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Energy & Income Advisor Live Chat July 2020
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AvatarRoger Conrad
2:00
Greetings everyone and welcome to the July subscribers only Energy and Income Advisor live chat.
2:02
The ground rules are type in your questions and Elliott and I will answer them as soon as we can completely and concisely. We will keep the chat open so long as there are unanswered questions in the queue, as well as from emails we received prior to the chat. There is no audio but there will be a published transcript available of all the Q&A shortly after we sign off, for which you'll receive a link. It will also be published on the EIA website.
2:03
Here's a couple of answers from the email queue: Q. According to BEP press release: "On July 30, 2020, the holders of BEP's limited partnership units ("BEP units") of record as of July 27, 2020 will receive one (1) Share of BEPC for every four (4) BEP units held, or 0.25 Shares for each BEP unit." How does this affect our holdings in BEP?  Thank you—Frank F.
 
A. Frank, this is effectively a 5-for-4 stock split announced by Brookfield earlier this year, though it has the added benefit of opening up investment in the company to capital that can’t buy partnership units.
 
On July 27, for every 4 shares of BEP-U/BEP you own, you received one share of BEPC, which is basically a C-Corp share that’s otherwise identical to BEP-U/BEP partnership units. These new C-Corp shares will immediately become publicly tradable on the NYSE and in Toronto, with the effective date of July 30.
The ownership and dividend distribution of BEPC and BEP-U/BEP are identical. What’s not is BEPC dividends will be taxes as ordinary common shares, while BEP-U/BEP will continue to be taxed as partnership units.
 
I think you can argue that just the announcement of this transaction has already benefitted owners of BEP-U/BEP, given the post-announcement pop up in the share price. I think having the option of holding C-Corp shares as well as partnership units should also help the valuation and thereby the share price stay at a higher level. And because this is a stock split, there should be no tax consequences for current holders
As for ownership/safety of dividends etc, there’s no change from this transaction to either income shareholders will receive from holdings or the percentage of ownership represented. You’ll have more shares—two different varieties in fact—and the per share dividend will be lower (43.4 cents versus 54.25 cents per share currently). So you’ll be getting the same amount of income from your investment, at least until the next increase in the payout, which will be between 5 and 8 percent and announced in January 2021.
 
The other significant news for Brookfield this week is shareholder approval of the TerraForm merger, which will close on July 31. The deal is anticipated to be immediately accretive to BEPC/BEP shares. Q2 earnings to be announced August 7 are the next big day and we’ll be looking at potentially increasing our buy target from 40 at that time. In the meantime, we advise holding both the BEPC received and the BEP already held.
2:04
Hi Roger: On tomorrow's chat please explain what the BEP to BEPC conversion on July 30 means and whether we should just accept the BEPC shares or convert back to BEP. Thanks.--Ken V.
 
Hi Ken. I hope my previous answer adequately addresses any questions and concerns you have about Brookfield’s stock split and the nature of the BEPC shares you should have now received.
 
Our advice is to hold both for now. But as for which is better to own longer-term, that really depends on the tax circumstances of the individual investor. The partnership units do have tax advantages that the C-Corp shares won’t, and these could become greater for high bracket investors if there are changes in the tax code in coming years. But they also have more complications when it comes to filing taxes, while C-Corp shares will do a straight 1099 for dividends.
As we’ve said before, we still believe the advantages of MLPs more than outweigh the complications of owning them. What Brookfield has done, however, is give investors a choice of what kind of shares they want to own. And by structuring this change as a choice rather than a forced conversion as some MLPs have, they’ve made it relatively painless for their current investors as well.
 
That’s a pretty stark contrast to what happened to CNX Midstream Partners LP (NYSE: CNXM) this week. Parent and general partner CNX Resources Corp (NYSE: CNX) announced it will swap 0.88 of its shares for each of the 42.1 million units of the partnership it doesn’t own. That will effectively eliminate the partnership’s distribution, since the oil and gas producer currently has no payout.
 
The value of the offer is roughly 50 percent below where Midstream began the year. And there’s still likely to be a tax hit for some.
2:09
Q. What midstream pipeline companies will benefit most if the Dakota Access Pipeline is permanently shut down? Thanks.--Jack A.
 
A. First off, permanent shutdown for DAPL is still not the most likely outcome. The federal Appellate court judges for the D.C. Circuit Court did issue an administrative stay of the Circuit judges order for a shutdown in 30 days. They could still remove it. But the longer they don’t, the more likely it is they’ll allow the pipeline to remain open while the case goes to court.
 
If that is what they decide, it’s then likely to be well into next year until they make a final decision on whether to overturn or uphold the Circuit Court’s opinion. And DAPL would continue to run in the meantime.
If after hearing the case, the Appellate Court upholds the Circuit Court decision and orders DAPL closed, Energy Transfer LP (NYSE: ET) and the other partners would be able to appeal to the U.S. Supreme Court, which could also stay the decision and ultimately overrule it. That in turn would likely take another year, during which DAPL could conceivably continue to run as well.
 
