JotCast | Energy & Income Advisor Live Chat June 2020

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Energy & Income Advisor Live Chat June 2020

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Roger Conrad

3:06

Thanks for your question. First of all, this is not that unusual as a transaction type. In February 2015, Enterprise bought Oiltanking Partners in an all-stock deal. As a result, a German company Marquard & Bahls AG became a large shareholder and it now want to sell. This agreement is meant to structure an orderly sale of up to $500 mil, which is an amount equivalent to approximately 1.3% of Enterprise's current market capitalization. That percentage should also remain relatively fixed, since the entire transaction is in equity. Whatever the option chosen by the seller, the 1.3% should be too small a number to significantly impact EPD's share price and cost of capital.

As we noted in the current EIA issue, energy stocks in general hit a recovery high on June 8 and have trended lower since. Our view is this is a good time to be sure you're in best in class names and to sell basically everything else.

Lochula

3:13

What is your opinion on BSM? Thanks.

Elliott Gue

3:13

They're an oil and gas royalty company and in a normal oil price environment I think it's an interesting business model. However, with oil prices where they are, I think you're not going to see the level of leasing activity in major US shale basins you need to drive any upside in the quarterly payout and investor interest in the stock.

Quint

3:18

I’m still holding ATGFF with about 50% loss. Do you see potential for upward movement?
Thank you

Roger Conrad

3:18

As painful as it's been to date, Altagas' restructuring the past couple years--including the dividend cut last year--has definitely been the right move for management. The big reductions in debt, the startup and successful operation of the British Columbia propane export facility, cost cutting at the utility and shedding unregulated operations like energy marketing over the past year and a half have resulted in far more stable cash flow and a stronger balance sheet than before--and as a result Altagas has been able to weather the energy patch meltdown in good shape so far.

I think that will ultimately result in Altagas returning to much higher valuation and share price--though some will take a while to warm up to the stock because of the dividend cut announced in December 2018. It's a stock for patient investors, though it does pay a generous monthly dividend of 6% plus.

Peter W.

3:28

Your recent newsletter noted that AM’s nat gas hedges are rolling off later this year. Their website shows that they are 98% hedged in 2020 and 100% hedged in 2021. Their oil hedges are much lower. What are your thoughts about their distribution considering a corporate strategy for reducing debt or buying back their shares? Thx.

Roger Conrad

3:28

My expectation is we're still looking at a fairly substantial dividend cut for Antero Midstream given the financial pressures on their parent Antero Resources. They've also drawn $1.171 bil on their credit line that matures in October 2022, which I think they're going to prioritize reducing given their very high cost of debt capital. The next maturity is Sept 2024 bonds yielding 10.5% to maturity--not a particularly distressed level for this industry but still about twice the coupon rate.

As you've pointed out, the parent has hedged a lot of gas, which is basically how they've been able to avoid a bankruptcy filing to this point. But the rolling off oil hedges will hurt, as will the limited prospects for hedging future gas at anything close to the current book. They announced some creative financing June 15 with Sixth Street Partners that appears to sacrifice future cash flow in the form of a royalty agreement to cut debt. But borrowing is still about 6 times market cap.

Roger Conrad

3:28

It's hard to see how they don't have to cut costs a lot more and that Antero Midstream doesn't need to compensate by cutting the payout.

hermron

3:36

Thinking about buying ET. Before doing so I would appreciate your view on the stability of the dividend for ET. The dream price is at 8, so on that basis the shares should be a good buy, but if the dividend is in jeopardy it may not be such a dream price. Your helpful analysis would be appreciated.

Roger Conrad

3:36

Energy Transfer is a suitable buy at this price for more aggressive investors. The dividend is definitely at elevated risk and that's well reflected in the share price with a 17% plus yield. And the next big date will be July 23, when management declares the dividend for payment in August. That will be followed by Q2 earnings and the guidance call on or about August 7.

Management has maintained to date that its dividend is sustainable from "stable cash flows," and that the combination of winding up new projects producing contracted cash flows this year will produce free cash flow starting in 2021. That's positive, as is the company's ability so far to maintain an investment grade credit rating. Bonds of 2050 yield just 5.2% to maturity as well. But while that's encouraging enough for us to stay with ET, this is a company with many moving parts. And we will sell if we start not to like what we see going forward.

Roger Conrad

3:37

One more reason for aggressive investors to like ET--insiders have been heavy buyers when the shares have traded in single digits.

3:42

How about MRO & OXY and updates?

Elliott Gue

3:42

MRO is a name we'd steer clear of -- I just don't think they're going to be able to generate consistent free cash flow without a rally back into the $40s for WTI that sticks. Even then, I think they're going to need to cut CAPEX to the point that production will really roll over, which raises their breakeven cost further out. Our view is that the worst is over for OXY and we like the stock though it's a "battleground" company which means it's going to be a more volatile pick.

