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Energy & Income Advisor Live Chat May 2020
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AvatarRoger Conrad
2:01
Hello everyone. Welcome to this month's live chat for Energy and Income Advisor readers.
2:03
The ground rules as always are to type your question into the chat box and we will get to it as soon as we possibly can. We will say on the chat so long as there are unanswered questions in the queue, and from emails we've received prior to the chat. There is no audio. There will be a complete transcript of all of the Q&A shortly after the conclusion of the chat. We will email you a link and the transcript itself will be posted to the EIA site.
2:04
Per usual, we'll start with some answers to questions received via email before the chat.
Q. Hi Roger and Elliott: What is your current view and recommendation for Occidental Petroleum (NYSE: OXY)? I have buy < 45 a with a Dream Buy of 25-30. Thanks--Jerry F.
 
A. That’s still our advice Jerry. It is just one recommendation in our Model Portfolio, and we advise strongly that readers treat it as such and not overload. It’s also not nearly as high quality of a producer as Concho Resources (NYSE: CXO), for example, mainly because it has a weaker balance sheet.
The basis for our continuing recommendation is our belief that Occidental’s assets are among the most attractive in North America. And despite the company’s current struggles, we believe management will be successful over the next 18 to 24 months stabilizing profitability and reducing debt sufficiently, with a combination of free cash flow ($1.1 billion is approximate guidance for 2020) and asset sales. There’s also the possibility of a takeover, though the $45.3 billion in debt is likely to be a deterrent.
Q. Gentlemen. I’m retired and need income. I have a question concerning your investing philosophy. I have “high graded” my portfolio following your guidance. In the past, if a company cut their dividend, I jettisoned them overboard immediately.
 
I just did so with Royal Dutch Shell. They’ve disappointed me for the last time! Do I need to change that philosophy with the likes of my Enterprise Products Partners (NYSE: EPD), Magellan Midstream Partners (NYSE: MMP) Chevron (NYSE: CVX), ExxonMobil (NYSE: XOM), TC Energy (TSX: TRP, NYSE: TRP) and other names you consider high quality? 
2:05
While I don’t think they will cut, I need to prepare myself if things worsen. I am now in the “Alamo“...no retreating from here. Should they cut, I will just have to weather the storm from that position. Agree or do you have a fall back position? Thanks.--David O.
 
A. Being ready to “high grade” is still pretty critical in our view, with so many energy companies slashing dividends and others on track for bankruptcy filings this year. And we think it’s likely the pace of failures would actually pick up in coming months if the recent rally in oil prices falters from here. We also note that benchmark Henry Hub natural gas has enjoyed almost no bounce from the March low, with prices in Appalachia and Canada still less than $1.50 per thousand cubic foot.
That said, we’ve now seen Q1 results and guidance for the five companies you’ve named. And all of them have given every indication they’ll be able to maintain their current dominant industry positions, preserve balance sheet strength and pay out current dividend rates for this year and next—even if energy sector conditions remain as they are now.
 
We will of course continue to view them skeptically—meaning if they do in the future show real signs current guidance is coming unglued, we will recommend moving into something else. But to this point, each of them appears to be weathering both sharply lower oil and gas prices and the demand destruction caused by COVID-19 fallout. And we’ve seen that start to be reflected in recovering share prices as well.
Bottom line is all these companies really need to do this year to generate strong returns for shareholders from here is to continue to prove their resiliency. Note that the past couple EIA issues Portfolio discussion has highlights on the Q1 results and updated guidance.
2:06
Q. Can we expect to see regular updates to Dream Prices in Energy and Income Advisor?--Arthur H.
 
A. Yes. We are now publishing the Dream Buy list in the Portfolio discussion section of EIA issues. Two reminders: Dream Buy prices are not an attempt to pick a bottom in recommended stocks. They’re prices that would only be reached under extreme conditions, such as we’ve had in the energy sector several times this spring. The idea buying at these prices is that so long as underlying companies stay solid, the stocks should produce windfall gains from those entry points.
 
Second, some of the recommended stocks have rebounded well above Dream Buy levels but are still below our “Buy” prices—which are essentially the highest recommend entry points for stocks. We continue to recommend accumulating our Portfolio stocks when they trade below those levels.
2:15
Q. Can you comment on the recent Securities and Exchange Commission announcement that they are examining ratings criteria for ESG—Environmental, Social and Governance?--Bill F.
 
A. I would say two things. First, this review is long overdue, given the plethora of “systems” now rating companies, mutual funds, sectors and even countries supposedly based on ESG criteria—and the confusion I think it’s fair to say they’ve generated for investors.

