JotCast | Energy & Income Advisor Live Chat August 2020

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Energy & Income Advisor Live Chat August 2020

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Elliott Gue

3:22

We haven't recommended PER in many years (we sold it from all of our model portfolios in 2014 if my memory serves) and I haven't followed the stock closely in recent years. Generally, I don't believe the trust has much value whatsoever given the price of oil, the structure of the trust and the cost of producing its wells. Most likely, the trust would be liquidated within the next 6 to 12 months, with no residual value for unitholders. I don't believe unitholders will have the ability to vote on this takeover offer though it must be approved by the trustee. So, I suspect the letter you received is an attempt by the companies seeking to acquire PER. Generally we'd regard any rally in PER as an opportunity to sell out.

Ron

3:26

Would appreciate you advice as to the best vehicle to use for protection if the general market were to decline in the near future.

Elliott Gue

3:26

In Energy & Income Advisor's sister publication Deep Dive Investing we've used the ProShares Short S&P 500 (SH) and UltraShort S&P 500 (SDS) to hedge against a broader market decline. SH is designed to go up 1% in value for every 1% decline in the value of the S&P 500. SDS is designed to go up in value by 2% for every 1% decline in the S&P 500. However, please note we are NOT recommending either of these ETFs as buys in that publication right now...These are the ETFs we'd consider as hedges against a broader market decline.

Eric

3:26

EPD and MMP have been around prior to the shale boom. Do you think growth going forward will be similar to pre-shale times, and how do valuations (e.g., price/DCF or EV/EBIDTA) look now compared to pre-shale days?

Roger Conrad

3:26

I think both Enterprise and Magellan have definitely adjusted their capital allocation and project expansion strategies to the idea that North American oil and gas midstream is entering a more "mature" phase after the rapid growth of the previous decade. Both have cut back their CAPEX and "high graded" their project development to more incremental expansions with the very strongest counter parties. That's shoring up distribution and balance sheet safety, though it also means much slower growth going forward--I think low single digit dividend growth is likely.

That said, both MMP and EPD trade with yields well north of 10%, which is actually well above where they were pre-shale days. Enterprise value/EBITDAs are well below. I think that alone is a pretty compelling reason to buy them now--just to get back to that level of valuation would imply a big price increase. I think EPD gets back into the 30s and MMP the 60s in the next cycle at least.

Frank

3:32

One more , Dear friends, Thoughts on TRSWF and/or others of that ilk>

Roger Conrad

3:32

There actually aren't many yieldcos left--with both Pattern Energy and TerraForm Power getting profitable buyouts this year. Those that are have generally appreciated considerably--CWEN to the mid-20s after a nearly 50% dividend increase, Atlantica to the low 30s, NEP the low 60s. TransAlta Renewables has been the laggard but has now pushed over USD12.

Obviously one thing that's happened here is investor interest has risen in renewable energy. But I think investors have also finally noticed that the yieldco business model of contracted renewable energy has proven resiliency and sustainability of growth. Like I said, prices are a lot higher than they were a couple years ago--and especially from where they dropped to this spring. But you still have mid-single digit yields with prospects for sustainable mid-single digit growth with very good visibility--and while NEP is a bit expensive the rest are buys. We track all of them in Conrad's Utility Investor.

Janet

3:38

Regarding CVX, what are your expectations of the stock price by the end of 2020... assuming the safety of the dividend and your prediction that oil will break out of its narrow trading range in the 4th quarter. Its proposed acquisition of Noble should be acretive to the company. Thanks for all your hard work and reliable updates.

Roger Conrad

3:38

Thanks so much for those kind words. We do think Chevron's acquisition of Noble Energy will be a nice catalyst for earnings and eventually its share price, though very likely we'll have to wait for oil to break higher before that's reflected in meaningful share price gains. The added reserves greatly reduce urgency of replenishing depleted production and they'll drive costs lower, so they enhance the super major's sustainability as well. And you can't beat the price they locked in, which is 60% less than where Noble started the year. We've kept our buy target for this company at 125 for some time and we still expect to see it well north of there in coming years.

Janet

3:39

If assumptions about the safety of the dividend and your prediction that oil will break out of its narrow trading range are accurate, what do you anticipate the stock price to reach by the end of 2020?

Roger Conrad

3:39

Hey Janet, I'm assuming you're talking about Chevron here, given your previous question. If not, feel free to ask about anything--we'll be here a while.

Rdk

3:55

You recommended AM a buy over a year ago when it was trading between 10-11 / share. Subsequently you recommended to sell AM at 4.00/share citing concerns with AR debt and citing a 100% probability of a dividend cut at AM. However since this time it appears AR is now on there way to paying off 2021 and 2022 debt maturities and creating positive internal cash flow. Meanwhile AM continues to cover their dividend albeit by a slim margin. My point is it appears to me that AM is a better buy today at 7.00/share than when it was recommended a buy at 10-11/ share. Thoughts?