There’s also the option of DAPL owners pursuing another U.S. Army Corps of Engineers environmental review, for purposes of issuing another permit that complies with the District Court judge’s order. I would consider this unlikely to happen unless the Appellate Court ends its stay and forces the pipeline to actually close. This raises the risk that a new president could raise the bar on what’s required.
Yet even if this did happen, I would rate DAPL’s odds of ultimately reopening as strong, given the makeup of the Appellate Court and the US Supreme Court. And given how almost all oil and especially natural gas pipelines were approved during the Obama Administration, it’s dangerous to assume too much about what a prospective Biden Administration would require for a pipeline that after all has been open for three years with a solid safety record. And let’s not forget that DAPL is crossing lands already well travelled by pipelines of all sorts.
 
Anyway, your question is who would benefit from a permanent closing of DAPL. And there are several systems that would see obvious demand for capacity. ONEOK Inc (NYSE: OKE) today for example stated it has available infrastructure it could repurpose for a Bakken pipeline.
Kinder Morgan’s (NYSE: KMI) Hiland system would likely see immediate interest. It’s also likely we’d see more action in oil by rail, which has taken a hit recently as a more expensive way to ship in an environment of slowing output.
 
Depending on how developments shake out in the DAPL case, this is an area we’ll be looking more closely going forward. But the important lesson from this is that diversified midstream companies with strong balance sheets offer the best way to play both offense and defense in a tough legal environment for owners and developers of energy pipelines. They have the strength to weather a regulatory/legal setback and the assets that can take advantage when capacity tightens.
martyr
2:14
Great job guys. Could you take a dive look into MNRL and give me your thoughts of it as a growth stock and an income stock. Thank you.
AvatarElliott Gue
2:14
Thanks for the question. Yes, I did take a look at it. For those unfamiliar, MNRL is basically in the business of buying royalty and mineral rights in oil and gas-producing acreage in the US. The beauty of this model relative to being a producer is that these companies don't have to deal with the cost side of the equation, they just collect a fee based, in part, on the value of oil/gas produced on their properties. I like their focus on liquids (over gas) and on the Permian (DE and Midland). With these royalty companies, however, a lot of their long-term success (or lack thereof) is going to be based on management's ability to identify regions of the US where drilling activity will pick up (including acreage within a big play like the Permian). I just don't know enough about the management team at MNRL to evaluate that. In the near-term, the other problems are, of course, major cutbacks in drilling activity and commodity prices  vis a vis where they were at the beginning of the year. That will impact royalty
Jack A
2:14
The earnings report from EPD just came out this morning, and they reported a revenue decrease year over year of 30%................ Does that concern you?..............
Thanks
AvatarRoger Conrad
2:14
No because the revenue line for Enterprise basically passes through the cost of energy they ship--which for the most part has no impact on gross margins--which is the major component of EBITDA along with operating costs. Energy prices (oil, gas, NGLs) fell from a year ago, so revenue did as well.

EBITDA and DCF did decline for Enterprise in Q2, as did throughputs for most operations with the exception of NGLs. And we'll be reviewing these numbers in the next EIA issue, which you'll be receiving in the next few days. But in Enterprise' case, there was still plenty of cash flow to cover the payout and the bulk of CAPEX, and that will be even moreso in the second half of the year. Bottom line: Enterprise is navigating this environment successfully and the dividend is safe. I see it's even getting some positive action in the market today, which I assure you it would not if revenue were a significant metric for performance.
AvatarElliott Gue
2:16
MNRL (cont.) that underpin those generous distributions. SO, I think in the near term, MNRL is going to follow the prospects for a US drilling activity resurgence and commodity pricing. So, in the near-term I'd continue to favor the large cap, established producers for growth and some of the midstreams for yield. Maybe as we see demand continue to stabilize, I'd turn to some of the royalty names like MNRL a little later on this year.
billfish
2:21
The last issue of EIA noted that Baaken fundamentals had improved for CEQP and the recommendation on that MLP is still a hold in the Model Portfolio, given the potential for a possible cut in distributions. CEQP’s preferred is non-callable and cumulative, so with its senior position, is it not a decent buy at these yields?

