fallout’s impact both upstream and downstream and regulatory setbacks, they’re still profitable.
As for Williams’ moves, they can cut their greenhouse gas emissions by 56% from 2005 levels simply by reducing methane emissions from their infrastructure with better leak detection and repair. We think it is significant they’ve announced this goal after the Trump Administration basically eliminated the methane rule. Mainly, it shows they can make more money by capturing the methane rather than releasing it into the atmosphere.
 
As for the 2050 goal, it’s for “net zero” emissions, which they can achieve from a combination of increased efficiency—reduced leakages—potential carbon capture technology and offsets including planting trees and buying emission credits. Having the goal does increase the company’s chances of attracting ESG money—and low cost capital is never a bad thing. But the bottom line is this is a very doable plan for Williams that should actually increase profitability. And we would not be at all surprised to see other midstream companies announcing similar plans in the future.
Q. Do you think LMRK has a stable dividend now? Is there any reason to buy their preferreds? And do they have any protection against inflation?—Eric
 
A. We think Landmark Infrastructure Partners (NSDQ: LMRK) will be able to sustain its reduced dividend level going forward. That’s despite some pressures on its underlying business from Covid-19 fallout, especially in the outdoor advertising portfolio. The quarterly rate of 20 cents per share also allows the company to internally fund a modest growth through acquisitions policy. That should allow management to successfully reduce/refinance a debt load that had been rising when the company was paying out more than it was earning in recent years.
 
The preferred stock is cumulative—meaning that if dividends ever were interrupted or cut for any reason, the unpaid portion would have to be paid in full before any common dividends were paid. That provides an added layer of protection for income investors, though in practice we’ve found that what afflicts a common dividend in most cases will wind up damaging preferred shareholders and bondholders as well.
 
In the case of Landmark, the company appears to be on the right track, which means both common and preferred dividends should get paid for the foreseeable future. The difference is the common can increase dividends, and should as the company’s fortunes improve while the preferred payout is fixed. That theoretically affords protection from inflation for the common—and there’s an argument rents should rise as well under that kind of environment.
Q. Hi guys. I guess the consensus seems to be that WTI oil prices may rise back to the high 40’s or low 50’s during the 3rd or 4th quarters of 2020, especially if airline traffic continues to recover. If so, would ProShares Ultra Bloomberg Crude (NYSE: UCO) and/or ProShares Ultra Oil & Gas (NYSE: DIG) be good ways to play any short-term price increase in oil?
 
If so, which would you suggest, UCO or DIG? I have a small short position in SCO & DUG as a hedge to the downside. Thanks for your continuing research that keeps us up to-date on what’s happening behind the scenes in this volatile market. Thanks for your detailed analysis of the Energy market.—Fred W.
1:59
A. Thanks Fred. As I’m sure you already know, we prefer Energy and Income Advisor readers generally focus on accumulating a portfolio of individual stocks, rather than sector ETFs. In the case of DIG, for example, the yield is only 3.8%. That’s less than half the two largest holdings Chevron and ExxonMobil, which together comprise nearly 40% of the portfolio.

DIG does offer 2X leverage for every one-point gain in the Dow Jones U.S. Oil & Gas Index. But with so many holdings—good but also bad and ugly in the market that is weeding out the weak rapidly—we believe you’ll actually get more leverage to a real energy recovery by simply buying and holding the best names, especially those in the EIA model portfolio.

As for UCO, it’s possible we’ll recommend a trade at some point. Our view is oil prices will eventually break higher from this narrow range they’ve held since early June. But again, we see a lot more leverage in the stocks.
Q. Roger, and thoughts on South Jersey Industries (NYSE: SJI)?—Ben F.  
 
A. It looks like this mid-sized New Jersey natural gas distribution utility has been hit by fallout from what happened at an Oregon electric utility, where electricity traders made a very bad bet on wholesale electricity prices before the West Coast heatwave and rotating blackouts in California drove them higher.
 
The selling of SJI--as well as a handful of other natural gas utilities--stems from the fact that they have natural gas marketing operations that could conceivably be affected by commodity price volatility. And we’ve seen that in natural gas prices the past month. That’s added to a generally poor sector performance in utilities and other dividend/value stocks.
 
