JotCast | Energy & Income Advisor Live Chat July 2020 | 7/29/2020

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Energy & Income Advisor Live Chat July 2020

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Roger Conrad

3:19

Continuing with Energy Transfer, so why recommend it if there's distribution risk? Two reasons: First, with a current yield of more than 18%, the current level of share price definitely reflects the possibility of a cut and then some. That's a very low bar to meet, which means limited downside risk even if there is a cut. And it's an easy bar to beat as well, which would be fuel for a rebound in the shares back to double digits. And second, this company has the key elements to be a midstream that matters in coming years--mainly a well diversified portfolio of well run assets that generate a lot of cash flow. A dividend cut wouldn't be great but neither would it be the kind of event that would derail an eventual recovery. Bottom line: We think there's a lot more potential reward from owning ET now than risk--so while it may not be appropriate for the most conservative investors, it definitely is for the more aggressive.

Steve

3:19

DKL increased dividend. Still endangered?

Elliott Gue

3:19

We still have DKL on our endangered dividends list and have it as a sell. They previously guided to 5% year-over-year distro growth this year and then reiterated that guidance when they reported back in May so the distro boost wasn't a surprise. Our issue is the intermediate to long-term sustainability. Coverage is getting pretty tight at 1.15 times and their parent is very shaky given their exposure to troubled inland refineries. We still think that's going to be an issue by next year.

mike c

3:23

Been with you guys for the last 20 years. You do a great job. DKL raised their dividend. Is it still a sell?

Roger Conrad

3:23

I don't really have anything to add to what Elliott said about Delek responding to an earlier question. We think you're far better off in the financially strong, diversified large midstream companies that matter.

Arnold S

3:30

Good afternoon... I just noticed that Rio Tinto just hit a new 52-week high. Any thoughts on metals and mining, and commodities in general besides oil? Thanks

Roger Conrad

3:30

We recently produced a report on metals investment for EIA's sister advisory service Deep Dive Investing, and we've been quite pleased with the results of the recommendations.

The big picture for most metals--including big ones like iron ore and copper--is demand is really only robust right now in one place, China. That's fortunate because that country now accounts for the bulk of demand anyway. But it is true that its pull is being more than offset by weakness elsewhere. And while that could change if the US passes a meaningful infrastructure spending bill, that means that in the meantime demand overall will be a negative for prices.

On the other hand, Covid-19 complications are creating enormous problems for certain producers, especially in South America. That means companies like Rio Tinto and BHP--which have by best practices kept employees healthy and facilities running--can sell all they want. We see more upside for these companies--and they do pay good dividends as well.

Elliott Gue

3:44

Yes, actually we cover some of these names in EIA's sister publication Deep Dive Investing. I'll let Roger answer re: the base metals miners. But, I also have been and continue to be bullish on the precious metals and related mining stocks. Lately, we've recommended Silver (via "SLV") as well as some of the gold producers. I believe we're still offering risk-free trial subscriptions to Deep Dive to Energy & Income Advisor members if you're interested in our recos beyond energy.

Charles E.

3:35

Roger: HESM not MLP as appears in your comment?

Roger Conrad

3:35

Yes, Hess Midstream is no longer an MLP. They converted to an Up-C corporation as part of a massive restructuring/merger/simplification deal with general partners Hess Corp and Global Infrastructure Partners in late 2019. That also involved buying in the rest of the operating company it did not own and adding water gathering assets, which dramatically increased the scale of the operation. The transaction was also done in such a way that did not sock unitholders with a big tax bill. It was definitely shareholder friendly.

Mack

3:43

MPLX and SHLX seem crazy undervalued with 15% payouts. But if the payout is safe, and cash flows are stable, etc., I could live with 15% for a while. What do you guys think?

Roger Conrad

3:43

As I said answering a question on Energy Transfer a bit earlier in the chat, first half 2020 has been an extraordinary time in the energy midstream business. And as a result, there's a lot we don't know about dividend risk of individual companies, especially those that have not as yet reported their Q2 results and updated guidance. For Shell Midstream Partners, that will be July 31, for MPLX August 3. MPLX did declare the same quarterly dividend of 68.75 cents per unit on July 28 and SHLX did the same on July 23--which is a very good sign they intend to keep paying them at that level. But again until we get more information, I don't think you can say their payouts are definitively "safe." That's especially true for Shell, whose management seemed to cast doubt on paying the current level indefinitely when it announced Q1 results.

That said, both MPLX and SHLX do operate high quality asset that generate steady cash flows. And both do have strong balance sheets--with MPLX actually drawing a BBB rating.

Roger Conrad

3:45

Continuing on MPLX and SHLX, I also think yields over 15% are definitely pricing in the potential for sizable cuts--which means limited downside risk if that's what happens--and considerable upside if they demonstrate the means to hold payouts at current levels while protecting balance sheets and growth potential. That's enough for us to continue recommending them in this environment.

