JotCast | Energy & Income Advisor Live Chat November 2020

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Energy & Income Advisor Live Chat November 2020

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Joe Humphreys

2:41

Are you done? I’m not seeing anything

Roger Conrad

2:41

Just answered you Joe. Like I said, we're going to get to every question in the queue as soon as we can concisely and comprehensively. And we'll be sending out a link to the transcript shortly after we're done in case you need to leave before we do answer.

Marty R.

2:45

Based on the future direction of oil prices, is this a good time to add to XOM, ENBL, PBA KMI, or would waiting get us to significantly lower buy prices?

Elliott Gue

2:45

We're getting increasingly bullish on energy stocks into early 2021. One big change is that we've seen the oil futures curve flip from significant contango to flat/backwardated over just the past 3 to 4 weeks. This shift usually indicates that the supply demand balance is tightening and the market sees improved conditions ahead. When you couple that with the fact that it's a completely unloved and out of favor group and that many active managers are underweight, I see the potential for a multi-year upcycle for the group after years of underperformance. I'm not exaggerating when I say that if active fund managers just bring energy back to equal weight you could see the group double in value from recent lows. So, we believe it's a good time to buy any of our recommended names and we'll be looking to add to our exposure in upcoming issues.

Lee O.

2:46

not on subject but what are your thoughts on tesla being added to spy and also xly

Roger Conrad

2:46

Hi Lee. I would guess it makes everything more volatile. The ETF sponsors really didn't have much of a choice other than to add it, since this company now has a $550 billion market capitalization. But it's also trading with enterprise value of 121 times trailing 12 months EBITDA and 158 times expected next 12 months earnings with no consistent record of earnings growth--and it's up nearly 600% this year.

If nothing else its a good reason to check under the hood of any ETF you buy.

Elliott Gue

2:51

I would add that sometimes getting added to an index can be like ringing a bell at the top. Back in November 1999, for example, MSFT was added to the Dow and went on to lose more than 40% of its value over the ensuing 3-year period. Interestingly, after 92 years, the Dow Industrials replaced XOM with CRM this year.

Ben F.

2:53

Good morning.

Any thoughts on the PTR and CEO? They are getting hit due to the Trump blacklist. Seems overdone.

Cheers

Roger Conrad

2:53

Hi Ben. The hit to CNOOC's NYSE listed ADR today does look fairly overdone. The only way you could make the argument it's justified is if delisting it from the NYSE would cut off its access to capital, which clearly it would not. There's some disagreement right now as to how much of these end of term actions would actually get rolled back--since the one thing Democrats and Republicans in Washington seem to agree on now is getting "tough" on China. But my guess would be oil prices are going to be much more of a factor for shareholder returns on oil stocks--even Chinese listed companies--than politics.

My only reservation about buying either of these stocks is that there are so many cheap US listed ones that aren't subject to this kind of risk. That definitely includes ExxonMobil--which even after this big drop in CNOOC and PetroChina still outyields them handily, in CNOOc's case by about 2 to 1. Why not just buy ExxonMobil and avoid this kind of risk entirely?

Lee

3:02

This is not the proper venue for questions on non oil and gas commodities. But I am a CUI plus subscriber and know that BHP is in that portfolio. Would you offer your opinions on copper, gold, silver and if you think we’ve entered a long term commodity cycle.

Roger Conrad

3:02

That's OK Lee, we're here today to answer any questions you have--and certainly there were plenty of energy questions on the CUI chat earlier this month!

Anyway, the short answer to your question about BHP Group (NYSE: BHP) is yes. Their most important earners right now are iron ore and copper--where they're benefitting from the ability to keep producing full out (unmatched mine safety) and selling to their main market China. And it's clear how important they are by how they've managed to stay out of the ongoing squabbles on trade between Canberra and Beijing. I think a boost in infrastructure spending in the US could be another catalyst for both commodities, as well as nickel. And I think they've invested in oil at the right time as well. Gold and silver move to their own beat but producing them is also a plus. Overall, with the sectors' best protected dividend, balance sheet and scale, BHP is I think the most conservative bet on the commodity cycle.

3:11

Thoughts on CEQP preferred. 12% yield and 20% discount from par.

Roger Conrad

3:11

I think the preferred will benefit from all of same strengths that Crestwood common shares will. That is a business that's now adapted to $40 oil and equivalent natural gas prices for the long-term, but is also leveraged to the energy price recovery we expect to take oil to the $50 range next year.

What I would not say is that it has any special immunity if things go the other way--that is CEQP does wind up cutting its common distribution. The same weaknesses that would cause that action will also threaten the ability of the company to keep paying the preferred dividends--which is why its price is also discounted. I do think if Crestwood continues to weather this storm--much depends on Bakken activity--then the preferred will rebound to par and possibly go to a premium. On the other hand, if CEQP convinces enough investors it can maintain the payout, it's going to be a $30 stock next year. So if I had to pick, I would go with the common--similar risk but more upside

Mack

3:16

Re: ENLC... In the Oct 7th issue in the Endangered Divs, you had ENLC as a SELL. Then in the Oct 29 issue it was moved to HOLD. What happened that changed your opinion, and what is still needed for you to move it to BUY? Thanks.