South Jersey, however, doesn't trade gas. Instead, it locks in recurring contract revenue with non-utility customers by using derivatives to hedge prices. 
 
The company’s renewables joint venture with Captoma that will help it deploy investment into contracted generation and storage, with the first assets in service in October 2020 and 75% of revenues fixed. That should be a big plus for meeting 2020 earnings per share guidance of $1.50 to $1.60 per share.
 
Management also declared a quarterly dividend of 29.5 cents per share this week. And we expect to see a boost later this year of low single digits. For more on South Jersey Industries and other natural gas distribution utilities, check out the September issue of Conrad’s Utility Investor—which will post a week from today.
 
Q. Hi Roger and Elliott. The Market is rising, oil is rising but your Energy and Income Advisor recommended portfolio continues to collapse. The best of breed Enterprise Products Partners (NYSE: EPD), Magellan Midstream Partners (NYSE: MMP), Kinder Morgan Inc (NYSE: KMI) and Energy Transfer LP (NYSE: ET) are down 40%+/- this year, and Occidental Petroleum (NYSE: OXY) and Schlumberger (NYSE: SLB) are far worse. The analysts that track these stocks continue to reduce their target prices. With the democrats leading in the polls and their policy regarding a ban on fracking are we now positioned as the last ones on the Titanic?

What action are you recommending? Where should we cut our losses and where should we hold? What would be the reason to hold and what would cause a recovery in unit price for these companies. Thanks—Mark D.
A. I understand your sentiment. But I would not agree the portfolio’s value is collapsing. Rather, like oil prices that have been locked in a tight band around $42 a barrel, it has more or less been running in place since early May. That’s while the S&P 500 and market leaders have been making new highs, which builds frustration for anyone investing in underperforming sectors like energy. And that factor alone has added to selling.

But what we’ve also seen is all of these best in class companies are demonstrating resilience as businesses in what’s clearly the worst environment in management’s experience. We’ve seen it most recently in the Q2 earnings and guidance reported the past several weeks. But we’ve also seen it how most of these companies have defended balance sheets and credit ratings, while others in their industry have gone bust. And we’ve seen it in the way the midstream companies on this list have defended their dividends.
2:00
Obviously, we are not seeing those favorable developments reflected in share prices yet. But if you take a step back, it is pretty clear that these stocks have stabilized in a relatively narrow range since early May.

Enterprise, for example, trades within a few pennies of where it did on May 1. So do Kinder and Magellan. So do Energy Transfer and Occidental—which by the way we consider to be more aggressive and not really best in class. And Schlumberger is actually a couple bucks per share higher.

The big questions are will these stocks ever recover the damages sustained earlier this year and if so when? We think proving resilience in numbers combined with a cyclical energy recovery will eventually accomplish this, but that we’re going to have to be patient a while longer.
Q. Hello folks. Thanks again for this opportunity. My only question deals with Occidental Petroleum (NYSE: OXY). Are you still sticking with it and if so why? I am deeply underwater with this stock. Thank your—Jeffrey H.

A. Hi Jeffrey. We are staying with OXY at this time for several reasons. First and foremost, it still has some of the best oil and gas assets in the business, particularly in the Permian Basin. There’s still a lot of work to do here to right the ship, which mainly means reducing debt taken on when the company bought Anadarko last year and better integrating operations. And there’s no question the big drop in oil prices earlier this year set management’s plans back quite a bit—especially regarding asset sales.

But the company is steadily making progress, announcing the $1.33 bil sale of a package of assets in the Rocky Mountain region earlier this month. The company also continues to whittle down debt, apparently lopping off another $3 bil with a successful early tender offer for notes matur
maturing in 2021. And the return to $40 plus per barrel oil is definitely a huge plus over earlier this year.

It’s likely the well-publicized sale of Occidental shares by Berkshire Hathaway caused investors to largely ignore this news. But we continue to expect a steady flow of favorable developments through to the announcement of Q3 earnings in early November.

Our patience is not unlimited. But it’s worth pointing out that OXY’s performance is really pretty much in line with that of other producers in this environment. And it’s much better than many, like the now bankrupt Chesapeake Energy Group (down -98%). That’s mainly because OXY has apparently stabilized operations. And so long as that’s the case, we’re willing to hold our portfolio position as a highly leveraged bet on the next cyclical upturn in energy.
Q. Hi Roger. I would be interested if you could address your views on ExxonMobil (NYSE: XOM) now it is not part of the Dow Jones Industrial Average. I imagine this will mean selling by many funds/ETFs? Is this a buying opportunity or not? Thanks—John C.
 