Roger Conrad

3:55

Yes, this has been a tough one to figure out. My view is still that there's little if any margin for error when it comes to Antero Midstream's dividend--though forecasting a "100% probability" doesn't sound like anything I'd say. The coverage ratio for one thing was just 1 times in Q2--which means essentially they relied on asset sales and additional credit lines to cover what CAPEX they did have. But the real danger is still from Antero Resources--which has done a good job of cutting costs to keep its head above water and has a great relationship with AM--but is still facing a very tough environment on natural gas prices (still under $2 MMBTU in Appalachia) as its aggressive price hedges wind down this.

Maybe they pull a rabbit out of a hat and find a way to avoid a dividend cut this year. But that really looks like the best we can hope for here--and I notice that insiders seem less than convinced selling 27% of holdings the past six months. And why lock up money here when EPD yields better than 10%?

Michael L

4:11

Earnings season just ended. I realize there hasn't been much in the way of news in the last few weeks, but from a macro perspective, have either of you seen anything that would change your opinions on any of the portfolio holdings? Just want to make sure I haven't missed anything. Thanks for the great work.

Roger Conrad

4:11

Thank you for reading!

Earnings season didn't hold many surprises for our portfolio holdings, and we believe our recommended companies proved their resilience on business plans, balance sheets and dividend sustainability. Since then, the most significant macro event has been the surge in benchmark natural gas prices in North America--which are now at their highest level since last November on supply concerns and hot summer weather. Oil, however, has basically stuck in the low 40s.

Bottom line is nothing has happened to change our view that oil prices are likely to pick up steam later this year, which will give everything we have here a lift.

Charlie

4:19

Would you provide one more update on ET. I know it is riskier than others, but I believe the company is secure and the only question is whether they will opt to decrease the dividend. I also believe that their current cash flow does not require a dividend decrease. Your thoughts? Also, thoughts on ENBL?Thank you...

Roger Conrad

4:19

Energy Transfer's Q2 distribution coverage was solid at 1.54 times, despite hits to basically every corner of its business except NGL and refined products transportation and services (new assets) and increased income from its investment in Sunoco LP (fuels distribution). Management affirmed it expects a second half improvement and cited several green shoots including an "upward trend" in volumes at most assets. The company also stated it expects to generate positive free cash flow in 2021--meaning it will be able to self fund CAPEX and distributions and thereby corral debt. If the volumes recovery continues it should be able to do that even if the Dakota Access Pipeline closes (3% EBITDA). But if not, risk will grow they will cut the payout in order to maintain the BBB- barely investment grade credit rating. That is priced in at a yield of 19%, which reduces the risk of holding on now or even buying for aggressive investors.

Roger Conrad

4:22

As for Enable Midstream, their Q2 results indicate they should be able to cover the Q2 payout through this cycle. This is a very volume-sensitive company and the Anadarko Basin of Oklahoma has seen a big drop off this year in output. But I think we've seen the worst with it. And there is potential upside both from a volume recovery and a possible transaction by 53.7% owner Centerpoint (50% of GP) that would settle ownership questions that have hung like a cloud over the share price this year. Again, it's an aggressive investment and no one should consider the dividend entirely safe. But it's pricing in a lot of risk here as well, which means upside if they can show resilience.

Brian

4:28

I understand MPLX has a very high dividend. How likely do you think it is that will be cut?

Roger Conrad

4:28

Certainly and investment yielding 15% plus is pricing in a dividend cut already. That means if the company can assure investors one isn't needed--or even if there is a less than expected cut--shares can move quite a bit higher. In the case of MPLX, a cut can't be wholly ruled out. But neither is one inevitable. Even in Q2, distributions were covered by 1.39 times and management affirmed earlier this month that it expects to achieve positive free cash flow after all CAPEX and distributions in 2021--after completing most projects in the works now. There's still a question of what general partner and 61.15% owner Marathon Petroleum (a major refiner) will do with its interest and if they will convert MPLX to a corporation as some expect. But here too whatever happens will be done with shareholder interests in mind--since the GP owns common shares too and would face tax consequences in an ill-executed corporate conversion. MPLX also completed a very low cost debt refi this month.

Rdk

4:30

Sorry Roger. AM is on the endangered list as a 100% dividend cut not as a 100% probability. My error. Thanks for your response.

Roger Conrad

4:30

Thank you for participating today. I should add regarding Antero Midstream that I've always been impressed with its management and have been even more so this year--just worried about the circumstances they're facing here.

Ron

4:36

Would you consider KMI which yields about 7.40%, which is not an MLP, to be of equal quality and value to EPD with a yield of 10%?

Roger Conrad

4:36

We do consider both to be very high quality companies. Assets are different with Kinder relying more on pipelines and especially natural gas. But both are big, diversified, have strong balance sheets, basically self-fund CAPEX and have strong customers/counterparties.

I think it's likely Kinder yields less than EPD in part because it's a corporation rather than an MLP--and there's definitely more large investors for energy companies organized as corporations at the moment. That relative attractiveness could change if corporate and individual tax rates rise next year--which is a possibility. But the important thing is both are solid companies in a very beaten down sector.