Michael L

3:46

Just want to confirm that if any of these quarterly reports coming out in the next few weeks surprises (good or bad) to the extent that your advise changes, you will send out an alert. This is very important for my, and, I'm sure, other's peace of mind. Thanks again for all the good work throughout all your publications!

Elliott Gue

3:46

Absolutely we will. We will be covering earnings generally over the next few issues, including specific names and also any broader trends that emerge from listening to the calls and reading the releases, financials etc. However, if we have an imminent chance to our buy/sell/hold recommendation we would send that out as a flash alert.

Roger Conrad

3:47

I'll add that about half the Model Portfolio companies have now reported and we haven't seen anything to change our bullish views.

Lee

3:49

In an earlier question re WES and WPX Elliot responded to WPX, but not WES. I sold half my WES shares when you dropped it to a sell rating and have sold monthly covered calls On the balance. Assuming your recommendation is still sell WES

Elliott Gue

3:49

Sorry about that...some noise and commotion that distracted me just as I was typing my answer (believe it or not it turned out to be an iguana that was scratching and clawing, trying to climb through a window). Yes, WES is still a sell for now...we just would prefer to focus on the highest quality names until this rally broadens out a bit more.

Steve

3:52

What are the risks to the Preferred shares of DCP?

Roger Conrad

3:52

DCP Midstream is no longer rated investment grade. And with its exposure to natural gas liquids prices through weakened producers, the payout should not be considered 100% safe either, despite the 50% cut earlier this year. There are some big pluses here--scale of operations, support of parents Phillips 66 and Enbridge Inc, elimination of IDRs. And the cash situation has also been improved by cutting CAPEX and operating costs. The preferreds offer some added protection so far as dividends, since no common units can be paid on until its payout is current. But we really prefer common and preferred shares of the financially stronger and more diversified midstreams--and particularly those in our Portfolios and that we highlighted in the last issue of EIA.

Charles E.

3:55

Roger: Thanks, Roger. I guess it will be removed from the mlp list.

Roger Conrad

3:55

Actually, our coverage universe list is now "MLPs and Midstreams"--so we cover everything whether its organized as a corporation or as an MLP. Our Model Portfolio and High Yield Energy List have both as well. Our view is it's what's inside that makes an attractive investment--not the packaging. The good ones come in both MLPs and corporate structure, just like the bad and ugly do.

Jon B

4:05

Hi. What are your latest views on Altagas? After all the adjustments they have undergone, the company still really seems like a hodge podge of assets (Canadian midstream and 3 disjunct regulated utilities). What's the rationale for ownership today? Do you think they will eventually split these operations and would this be a catalyst? Also, what are the biggest risks in their midstream operations? Thanks!

Roger Conrad

4:05

I would disagree with the assessment of Altagas as a hodgepodge of assets. That was a fair criticism a couple of years ago surely. And there are some assets like the 10% of the Mountain Valley Pipeline--now 90% complete--that I think are good candidates for an eventual sale. But management making good progress with timely divestitures, such as the $47 million sale of an energy storage facility to Ormat announced in late June. And unlike when the WGL merger closed, the company is now a pretty tight collection of regulated utilities and contracted, fee-generating midstream assets, with the Prince Rupert propane export facility a bigger success than most expected.

I would also argue that actions taken by management to streamline the company have resulted in a far steadier share price performance this year than peers in the midstream and even the utility universe. And that's even factoring in volatility in the USD/CAD exchange rate.

Rationale for owning the stock now is a safe monthly yield close to 6%

Roger Conrad

4:06

Continuing with Altagas: And that management is getting close to being able to increase on a regular basis. Q2 earnings will be coming out tomorrow.

Dave

4:15

Have a 3-part question: 1) Your latest thoughts on ENB and 2) what’s the reason CVX is not on the EIA recommended list while it has been a long-standing buy in CUI 3) Thoughts on CVX after the recent announcment of its Noble acquistion.

Roger Conrad

4:15

I thought Enbridge's earnings announced today were very strong on balance. I was encouraged by the reaffirmation of 2020 guidance and solid performance of most operations and assets. The Line 3 project still faces some uncertainty but there are multiple avenues for this company to grow even without it going forward. Look for a full recap of results in the upcoming EIA issue. But the bottom line is it's a buy up to 32.

We have ExxonMobil in the EIA Portfolio. Chevron is tracked in our "E&P and Services" coverage universe and rated a buy up to 125. We like them both.