A. Hi John. We don't think removal from the Dow Jones Industrial Average will be a significant event for ExxonMobil's future returns. For one thing, unlike the S&P 500, the DJIA is more of a show index than one that ETFs and mutual funds use to weight portfolios. In fact, the company is now a member of 173 different stock indexes--which is actually three more than a week ago.
 
Second, energy and particularly oil and gas producers have already shrunk to an historically low percentage of major institutional portfolios. Institutions now own only 53.7% of ExxonMobil, which means individuals own the rest. That compares to 90% for Texas Instruments, for example.
The sellers in other words are long gone and the big question is how much rebalancing there will be into energy the next time the cycle moves higher. We expect it will be enough to push this stock to a considerably higher level, despite the maturity of this industry and growing influence of ESG strategies.
 
2:05
Q. Hi Roger and Elliott. Thanks for doing these chats and for all your good advice. Am wondering if your basically optimistic view of OXY has been affected by Buffet's basically opposite view?—Jerry F.
 
A. Hi Jerry. Thanks for participating. As we indicated in answering a previous pre-chat question, we’re still optimistic on Occidental being able to overcome its challenges, which obviously mushroomed when oil prices crashed earlier this year.
 
It seems likely that Berkshire’s well-publicized sale of its Occidental shares will encourage others to sell as well. But the most important thing here is still this company’s ability to execute the asset sales, operating cost cutting and debt reduction it needs to avoid further balance sheet erosion near-term as it lays the groundwork for a profit rebound when the energy price cycle turns higher again. We still think odds favor success and that this stock provides considerable upside leverage if we’re patient a bit longer.
Frank
2:11
Thoughts on CORR and its Pfd
AvatarRoger Conrad
2:11
Our view is CorEnergy is at the end of the day too small to run a sustainable business in a mature energy midstream sector that clearly favors the largest players. Mainly, it depends on too few assets and customers to be able to weather a blow to any of them. We saw that with the big dividend cut this year from 75 cents to 5 cents per quarter--and the year to date 80% drop in the stock. And we may get another dose of it this hurricane season with company equipment in the path of storms. The preferred stock is cumulative, so dividends can't be paid on the common until they're current on the preferred. But at the end of the day, the same factors hitting the ability to pay common dividends will affect the preferred--and neither security is worth that risk in a market where even Enterprise and Magellan yield north of 10%.
Mtnlover
2:15
Would you change the printing color on your EIA issues where it indicates the ISSUE NUMBER & DATE? This is always hard to see as doesn't stand out in the small black letters & numbers now used in the blue banner underneath the EIA lettering...my LOG OUT is also lost on the website, but I know its there & can usually click on right area. Also like the new Dream Prices page we can pull up but what is missing is the date issued??
AvatarRoger Conrad
2:15
Thank you for those comments and suggestions. We really appreciate and will see what we can do.
Frank
2:24
Thoughts on CPLP and KNOP, Thanks
AvatarRoger Conrad
2:24
Our general view on the tanker business is that tough times are likely to continue for the rest of 2020. Capital Products Partners is the latest casualty with the dividend cut to 10 cents from the previous 35. But really the action is the same industry wide, as contracts mature and companies hold in more cash in anticipation of lower renewal rates--or no renewal at all. Knot Offshore Partners has a niche in that it's shuttle tankers with very big customers. And that showed up in Q2 coverage of 1.7 times and 99.7% fleet utilization. We are seeing some green shoots in this business (offshore drilling) so the dividend has a better chance of holding--as management affirmed during the earnings call. But Shell electing not execute its option on a vessel this month shows it's not immune to pressures. This is a group we'd be very cautious on.
Charlie
2:26
Whoops! I left out a sincere thank you for holding these monthly chats, and the constant hard work you put in each and every day to help us all stay on the right track. You are tireless in our support! Again, thank you both! Charlie
AvatarRoger Conrad
2:26
Thanks Charlie. We very much appreciate it, and as I've said before we get as much out of these chats as anyone.
Mack
2:34