Ken in Phx

4:43

One of my favorite unsung stocks is a non-mainstream energy outlier, EVA. Another is HASI. Both have recovered well from the spring debacle. Any thoughts going forward?

Roger Conrad

4:43

If you're a CUI subscriber, you've probably noticed Hannon Armstrong Sustainable is trading well above my highest recommended entry point. it's definitely been discovered as a business development company lending money to energy efficiency and renewable energy projects--and lately taking a financial stake in Engie SA's US contracted wind and solar portfolio. I think it has a solid formula for consistent and reliable low single digit dividend growth as it adds scale in what's a very low risk business. But in the low 40s, I think it's gotten a bit ahead of itself.

Enviva Partners also seems to have graduated to a higher valuation range as it's added production scale (wood pellets) and markets (utilities in Europe and Asia looking to reduce coal use). That ratcheted up growth was reflected in stepped up dividend growth this month. This is one I became acquainted with at an MLP conference some years ago and we continue to cover in our MLPs and Midstream coverage universe in Energy and Income Advisor.

Roger Conrad

4:43

Finishing up with EVA, I like the company but the shares have come a long way in a hurry, so everyone should probably wait for a dip to buy in or buy more.

Ken in Phx

4:45

Another stock I like is COLD, which I think of as being in the energy storage business. I have a client who is a big user of COLD's services and thinks the CEO is first class. Do you follow it at all?

Roger Conrad

4:45

We don't at this time, though it's certainly a candidate for our REIT Sheet as a unique business organized to pay a decent dividend. Appreciate the additional color on the CEO as well. Thanks.

Hans

4:48

OXY.WS corporate warrants end of July at $8 now $3 any advice

Elliott Gue

4:48

These warrants are essentially call options with a $22 strike price that expire in August 2027. Since the end of July, the value of OXY has declined rom around $16 to around $12.75 so the decline in these warrants is pretty much what you'd expect from whjat amounts to a long-term out-of-the-money option on OXY. We believe the stock could ultimately climb to $30+ at $50 to $55/bbl oil, especially with additional upside catalysts in the form of successful asset sales and debt reductions. However, we generally would only recommend the stock itself in EIA rather than warrants on a stock like OXY.

Ken in Phx

4:51

The problem with so many excellent companies is that they have, as you say, gotten ahead of themselves in the current frenzy. At one time you said you were considering cash covered or naked puts for one of your other services. Anything happening in that regard?

Roger Conrad

4:51

Thanks for asking. I'm not sure if this is what you have in mind, but Elliott is actually on the verge of launching an options dedicated service.

If you're unaware and that's of interest, please send us an email or call anytime Sherry at 1-877-302-0749, 9-5 PM ET, Monday through Friday.

Mack

5:27

Interesting throw-in there Roger about an options service! I read your comments on OXY and wonder if longer dated options (i.e. LEAPS) would be a good way to play an OXY recovery? Thanks for all your good work in these chats.

Elliott Gue

5:27

I've actually been beta testing this options service for a few months now (since April 2020). Generally the service focuses on two types of trade: 1. the sale of put options, which allows the options seller to collect premium income provided the underlying stock or ETF trades above the strike price of the puts sold at the time of expiration. These trades are generally high probability trades (I look for at least a 75% "win" rate on these trades. 2. the use of options or options spreads to trade various stocks or ETFs with some identifiable upside or downside catalyst. Usually these trades have a high reward to risk ratio and I use spreads to lower risks and maximize upside potential. As Roger said, if any of those strategies might be of interest, please send us an email or call Sherry at 1-877-302-0749, 9-5 PM ET, Monday through Friday.

Mack

5:34

One more guys.... is CEQP still a hold? If so, what are you waiting to see from them? Thanks.

Roger Conrad

5:34

Hi Mack. Thanks for the question. Crestwood has been a tough call for us this year. The Q2 results were quite good, not just the numbers--notably 1.6X distribution coverage, 4.2X debt to EBITDA and outperformance of G&P base case forecast. And it wasn't just the guidance either, which is on track for free cash flow generation. Rather, it was the way the company did this despite heavy exposure to bankrupt Chesapeake Energy.

So what's holding us back from upgrading CEQP to a buy again? For one thing, we don't think it's wholly out of the woods with Chesapeake Energy exposure. It's also definitely at risk to a shutdown of the Dakota Access Pipeline with a big presence in the Bakken--and despite the recent spike in benchmark natural gas prices, many of its customers are still getting pinched at sub-$3 gas and have been all year.

The yield of 18% plus is definitely pricing in a dividend cut, so we're OK holding this now. But I guess we'd want to see a couple more quarters of resilience before making it a buy.

Roger Conrad

5:35

Maybe also some more clarity on what's going to happen to DAPL--though the longer it stays open, the more time Crestwood has to find alternatives for its G&P customers for long haul solutions.

Mack

5:43

Roger -- Thanks for the update on CEQP. Clearly still a hold!!

Roger Conrad

5:43

Yes! But definitely one we're watching now--hard not to like at an 18% yield that in all but a worst case is decently covered.

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