JotCast | Energy & Income Advisor Live Chat December 2020

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Energy & Income Advisor Live Chat December 2020

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Roger Conrad

3:21

Well as you can infer from my answer to the previous question, my view is business is very good at Enterprise. Earlier this month, CEO Jim Teague addressed a virtual symposium conducted by Wells Fargo and poured cold water on talk of a C-Corp conversion that may have disappointed some in the crowd. But what he mainly confirmed was the success of the business model in natural gas liquids, which the company now plans to extend to petrochemicals.

As we've said before about oil prices, the important thing is for them to reach a level where investors are more comfortable coming back into energy stocks. I think we've seen that's not a high 40s price, but we think a low to mid 50s price that holds will do the trick. And EPD is likely to be one of the first MLPs to benefit if not the first. By the way, EPD's chart is much the same as other midstreams, putting back since mid-month. I think it's likely some of that is tax selling.

Guest

3:30

Are LNG exports going to happen to the levels they were built up to be? There has been a lot of building - conversions - capex spending, and talk. Which companies are really making a successful go of it right now?

Roger Conrad

3:30

Every US LNG project that's reached the final investment decision stage so far has first secured anchor customers. Bottom line: No one is committing the significant capital needed to build these facilities without assurance of cash flow when they start up. In fact, we've seen numerous projects cancelled even after securing contracts for some capacity but not enough to satisfy the would-be developers. That means very low risk for owners of facilities now operating, such as Kinder's Elba Island LNG, as contracts are primarily capacity fee-based and cash flow is therefore not affected by changes in volumes. If you're looking for projects still being built in North America, Sempra Energy recently made a positive FID for one off the Pacific Coast of Mexico, and there's a big one in progress off the British Columbia Coast. But by and large activity has slowed as CAPEX plans have rolled back. That's likely to keep currently running facilities more valuable for longer.

Roger Conrad

3:31

As a footnote to an earlier question on EVs answered by Elliott, governments can mandate EV adoption all they want. But at the end of the day, the economics have to be there for that to actually happen--and there's more than enough reason to be skeptical it will any time soon.

I will say that Total SA locked up the Paris market for EV charging stations with a long-term contract this year--so whatever you think about EVs, the industry is well aware of where its risk and potential upside is--and it has the financial means to dominate a change.

lee

3:49

i own tot as only super major,do you see another as better play

Roger Conrad

3:49

I like Total for many reasons, including the fact that management is building new cash flow streams and continues to cut the cost out of its business. As I noted earlier in the chat, Chevron is attractive for its very strong balance sheet, the Noble acquisition and a generally successful effort in recent years to build reserves at very low prices. We like ExxonMobil for its business plan of expanding output, which we think will win it adherents among investors as it becomes plan the energy price cycle is trending up.

Bottom line with these companies is they're large and financially powerful enough to adapt to whatever happens in the energy markets, including with policy long-term. And they're also very well positioned for what we believe will be a 50s oil price next year.

Michael L

4:10

Elliott The oil market is slightly in backwardation with the 12 mo. strip never rising to 50. Do you think this is on the low side, or do you think it will be 2022 before we get a meaningful move into the low 50s for WTI?

Elliott Gue

4:10

No, I think it'll be sooner than that. I have a more detailed commodity outlook in the issue we're just about to publish. Re: the curve -- I think what we're seeing since mid December for both Brent and WTI is a bit of uncertainty re: the outlook for supply/demand in the first few months of 2021. That's why you're seen the period from Feb-May/June flip around a bit over the past few weeks. Some of it is likely uncertainty surrounding what OPEC+ plans to do on Monday. Also, some uncertainty around the impact to demand from virus lockdowns early next year as vaccines roll out. Beyond that, however, the picture has remained pretty clear with the curve in backwardation -- I think that reflects a likely very tight market as demand recovers and supply remains constrained (demand recovery is a "when" not an "if" in my view). One way I like to look at the curve is to look at brent 8 months out less brent second month -- historically backwardation of 50 cents or more on that basis after a lengthy period of contango.

Elliott Gue

4:11

...Signals a prolonged price rally for crude. I am also starting to turn more bullish natgas for the first time in close to a decade. The near-term outlook is pretty terrible due to weather but associated gas production from the Big 6 liquids shale fields is something like 40% of total US gas output and it's plummeting.

Michael L

4:27

To follow on from your last answer, that would make XOM a compelling buy, wouldn't it?

Roger Conrad

4:27

We've thought so for a while. There's still a narrative you see in the investment blogosphere and to some extent in the financial media that ExxonMobil has been "borrowing" to maintain the dividend--which basically means the sum of CAPEX plus dividends is higher than operating cash flow. That situation will change in 2021 even under very conservative assumptions for energy prices as XOM expects to generate a great deal of free cash next year. But even if you equate investment in future growth with dividend risk, it's pretty clear the bond market has no problem loaning to ExxonMobil with the company's bonds of April 2051 yielding just 2.74% to maturity. We think mid-50s oil will go a long way toward shoring up investor confidence both the dividend and management's plan for the future. And when you consider this stock has averaged a yield of less than 4% the last 10 years--not a great period of oil prices to say the least--the upside is pretty massive. Just getting back to a 4% yield from the current 8% plus

Roger Conrad

4:27

would take a double for the share price.