Thanks
AvatarRoger Conrad
2:21
I generally go by the rule never to buy fixed income of any company I wouldn't want to own common shares of. There are just too many cases of dividend cuts leading to more dividend cuts and eventually preferreds get pulled down as well. But while I wouldn't say Crestwood preferreds are really any safer than the common stock, we're also encouraged enough by what we're seeing in the Bakken--Hess Midstream for example had great earnings today--to be happy holding CEQP common and very likely will boost it back to a buy rating once we see Q2 results on August 4. And it is noteworthy they declared another dividend of 62.5 cents per share on July 16. So is today's boost in the shares, which I believe is at least partly due to Hess Midstream's rather solid numbers and parent Hess' increase in expected Bakken output this year.
AvatarRoger Conrad
2:21
Bottom line, we prefer CEQP but the preferreds are looking safer now as well.
Jack A
2:27
Also, I bought Valero and am down about 15%........... What do you see in the future for refiners?  Also, if Biden gets elected, what do you see in the future for pipelines.......... His goal is to take us off fossil fuels in 15 years............ Is this realistic??
AvatarElliott Gue
2:27
All of the energy names are down a bit since early June and I think the main driver of that is the rotation back out of value stocks and into more growth names. That, in turn, is levered to concerns about a "second wave" of virus infections this summer in States like Florida, Texas, Arizona and California and the consequent flattening we've seen in driving demand recovery over the past month or so. I continue to believe that's temporary; in fact, we're already seeing a peak and decline in the so-called "second wave" in some of those States. Ultimately, I think we'll see that rotation back into more cyclical value shares and VLO will be a prime beneficiary. Refiners will be among the first energy stocks to benefit from rising energy demand. As for Biden, I just don't think getting the US off fossil fuels is realistic over any meaningful time frame, especially with the economy in recession.
fbooth@roadrunner.com
2:27
You have given a restrained recommendation to KYN.  What about KMF?  Thanx
AvatarRoger Conrad
2:27
I think there is a play here on the big discounts to NAV these closed end funds have. In a best case, they'll close at the same time the value of the holdings rises and you'll get a leveraged gain. On the other hand, both of these Kayne Anderson funds use a lot of debt leverage--which as we saw with the wipeout this spring means they're vulnerable to a sudden drop in asset values that requires them to sell assets/use cash to cut debt to stay in compliance with lending covenants. They're not unique in that but it does make them much higher risk than say buying individual midstream companies. I do like the portfolio of KMF as I do KYN, based on the most recent snapshots provided by management. But I think it would be a mistake to consider these funds safer than a balanced portfolio of individual stocks. The example of this year shows thats not the case.
David O
2:33
Gentlemen,

Have faithfully deployed your advice...the bulk of my income for retirement comes from EIA portfolios. I need to diversify, but just can’t pull the trigger on REITS. Do utilities fundamentally provide diversification from our mid streams? NEE does not provide a living wage. Would you recommend telecoms...VZ, BCE, TU?
AvatarRoger Conrad
2:33
Those three are of course telecoms. And that industry has proven to be somewhat more affected by Covid-19 related pressures than for example regulated utilities, including NextEra Energy, which gets about a third of earnings from contracted wind and solar energy and natural gas pipelines. The primary exposure has been from unpaid bills at the core communications businesses, reduced advertising revenue and impaired selling channels, as foot traffic to designated stores has declined.

That said, Verizon's earnings were solid at their core, as it defended market share and continued to expand its 5-G efforts--which as it turned out are taking longer to roll out than T-Mobile's but will eventually be the only national network that actually delivers 5-G's promised benefits. And at the same time, free cash flow was strong enough to cover dividends by a wide margin to keep debt reduction targets on track.

BCE and Telus are priced in and pay dividends in Canadian dollars, so there is a currency angle with them.
AvatarRoger Conrad
2:35
To continue with the telecoms answer, neither BCE or Telus have reported Q2 results but will do so in early August. I do recommend both in EIA's sister advisory Conrad's Utility Investor. And I think telecoms are still a safe way to diversify from energy/midstreams etc--especially at their very low valuations now. Even Verizon trades for less than 12X expected 2020 earnings.
Michael L.
2:44
Oneok: Just listened to part of the conference call. Numbers weren't great , but guidance seemed okay. During the call they stated that they could pay the current distribution in '21 even if DAPL remained shut down. Did either of you see or hear anything that would give you pause, and do you plan to stick with Oneok?

 Also, HESM numbers were positive, but noticed they are relying more than ever on the parent.
How do you guys feel about Hess midstream now?

 Thanks for all the great work.
AvatarRoger Conrad
2:44
First, I will say we're going to have a detailed discussion of both of these companies in upcoming EIA issue. But in the meantime, I think the Q2 numbers and guidance demonstrate both Hess Midstream and ONEOK are still successfully navigating this very tough environment--and that's really what we were asking of them to show at a time when we had every expectation the actual Q2 numbers were going to be weak.

What Hess reported obviously looked better--and the continuing dividend increases and guidance boost are unique in this business right now. You're absolutely right that staying that way depends on Hess Corp staying healthy and paying on its MVCs. But from what I saw at the parent, that's not really in question at this time. In fact, there's every expectation volumes are going to continue increasing from its Bakken properties.