I am looking to increase position size of two of my MLP holdings. (MLPs, not C-corps due to tax advantages.) EIA has rightfully focused on balance sheet strength as an indicator of payout safety.  But I wonder if bal sheet strength also supports price.  I would think "yes."  So in that context, I'm looking at MPLX and PAA.  I don't think either of these will see much price appreciation anytime soon.  But both have attractive yields if I can be sure the payouts will not be cut.  Both have risks: MPLX's 15.4% yield should signal danger, while PAA (10%) has a history of payout cuts.  Appreciate your thoughts.  Thanks.
AvatarRoger Conrad
2:34
I actually believe both of these names offer considerable upside--but we're going to have to remain patient to get there. As I noted in answering one of the pre-chat questions, the vast majority of the EIA Portfolio has actually traded in a very narrow trading range since early May. The portfolio companies themselves (including MPLX and PAA/PAGP) have demonstrated resilience in their Q2 numbers and guidance--as well as defending balance sheets and except for OXY and Schlumberger their dividends. But they're not a popular part of the market right now clearly. And they're not likely to be so long as oil keeps trading in basically a flat line in the low 40s--as it has since early June basically. But when the cycle does turn higher, I think MPLX is easily a low 30s stock and PAA a mid to high teens. I don't think we can consider the dividends as safe as say a regulated utility's. But they are definitely pricing in cuts despite what's still strong cash flow coverage--that's a good risk/reward in our view.
Charlie
2:39
I would appreciate an updated opinion on XOM and OXY. Both are falling in price lately. Do you think the div and future price appreciation are still " baked in" for XOM and what do you think a reasonable price target is for OXY for YE 2021 and 2022?
AvatarElliott Gue
2:39
I don't think there's anything company-specific going on with XOM. The company's earnings release at the end if July was pretty much on as-expected and the stock actually rallied a bit on that day. XOM has been drifting lower since early June alongside the rest of the energy industry. Part of it is that the stock market remains preoccupied with growth and technology stocks -- the Nasdaq 100 is up a whopping 22.8% since June 8th and the Russell 1000 Growth Index is up 19.3% while the Russell 1000 Value index is down 1.9%. It's been the "summer of growth". At some point, the leadership will change and that could be catalyzed by further signs the economy is on the mend this autumn. This summer, however, even as oil prices have been stable and the high quality producers make all the right moves, the stocks have yet to be rewarded.
AvatarElliott Gue
2:44
As for OXY, I think their earnings release was really very solid. The company reinstated its guidance. The company is still plagued with excess debt from last year's Anadarko acquisition but they don't have a cash flow problem. The company needs about $2.9 billion in CAPEX to maintain current production and their break even oil price is in the low $30's now after significant cost reductions. The debt load makes OXY a riskier name than a super oil like XOM but the stock could easily be worth north of $30 share in a $50+ oil environment we expect in 2021.
Eric
3:11
Thanks for all your guidance through these difficult times! EPD, KMI and MMP are trading down since their most recent earnings reports. What did you think of their earnings, and have did they change your thinking on 'dream prices?'  Thanks.
AvatarRoger Conrad
3:11
The actual numbers posted reflected the weakness in the sector at a time when producers are slashing production and end users curtailed demand due to Covid-19 fallout. And the guidance wasn't exactly upbeat either for the second half of the year, though there were definitely green shoots. But the important thing with these results is all three of these companies demonstrated resilience by keeping capital plans on track, defending their balance sheet strength and covering their distributions with room to spare.

I don't know if it's fair to say these stocks have traded down since announcing earnings--if anything they've just kept to the same trading range we've seen since May. But in any case, there's nothing in the earnings that would indicate they're worth less--just that recovery may take time.
AvatarRoger Conrad
3:13
As for the Dream Buy prices, they're meant to be levels that would only be reached under extreme circumstances. We don't see any reason to change them for these companies now.
3:14
Thanks for your question and kind words.
Dominic B
3:22
Thanks for all you do. I have been a subscriber since Roger’s previous publication. I purchased Sandridge Permian Trust (PER) many years ago. I just received notice that Avalon Energy, LLC and Montare Resources I, LLC, have begun action to acquire the trust (either by merger, acquisition of assets, acquisition of the remaining Units not owned by Avalon or otherwise) . I would like your recommendation as to my course of action.
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