Michael L

4:57

I've had great success with your Deep Diving portfolios, and was wondering if there is a reason other than streached P/Es why stocks like the FAANG group, Uber, etc., are not considered in that publication. Thanks for the great work over the last decade.

Elliott Gue

4:57

Thanks for the question, I'm delighted that you find Deep Dive useful. There's no specific reason why growth/FAANG stocks would not be considered in the service. In fact, in the Active Total Return Portfolio we recommended a growth name ServiceNow (NOW) in the spring that went on to do very well. It's a pretty solid growth/tech play. At this time, however, I've cut back on growth exposure because of where I believe we are in the market and economic cycle. Simply put, different kinds of stocks do better at different times. Contrary to popular believe you usually want to buy growth/tech late in an economic cycle or in a downturn/soft patch when economic growth is slowing because these companies don't need to have economic tailwinds to grow earnings. The one thing you don't want to own in a weak economy is cheap/cyclical/value stocks. However, at this time, my read of the economic data is that we're in the early cycle ...

Elliott Gue

4:59

...In the early cycle (coming out of recession) you typically see leadership shift from growth to value and from large caps to small caps. I believe (right on schedule) that's happening right now. So, the bottom oine after my long-winded answer is that this is a headwind for FAANG/Tech/Growth and a Tailwind for small/cyclical/value that normally lasts for years.

Lee

5:01

With Brexit now completed are there UK equities you might recommend. Shell, BHP, RIO, BP? And what about Brit financials?

Roger Conrad

5:01

Good question. I'm not sure how much the Brexit deal or its impact on the value of the British pound will affect major resource companies--other than how bullish or bearish it turns out for the global economy. I think what happened has to be a lot better than a no deal Brexit. But these companies are going to primarily follow resource prices--iron ore for BHP and Rio and oil/gas for Shell and BP. That should be a good thing in 2021, and I have recommended BHP in our Deep Dive Investing service--as well as the CUI Plus portfolio.

I think PPL Corp's quest to sell its UK electric utility got a real boost from this deal and I continue to recommend the stock for more aggressive investors in Conrad's Utility Investor. In fact, we have a bet on near term upside in our Pig Versus Bear trading service. Brexit should ease the way to regulatory approval of a sale--and shores up the British pound's value vs the US dollar ahead of a deal.

We are looking at more UK stocks to recommend.

Jack A

5:04

If you were to recommend 3 stocks that you feel will give the greatest return over the next 12 months, which would you choose? Thanks

Elliott Gue

5:04

Always tough to answer that one. But, Roger and I both outline our top energy picks in the issue of EIA that will be up shortly. The two stocks I mentioned are Occidental (OXY), which is an aggressive pick. The bottom line there is that if my commodity price outlook is in the ballpark, OXY pays down their debt quickly, removing the main overhang to valuations and I think the stock could double. For a more conservative energy pick, I like PXD which has one of the lowest breakevens in the business. I think more clarity on their planned variable distribution policy on their Q4 call scheduled for mid-Feb could be a significant upside catalyst there.

Michael L

5:04

Thanks so much for your answers, Elliott! Here's wishing you and Roger, and everyone else on here, a prosperous and healthy New Year!

Elliott Gue

5:04

Thank you and Happy New Year.

Mack

5:05

I'm late to the party today folks, but want to thank you for all your great insights & guidance all thru this crazy year. I've restructured my MLP & midstream holdings to weed out the financially weaker companies, and right-sized the positions. One hope for 2021 is that there will be an increasing level of buybacks of both C-corps and MLPs. Happy New Year to Elliott, Roger and of course, Sherry!

Roger Conrad

5:05

Thank you and Happy New Year to you Mack. We appreciate the kind words and I think your strategy is the right one for 2021.

As far as buybacks go, I think we could see a great deal of activity as midstream companies start to realize a high level of free cash flow from improved revenue and reduced costs. Long-term, I would prefer dividend increases but I think those will come as well.

5:35

If you are starting to get bullish on natural gas what would be your thoughts on AM. I know you have that as a sell when it was a 5.00 stock but now at nearly 8.00 and earnings continue to strendthen. Also it looks like AR debt over the next 2 years will be covered with its cash flow?

Roger Conrad

5:35

It's a tough call. I've always viewed the Antero family as well run, particularly the integration of the midstream and producer ends of the business. AM is still wholly dependent on AR--and while that company appears to have stabilized, issuing $500 mil of 5.5 year notes at an interest rate of 8.375% is not a sign of strength.

A boost in natural gas prices that lasts would of course be bullish. And as Elliott pointed out, flows of associated natural gas have contracted this year, which makes Antero's gas more valuable. I guess the real question, though, is why take the risk on AM when you can buy EPD, MMP, MPLX and the rest of the 14 midstreams we've highlighted at such low prices that are larger, more diversified and financially stronger? There will come a day when we'll want to take those risks. But with the best in class this cheap, why shop anywhere else?

Roger Conrad

6:07

Well that looks like all we have in the queue for this month. Thanks again everyone for participating today, and especially for being a member of Energy and Income Advisor. We truly appreciate your loyalty and trust.

As a reminder, be on the look out for a link to a complete transcript of the Q&A in the near future after I close this out.

6:09

To close, all of us at Capitalist Times wish all of you--our valued customers--the very happiest, healthiest and most profitable of New Year's.

Here's to your health and wealth and many happy returns in 2021!

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