Bud

3:42

Your thoughts on ET.
Thanks

Roger Conrad

3:42

Hey Bud, hopefully that was enough for you in the previous answer on ET. We're still cautiously optimistic the very good pieces will continue to offset the less positive ones. One other point is the Federal Energy Regulatory Commission has issued a declaratory order for bankrupt Chesapeake Energy to honor its contract with ET--which is basically a capacity deal for 23% of the Tiger Pipeline. That will keep the cash coming in the near term at least. But even the bankruptcy court says otherwise and provokes a prolonged legal fight, ET can still support its balance sheet and dividend.

martyR

3:44

Hi What are your thoughts for MNRL for it's dividend safety [ continuing 1.48/share] now and future price and dividend growth when oil stabilizes?

Elliott Gue

3:44

Generally I like the royalty and mineral rights companies in a health oil price environment...They have exposure to expanded drilling activity without the operating risks upstream names have. I am a little worried about them in this environment of severely curtailed drilling activity and forced well shut ins...that said MNRL isn't a name I've followed closely so I'll take a deeper dive into the fundamentals of that one to give you a more specific answer.

martyR

3:48

What is happening with CEQP as it is on a bad slid?

Roger Conrad

3:48

Crestwood is exposed to the Chesapeake bankruptcy though its midstream infrastructure in the Powder River Basin, as well as the Stagecoach venture with Consolidated Edison. The Power River contract does not appear to be at risk. Chesapeake is apparently attempting to use Chapter 11 to exit Stagecoach and Crestwood/Consolidated Edison have petitioned FERC to require it to honor the contracts, as it did earlier for Energy Transfer's Tiger Pipeline.

The uncertainty about Chesapeake and its potential impact have weighed on Crestwood for some time. The important thing, though, is this is not a new story or a surprise as CHK has basically been on a long slide, arguably since ousting its founder well back in the previous decade. That's given Crestwood and others time to prepare. And in fact, management stated yesterday that it "does not anticipate any changes to its ability to achieve" its 2020 cash flow forecast provided on May 5.

Roger Conrad

3:50

In any case, Crestwood has been pricing in a big dividend cut for a while at a yield of 19% plus--which management has denied it intends. And with no maturing debt until 2023 it has that flexibility so long as cash is coming in. Earnings are due out July 30 and we'll get a better idea of where things are headed then. But for now, the risk/reward favors a hold for more aggressive investors.

Mack

3:55

In the latest EIA issue, you have NS in the High Yield list (11.42% payout with 2.8 coverage. Given that NS made a distro cut in the not too distant past, when is NS likely to grow the distrib again? I would think it would be a while. Thanks.

Roger Conrad

3:55

I agree management at NuStar will likely prioritize debt reduction and cash retention over dividend growth and possibly CAPEX for at least the next year. I think the current yield of 11% plus is probably a lot safer than investors are now giving it credit. And I think with storage operations offsetting some of the volume risks on the pipelines that Q2 results announced in early August will show resiliency that should surprise positively. Encouragingly, I notice that analysts tracking the stock according to Bloomberg Intelligence have been tilting considerably more bullish as by some indications Permian Basin volumes aren't falling as quickly as some forecast earlier. And insiders have also picked up their buying this year. That I think makes shares worth sticking with now for everyone but the very conservative.

Ron

4:11

What impact will the bankruptcy of CHK have on other nat gas producers such as AR. Antero seems to be having great progress with covering there debt in 2020 and 2021 as well as actually generating positive cash flow after repayment,

Roger Conrad

4:11

I don't think the act of Chesapeake filing Chapter 11 need have a significant impact on North America's natural gas supply glut. Not only has this company been pulling in its horns for a while. But the only way it can exit bankruptcy is with creditors' approval. That requires paying them with proceeds from producing and selling energy, with natural gas the primary product. If anything, not having to pay debt interest may actually incentivize the company to pump more.

Where the filing could have an impact on other cash strapped/high debt producers is from the market reaction. If Antero et al perceive this as a viable way to further align costs with the likelihood of a lower for longer natural gas prices, we may see more filings, at least of the structured variety. Antero Resources for example has $3.57 bil of debt versus just $683 mil of market cap. EQT has $5.46 bil and $3 bil in market cap. Oasis Petroleum has $2.9 bil debt and $243 mil market cap and so on.

Roger Conrad

4:12

In any case, we'd avoid all weaker producer names at this time, especially those focused on natural gas.

Mack

4:13

I submitted this question yesterday but here goes again in case it got lost.... I have 9 midstream holdings of smaller, medium and large sized positions. I want four of the large holdings to be 'tent poles' holding up the group. Right now I have three: EPD, MMP, KMI. For the fourth tent pole I'm considering HESM, MPLX and possibly WMB. Which of these three do you think has the safest payout, and, which has best outlook for price appreciation? Thanks.

Roger Conrad

4:13

I Mack. I hope I answered your question sufficiently from the email. I think it's a good strategy. BTW we also like Hess Midstream and MPLX, but your question seemed to be which was safest between them and Williams.

Ron

4:18

Is there any recent updates on oil demand. Is it recovering faster than first thought?

Elliott Gue

4:18

Generally, yes. I have been quite surprised at how quickly demand is bouncing back … In the US, for example, motor gasoline demand was at 8.61 million bbl/day last week, which is about 1 million bbl/day below average for this time of year. at the nadir in the spring, demand was more than 4 million bbl/day less than average.