ESG is popular and by some measures is even more so amid COVID-19 fallout. And issues like governance are important in whether companies are run for the benefit of investors, including in the energy business. But inconsistently applied, they can actually provide a misleading picture.
Second, per usual, the private sector is already ahead on this. Specifically, credit raters Fitch, S&P and Moody’s have already made ESG a part of their analysis. I was able to get an early, in depth look back in November at the Edison Electric Institute conference, specifically at electric utilities but also as it would affect other industries including energy.

Like every system, there are going to be some kinks to work out. But by and large, they’ve created another tool for risk analysis that I think will be valuable going forward.
Fred W.
2:21
Roger,
In your 5/22 update where you reaffirmed Oils Super Majors Business model, I believe you indicated that TOTAL, in particular, was increasing their renewable energy capability quite a bit.

I am considering adding TOT, XOM and CVX as important holdings to my Retirement Portfolio.

Would you recommend buying an equal amount ($ wise) of all 3 companies, or, purchasing a larger position in TOT than the other two due to TOTAL'S investments in renewable energy, especially with the November Elections on the Horizon and its unknown consequences and corresponding impact on oil? (ie,possibility of Dems winning vs Republicans)

Of course I wouldn’t go all in at once, I plan to spread my purchases out over time as you and Elliot have emphasized numerous times.

Thanks
AvatarRoger Conrad
2:21
I think splitting the difference is always a good choice when it comes to choosing between high quality companies in a sector. I do think having the LNG/electricity/utility unit was a huge benefit for Total SA in Q1 and is likely to be the rest of the year--it could also attract investor interest if there's a big change politically in the US, which polls seem to indicate is at least a serious possibility.

But while I don't know of any announced plans for CVX or XOM to follow Total into those businesses, the idea of having revenue that's both leveraged to the core upstream/downstream business and produces steadier cash flows is bound to have attracted their attention. And again the larger point is the super majors have the balance sheets to enter and dominate anything they need to be sustainable--as Total has proven.
Lee
2:21
I am over positioned in energy, mostly best in class midstream, but also CVX SLB VLO, et al. I have used SCO to mitigate possible collapse in crude. Your thoughts on unwinding that hedge, please. Many thanks from a long time happy subscriber.
AvatarElliott Gue
2:22
Thanks for the question. We still have a small hedge position (25 units) in the ProShares UltraShort Oil ETF (SCO) recommended in the model portfolio right now. We recommending taking significant profits on SCO back in April. Our view is that oil still faces some near-term headwinds that could bring about another sell-off into the mid $20's. That said, the good news is that the worst is likely behind us and the outlook is actually improving notably into year-end 2020 and early 2021. I like to look at some of the high frequency data such as trends in Apple Mobility map routing data and, of course, the weekly inventory report from Dept. of Energy. A clear picture is emerging where as State-level lock-downs are eased, we are seeing consumers get back out on the roads. Just look at US data from Memorial Day weekend -- US driving routing requests were actually up 25% from the baseline level (January 13, 2020). While that's still below normal for this holiday weekend, it's also a dramatic turnaround from DOWN 60+%
as recently as mid-April. Meanwhile, on the supply front, we’re seeing meaningful curtailments from OPEC AND US producers. Rystad shows Permian production down on the order of 850,000 bbl/day in June relative to March and down 500,000 bbl/day in Bakken for June relative to the peak late last year. Saudi has cut about 1 million more barrels per day from the global market than agreed. I think the biggest risks going forward remain a still-weak economy and, therefore, weak demand for, in particular, distillates like diesel and jet fuel. On the flip side, some of the declines in US production were likely emergency shut-ins due to extraordinarily low prices in April/May – according to Plains All American and other midstream, some of those wells are now being put back onstream as oil prices climb to the low $30’s per barrel. So, to answer your question, we’re likely to recommend selling the remainder of the SCO hedge if oil were to either break higher from its recent range or see a quick spike to the low to mid-$20
And, longer term, I think we’re seeing some encouraging recovery in demand coupled with much lower global supply – the nmagnitude of supply reductions is finally catching up to demand reductions and so the risk to oil prices – and the need for this SCO hedge – is starting to recede.
Mike C..
2:30
Good morning gentlemen – Thanks for being so solid, dependable, and indispensable in these surreal times!
 
I’m curious about your forecast for natural gas, and if you think we’ll see a turning of the bear this year, as with Elliott’s sense of a bottom to WTI.
 
And thanks for adding dream prices to EIA! It’s much appreciated.
 