I think HESM is pretty good value at a high teens price--also not an MLP, which is attractive to some. Neither is ONEOK. I thought that company did give some pretty good color on
AvatarRoger Conrad
2:49
Continuing with ONEOK, I though they gave great color on their Bakken operations during the earnings call, which is of course what they had to do. I think they also set a pretty good baseline for what's needed to keep paying the current level of dividend--mainly generating enough excess cash flow to continue deleveraging efforts. And they pointed out some green shoots that should help earnings in the second half of 2020--which is what's important to the dividend going forward. I also think the company could well wind up a beneficiary if DAPL is shut permanently. So while there's no doubt of some dividend risk here, there's more reason to think they hold the dividend as they did in 2015-16 and eventually return to a higher share price. We plan to keep holding.
harry
2:56
thinking of swapping enbl for fei
AvatarRoger Conrad
2:56
Hi Harry. All of the reservations I expressed about the closed end Kayne Anderson funds would apply to First Trust MLP and Energy Income Fund. They employ a great deal of debt leverage (24.65% of assets), which leaves them exposed to another big drop in asset values. That's why they cut the monthly payout in half this spring. I think the portfolio is generally solid based on the last snap shot they've made available to the public. But the debt really does make this a much higher risk proposition than just owning a portfolio of individual MLPs.

As for Enable, they report Q2 results and issue guidance on August 5. The current yield would seem to indicate some dividend risk, despite the 50% cut earlier this year. And there's still the overhanging ownership question, with Elliott Management pushing for a sale of Centerpoint Energy's stake. I expect we'll hear more about that in the earnings call. But I also think there's a very good chance results and guidance may surprise to the upside with Anadarko Basin
Hans
2:58
Any update on CPLP since you have it a hold.
AvatarElliott Gue
2:58
CPLP is a decent company in a terrible neighborhood. Demand for tankers is going to depend on demand for oil and refined products and right now we're still trending down on a year-over-year basis though we've probably passed the trough. Our ooutlook calls for demand to gradually recovery into 2021 but until that happens we just don't want to recommend any of the tankers in the model portfolio.
AvatarRoger Conrad
2:58
Continuing with Enable, with Anadarko Basin activity apparently picking up some steam. And a sale of these assets would almost certainly be a good thing for Enable--especially if it involves combining the system with a larger company. The balance is also still investment grade as well, which may be an attraction. It's a higher risk bet but ironically not much riskier than FEI or other closed-end funds. And unlike with those CEFs, we know exactly what we own.
harry
3:04
is pagp a buy
AvatarRoger Conrad
3:04
Yes we continue to recommend Plains GP Holdings, actually up to a much higher level. The primary asset is of course 34.11% of Plains All American Pipeline, which will announce earnings and guidance on August 4. The company took a hit on lower volumes this spring, and at its marketing division as well. With Permian Basin activity apparently rebounding the past few months, there's good reason to expect better than feared results in Q2 as well as more upbeat guidance for Plains--and that should be good news for both PAA and PAGP. In the meantime, the post-cut distribution should continue to be very well covered with cash flow,
Hans
3:09
WES and WPX still have both in my portfolio by selling them I would have a big loss, should I hold on + wait for better times to come  Thanks
AvatarElliott Gue
3:09
WPX is a solid producer and I think they've got a strong management team there. They also have a good hedge book for 2020 at close to 90% of 2020 exposure hedged though that drops sharply into 2021.  Finally, a decent balance sheet with net debt to EBITDA   ratio in the 2.9 times region. In short, they're one of the better smaller producers out there. At this time we still favor the larger "best of breed" upstream names like CXO but as the uptrend in oil matures a bit, I'll probably start looking more closely at high quality second-tier names like WPX.
DRG
3:14
Can you please explain your rationale for including a stock, ET to be specific, in the High Yield Energy Target list citing its strong and rising distribution coverage and progress in leverage reduction even though the stock has a dividend cut possibility high enough for you to include it simultaneously in your Endangered Dividend List. Aren’t you sending conflicting messages and confusing your readers unless I am missing something here.
AvatarRoger Conrad
3:14
First off, I don't think anyone would argue these are extraordinary times in the North American energy midstream business. And with the combination of Covid-19 fallout and Saudi overproduction driving down oil to negative levels this spring, there is a lot we haven't known about where dividend risk lies the past several months.

Energy Transfer management has consistently maintained that its distribution is well protected by cash flows from stable assets--and it once again put its money where it's mouth is by declaring the same 30.5 cents per quarterly dividend yesterday (July 28). What we won't know until they report Q2 results and update guidance on August 5 is how much of a strain that's putting on the balance sheet--and the company's ability to hold an investment grade credit rating, which right now is BBB- with a negative outlook from S&P. And until we do see those numbers, ET's dividend has to be considered endangered to some extent.
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