As we said in the July 20 Energy Commentary "Energy M&A Heats Up" as well as the July 22 issue of EIA, we view Chevron's Noble acquisition very favorably, both for CVX' earnings prospects and as a favorable portent for the industry as a whole. Mainly, a savvy player with very deep pockets is taking advantage of a low price to buy good assets cheap. That's typically what you see when the sector has hit bottom and is on the way back.

Michael L

4:16

Just a note to thank you both for the work and these chats- they are very timely and informative.

Roger Conrad

4:16

Thanks Michael. We appreciate it and as we've said before we get a lot out of the questions and feedback.

Lee

4:20

i’m long SCO and it does give me comfort as a hedge against falling crude prices. But, when to sell that position?
I still have shares of the ultra short utility SDP (?) which was a good idea at the time but has now become a big loss.

Elliott Gue

4:20

By way of background, we recommended selling half the position back in April and now hold one-half the original position as a hedge. We have turned increasingly more bullish on oil since demand has started to recover and we passed the risk of storage fill at key hubs like Cushing. I still think there's a chance you could see oil pull back towards the mid $30s, especially as peak summer travel season wanes. However, we are likely to recommend selling that hedge on a dip in oil as I believe it's increasingly likely we've seen the bottom for oil and a generational low in energy stocks.

Hans

4:23

VET still being a hold I think, any update on this

Roger Conrad

4:23

Yes. They did announce Q2 results this week. The numbers were weak but in no way unexpected, given the big drop in realized selling prices for oil and gas globally. Keep in mind this is a company that despite its modest size produces and sells in Europe and Australia/Asia as well as North America. That in the past has helped level out earnings volatility. But given this has been a global retreat for energy, that didn't happen this time around. And the result is despite a 3% boost in production, Q2 funds from operations fell by -52%--and that forced the company to at least temporarily eliminate the dividend and slash CAPEX to avoid rolling up debt.

The good news is they're still profitable even at these price levels. The assets are still solid. The cost structure is low and they have succeeded in holding absolute levels of debt roughly level. The top financial property is debt reduction as management has said, but the company does intend to reinstate a dividend when it reaches its goals.

Roger Conrad

4:26

Continuing on Vermilion, there's no maturing debt until 2024, which gives management time to pay it off provided it can continue to generate free cash flow. Doing that consistently will depend on what happens to energy prices, which means uncertainty. But I still think this will be a Canadian producer that will survive. And when it resumes paying a dividend, I'll likely upgrade it to a buy in our Canada Australia coverage universe.

Hans

4:32

What would it take for RDS.A to change from hold to buy, is it just the cut in dividends?

Roger Conrad

4:32

Basically, we believe ExxonMobil, Chevron and Total SA offer much better value in the super majors camp right now. The dividend cut at Royal Dutch has set a payout at a very conservative level, which is good for the still Aa2 credit rating. But it's become pretty clear that this company way overpaid for BG in the previous decade and is still suffering the consequences. Contrast that transaction with Chevron's purchase of Noble at a rock bottom price--which by the way also dramatically enhances its natural gas position with a leading stake in the Leviathan field off the Israeli coast. Chevron reports July 31 as does ExxonMobil. Total reports on July 30. All have a much clearer road to growth right now than Shell--and they yield more as well.

Jack A.

4:52

Unfortunately, I bought Cross America Partners slightly higher than your recommended price, and since then I'm holding it at a loss. What do you see going forward? Thanks.

Roger Conrad

4:52

They announce Q2 results on August 6. That will give us our first real window on whether our assumption is correct that increased driving by Americans is reviving cash flow for this fuels distributor/convenience store lessor. But the decision by management to retain the current dividend date with the payout declared July 23 is a good sign we can expect stable numbers.

There's also the possibility we'll hear something regarding Alimentation Couche-Tard's interest in Marathon Petroleum's Speedway unit, which could have acquisition implications for this MLP.

In any case, we believe Cross America Partners a solid risk/reward proposition for more aggressive investors--and as much as anything yielding more than 15% ever is, the payout looks set to hold.

harry

5:00

amp still a great buy

Roger Conrad

5:00

Do you mean Ameriprise Financial (NYSE: AMP), or are you referring to Antero Midstream (NYSE: AM), which was formerly Antero Midstream Partners?

If it's the latter, we'd be steering clear at this time. AM and its parent Antero Resources (NYSE: AR) announced earnings today that basically reinforced my concerns that a big distribution cut is coming. For AM, distribution coverage was again very thin at 1 times, which means CAPEX (cut 63% from a year ago) has to be covered with new debt. And that's even after a sizable share repurchase that should have increased coverage. The big challenge here is weak natural gas prices and despite close coordination between AM and AR, which is also heavily priced hedged--there just aren't enough costs to squeeze out to offset sub-$2 natural gas prices. I've been impressed with management's ability to weather the environment so far. But with the dominant midstreams so cheap now, why push your luck with the infinitely weaker Anteros?

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