Best,
Mike
AvatarElliott Gue
2:30
Thanks for the question and kind comments about the service. As I mentioned in response to an earlier question, I'm turning more bullish re: WTI and oil and I do think the headwinds continue to recede as supply cuts finally catch up to demand destruction. Another trend I see as very interesting is that while US driving demand is recovering nicely, we're still seeing dramatic reductions in demand for public transport in major US cities and cities around the world. Clearly, some consumers are worried about getting back on the Tube, etc and catching coronavirus -- they're actually showing a strong preference for driving private cars. So, that's a positive for gasoline demand this summer. As for natgas, however, I just don't see the same dynamics at play. Yes, Permian associated production will fall but there are still oceans of US gas that can be produced with prices in the $2 to $3 rnge profitably (including in the Marcellus). So, I think there remains a shot at gas getting back to $3 or so....
And you could see some spikes above that on weather news but I just don’t see a sustained bull market in US gas prices as I think you could see for oil into 2021.
John Ryburn
2:30
Your opinion of Western Midstream-WES
AvatarRoger Conrad
2:30
Western's fortunes are closely tied right now to those of its major customer, which is Occidental (60-65% of revenue). That's made life tough lately, particularly at the gathering and processing business--which is why WES cut its payout 50% last month. At this point, I think they've pretty much circled the wagons and with the 45% CAPEX cut they should be able to mostly avoid capital markets this year with no debt maturing until June 2021.

My concerns are that Occidental has stated it will reduce the ownership stake in WES it acquired with the former Anadarko to "less than 50%." It's now 54.54% but that's still a lot of shares that will come on the market at some point. And there's the concern that OXY will cut drilling further than expected, which will hit WES' EBITDA harder.

Bottom line is I think WES has probably stabilized its business for the year and it does have good assets. But I'd rather be in a midstream without that baggage.
John Ryburn
2:38
Is Energy Transfer-ET- as reasonable buy  near the current price levels?
AvatarRoger Conrad
2:38
I think so. In fact, we continue to rate it a buy up to 15 as a more aggressive midstream in our High Yield Energy List. The company has not been immune to what's happening in the shale sector and may have to cut CAPEX even further this year to avoid having to access capital markets. But the fact that it was able to issue 2020 EBITDA guidance this month when it announced Q1 is a good sign, and CEO Warren obviously wants to keep paying the dividend.

I think the most important takeaway from Q1 results and the updated guidance announced mid-month is this is a large and diversified company that's mostly focused on the strongest counterparties in North American energy. The 1.72X coverage ratio even after a negative inventory valuation provides a strong cash cushion--especially with the capital program winding down.

I think you have to be at least somewhat prepared for a lower distribution next year, if industry conditions weaken. But it's hard to say that's not priced in at a yield of 14.5%.
Arnold S
2:48
My question is about OMP - Oasis Midstream Partners LP.    Recently it was up 79% in a single day.  In your opinion, what could cause such a run-up? Is there possibly insider information that leaked out? I can't comprehend such moves. It has been a bit volatile since then, but what light could you shed on this company and the extreme price movements? Thank you.
AvatarRoger Conrad
2:48
When you get down to these levels, the percentage moves can get pretty crazy. The catalyst for Oasis Midstream Partners seems pretty clearly to be the decision to maintain the 54 cents per share distribution for at least the June payment. That very likely caught short sellers by surprise. But the bottom line is really nothing has changed here.

OMP is still dependent on its general partner and 45.24% owner Oasis Petroleum as its principal customer. And OAS management is warning it will trip a debt covenant by Q4. Bonds of March 2022 currently trade for less than 17 cents on the dollar and a yield to maturity of almost 154%. That's a pretty sure sign of a high expectation of bankruptcy.

Staying with OMP now basically amounts to a bet that OAS will honor its contracts in bankruptcy and that third party volumes on its Bighorn system in the Bakken will stay strong. Those are highly speculative assumptions--and there's also just $86 mil left on OMP's credit line maturing in Sept 2022.
AvatarRoger Conrad
2:51
Continuing on OMP--that means not much availability of outside capital, and not much margin for error. I think some dividend risk is reflected in the 24% yield. But I think it's more likely an OAS bankruptcy would force the distribution to be eliminated entirely--and it's hard to see OMP shares holding this price if that happens. In any case, with yields across the board this high in midstream, why take the kind of unique risks OMP has?
Clint W.
2:55
It is generally my understanding that Total S.A. dividends are subject to a 25% withholding that may be at least partially recouped for a US citizen through a foreign tax credit. I will research that further and get tax advice before proceeding. My question is not about the specifics of the tax issues. My question is whether the foreign tax issue significantly impacts your advice on how strongly you recommend Total S.A. as an investment. In other words, is your recommendation of Total S.A. conditioned based on an individual's tax situation or does the current tax rules not typically render the tax implications as a significant deterrent to investment for most individuals?
AvatarRoger Conrad
2:55
No. It's recommended for any tax situation or type of account. Even if you assume no recovery of foreign withholding tax--which you can recoup from a taxable account--you still have a yield of over 6.5% with Total--and that's after the pop in the share price the past few days.