Hans

4:25

CAPL : some reports talk about distribution cuts, any info. on that Thanks

Roger Conrad

4:25

There's a piece on Seeking Alpha forecasting a distribution cut at Cross America Partners for the following reasons: "Poor" distribution coverage. "already high" leverage that limits "ability to continue funding" dividends with new debt and "weak" liquidity. The thesis is the payout will be cut 50% and the author gives shares a "neutral" rating.

We would agree that any stock offering up a yield of more than 15% is telegraphing risk to the dividend, as well as pricing it in. And there are some important dates coming up for CAPL, starting with a dividend declaration in mid July and Q2 earnings in early August. That's why it's a high yield buy for more aggressive investors.

On the other hand, there's no maturing debt until April 2024. Insiders have been heavy buyers this year, led by 48.28% owner Joseph V Topper. Q1 results were definitely on the upswing and there's been a strong rebound in driving activity in the US, which means it's highly likely the favorable trends guided to in the Q1 call have continued.

Roger Conrad

4:30

I would also point out that CAPL is a downstream company, not a midstream. Its major CAPEX is for acquisitions, for which it can obviously control the pace to match resources. It's also pretty consistently generated free cash flow--with $56.2 mil over the last 12 months covering the vast majority of dividends. One could say the roughly $20 mil by which dividends plus all CAPEX exceeded operating cash flow constitutes money that must be raised from outside capital, but again that includes what's been spent on growth. Again, this one is for aggressive investors. But there's another side of the story and we see it differently from the Seeking Alpha author.

Hans

4:37

CEQP and ET with chk bankruptcy how will this affect ceqp and pipeline contract cancelations for ET

Roger Conrad

4:37

In Energy Transfer's case, FERC has already ruled Chesapeake can't stop paying for its 23% share of capacity on the Tiger Pipeline. As I said earlier in the chat, the bankruptcy court may rule otherwise, which would likely set up a prolonged battle in higher courts. But overall CHK is a relatively modest piece of ET's business. And FERC would be carrying the legal battle to defend its rights.

As I also answered earlier, Crestwood and its partner Consolidated Edison in the Stagecoach system have already petitioned FERC to assert their contract rights against CHK in bankruptcy. We expect them to grant that. But in any case, the Powder River assets don't appear affected. And because Chesapeake's slide into bankruptcy has taken place over many years, Crestwood is protected and diversified enough for management to say yesterday it doesn't expect any changes in ability to achieve its 2020 outlook.

Bottom line is we'll keep our eye on this. But so far, there are no real surprises to affect our views on CEQP/ET.

Eric

4:44

Why haven't you included MMP in your high yield list?

Roger Conrad

4:44

No particular reason. It is in the the model Portfolio and as I mentioned earlier in the chat, it's very much a best in class cornerstone recommendation. Encouragingly, as we mentioned in the current EIA issue up on the site now, Magellan CEO Michael Mears had some pretty encouraging things to say in mid-June at the J.P. Morgan Energy conference to the effect that Q2 had tracked with its guidance. The crude oil business, for example, is "performing exactly as we expected" as contracted volumes continued to flow with all shippers "performing as expected under contract" and export volumes actually ahead of Q1. He also noted improvement in blending operations, for which it expected zero margins back in May. And the company is hedging favorable fall margins, pointing to a better second half. He also pointed to improved refined products results, with gasoline better than expected and only limited exposure to jet fuel.

Bottom line is Magellan may deliver a positive surprise when it releases Q2 results in late July

Eric

4:54

Regarding the equity raise by OKE, did this ~7-8% share dilution lower the valuation for equity holders by that amount, or should the cash inflow offset the equity dilution? I'm interested not in what the market thinks short term, but what you two as experts think in terms of long term valuation of the equity portion of the company. Thanks!

Roger Conrad

4:54

I don't think there's any permanent damage done here to shareholder value by the equity raise, which at the end of the day shores up the balance sheet and boosts liquidity at a time when the business is facing a lot of uncertainty--mainly from where activity will ultimately go in the Bakken.

As I noted earlier in the chat, management made the decision to issue with the share price roughly 4 times its late March low but wound up getting a price a bit less than 3 times. Part of that was bad luck, as the announcement of the raise came out on a day when the S&P 500 dropped nearly 6%, its biggest one-day fall since March. Part of it was arguably sloppy execution by the investment banks running the sale. But in any case, while the price was less than optimal, it did provide needed cash in a tough year. And again, the key dates for OKE are when it declares dividends on July 22 and about a week later when it's expected to issue Q2 results and update guidance.

Mack

4:58

How likely is it that CHK's bankruptcy filing/proceedings will turn out to be really bad news for CEQP ? Thanks

Roger Conrad

4:58

Crestwood management basically affirmed its 2020 guidance yesterday and stated it did not expect anything from the Chesapeake situation to change that. I think we'll learn a lot more in late July/early August when they release Q2 numbers and update guidance, and possibly before that July 16 when they declare the dividend for August . But at this point, they've been anticipating a Chesapeake bankruptcy for quite a while--just as we have--and it appears they've prepared for it. So we're sticking with the stock as a hold for aggressive investors.

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