That's not the highest yield in this sector by a long stretch. But it's still pretty attractive. And much of the return I expect with this stock the next few years will be in capital gains.
jmonday
2:57
I believe their will be a big down trend around August. The National debt is out of hand, just the interest alone is more than
AvatarElliott Gue
2:57
I think deficits remain a concern. it's something we've been tracking in EIA sister publication Deep Dive Investing lately but the projections show the US budget deficit at around $3.8 trillion in 2020 (18% of GDP) based on virus-related measures already passed and it could easily jump another $1 trillion or so if there's more fiscal stimulus as looks likely. By next year, that will push US total debt to GDp above 110%, which exceeds the 1946 (post WWII) debt-to-gdp level of 106% for the first time in modern history. Of course, the Fed is buying up a good chunk of that (Fed's balance sheet recently jumped above $7 trillion) and interest rates remain low. However, we generally agree that the market hasn't necessarily come to grips with the long-term ill effects of the deepest recession since at least the 1930's, soaring public debt...Instead right now market participants are focused on the glass-half-full outlook re: economic reopening.
Rk
3:05
i believe the market in general is extremely overvalued. Do you see a significant correction ahead  in the market as well as your recommendations.
AvatarElliott Gue
3:06
In EIA sister publication Deep Dive Investing, we've highlighted the risk of a new leg lower in the broader stock market at some point this year for a number of reasons. Simply put, the rally off the March lows appears driven by two main things 1. An unprecedented wave of fiscal/monetary stimulus and 2. optimism around economic re-opening. We aren't convinced the market has truly come to grips with the longer-term ill effects of the recession and Wall Street is projecting an overly optimistic outlook for a recovery in corporate earnings. So, our strategy in that service has been to hedge some of our exposure to the broader market and focus on sectors/assets classes that tend to perform well through a bear market in the S&P 500 (gold, investment grade corporate bonds are 2 examples).
However, we are also seeing a major valuation dislocation between a few very expensive growth stocks (AMZN, FB, etc.) on one hand and unusually cheap value/cyclical stocks (energy, financials etc) on the other…This is a trend that’s been underway for a number of years now and has gone parabolic this year similar to what happened 20 years ago in 2000. We think that we my be setting up for a breathtaking rotation back into more value-oriented groups. So, we think that depressed groups like energy/financials may have already seen the lows of this cycle.
Rk
3:12
I read Germany is making significant investment into hydrogen. The article said they are looking into building significant pipeline infrastructure to support this endeavor. Do you see this occurring in the U.S. anytime in the near future?
AvatarElliott Gue
3:12
No, I really don't see that happening in the US. If anything the recent decline in oil/gasoline/diesel coupled with the recession and consequent decline in new car sales is likely to slow any shift away from fossil fuels. In any event, even in countries like Germany hydrogen technology is likely some years away from commercial scale.
Arnold S
3:15
There has been some speculation recently that Russia may not continue to cut production for a whole lot longer.  They have clearly hurt the United States, Saudi Arabia and Canada enough. Could you speculate as to why they might increase production when it's hurting themselves along with everyone else?
AvatarElliott Gue
3:15
Russian oil companies have made significant investments in new fields in recent years and aren't very happy that they've been forced to refrain from starting up some of these new fields due to national energy policy. In addition, due to seasonal factors -- mainly in Siberia -- Russia can't produce and develop new fields when it wants to, it must account for the extreme weather conditions in the winter months. All that said, I'm not too worried about a surge in Russian oil output as, at the current quote, it just wouldn't be a profitable endeavor for them.
AvatarRoger Conrad
3:19
Q. Hi. I read one pundit who said Occidental Petroleum (NYSE: OXY) could not be profitable unless WTI was over $50 a barrel. And with loans coming due in 2021, he questioned the viability of the company. Could you comment? Thank you--Jack A.
 
A. I’m not certain where that number comes from—maybe a level of free cash flow needed to service maturing debt in 2021, which is quite substantial at $6.82 billion. Occidental projects around $1.1 billion in free cash flow for calendar 2020, or about $700 million after dividends at the new rate of 11 cents per quarter. That’s after expected CAPEX of $2.76 billion.
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