Roger Conrad

3:16

Two things. First, they had a pretty decent Q3, including a volumes recovery in Oklahoma and the Permian Basin. That to me indicates they've adjusted to the current environment of low prices and reduced drilling activity--and that customers have also stabilized. Second, is that energy prices themselves have rebounded, which does not eliminate dividend risk but does reduce it. I don't think they're completely out of the woods, which is why there's a hold rec and why the stock is on the Endangered Dividends List. But if I see a couple more quarters of improvement, I'll likely take it off EDL and it could possibly be a buy again.

At this point, however, there are just too many other companies in the midstream business with less risk and at least as much upside. And that's where we want to focus our buying now.

Mack

3:22

Couple of questions: [1] I prefer PAA over PAGP for tax reasons. So could you give us a buy under price for PAA even if its just a one time thing. [2] Is CEQP still a HOLD or has it been moved to BUY? [3] Do you have any hesitation in buying a mid-sized position in HESM? For me, it's a 'supporting holding' but not as large as KMI, MMP, EPD, WMB. Thanks for your response.

Roger Conrad

3:22

We do track Plains All American (NYSE: PAA) in the MLPs and Midstreams coverage universe, which is one of the stock tables that's posted on the site and updated with each new issue of EIA. The current highest recommended entry point is 10. Crestwood as I believe I answered in a previous question is a buy up to 15.

We would have no hesitation about taking a position in Hess Midstream, which is both a Model Portfolio holding and in the High Yield Energy List. The transaction earlier this year that expanded its scale has been a huge plus, as is clear from the Q3 operating numbers and continuing dividend increases. Our buy up to point is 24.

Mark

3:30

Hi Roger It has been very interesting and encouraging to see the recovery in our model portfolio over the last few weeks and I would really like to get your thoughts on what we may see heading into year end in terms os

Roger Conrad

3:30

Mark, we think it's very early innings here for this rally. There's still an OPEC meeting to contend with, as well as economic concerns from this latest stage of the pandemic. And I think a lot of money is waiting on the sidelines to see what kind of energy policy emerges on the federal level starting next year. But our view is we've passed the inflection point for a shift in the cycle--and while progress almost certainly will be uneven (it always is at this stage), the bottom is in for the kind of best in class companies we've pushed the past few years and the returns we saw this month are just a taste of what's to come.

I think you can gather from answers to questions in these chats, as well as the focus of EIA issues, that our bullishness doesn't extend to everything. Not all of the now dividend-less midstreams and battered producers will go bankrupt, and not all Endangered Dividends List companies will cut. But there's still plenty of risk to focus only on the best in class, i.e. model portfolio stocks.

Janet

3:40

Recent news reported that Pembina Pipeline (PMB) has been downgraded .What are your thoughts on this, and do you recommend holding it?

Roger Conrad

3:40

I see downgrades from analysts at Wells Fargo and National Bank Financial for Pembina this month--basically from buy to hold. For the NB guy, it looks like part of a broadly more conservative posture toward Canadian infrastructure stocks, with 13 of 20 under coverage now effectively hold. For the Wells analyst, it's a more aggressive stance in midstream that also saw a cut to hold at TC Energy and Magellan Midstream.

In any case, it leaves 18 analysts rating buy on Pembina, versus 5 holds and no sells. That's not really anything I'd call alarming or really even noteworthy, other than it shows Wells does a good job publicizing its analysts' opinions.

As we noted in our earnings analysis in EIA. we'r encouraged by Pembina's solid Q3 results and guidance, including defense of the dividend and balance sheet and ability to execute new growth CAPEX. We also like the endorsement from management of steady insider buying. It's a buy up to 35 for those without a position.

Mark

3:47

in terms of a sustained recovery or a return to volatility and /or a possible weakening driven by tax loss harvesting. Several portfolio recommendations and positions are down 40%+ and I would like to tax loss some and potentially enter others. What do you think OXY , XOM, SLB and RDS will do over through year end. I have the same question re ET, EDP, KMI, and MMP. Just trying to get as much input as possible to help with Year End and the long term positioning moves I want to make. I Always want to fold in your thoughts. Thanks Roger

Roger Conrad

3:47

That's a very difficult question. As we've said here, we think the momentum has shifted in favor of energy stocks in terms of the long cycle. Prices for best in class companies like those you name have generally had a good November but are still well below where they began the year and valuations are still near historic lows. And underlying businesses have clearly demonstrated they're not only weathering this environment but have actually adjusted to $40 oil, even while retaining upside leverage to the recovery in oil prices we see to the $50 range next year. That's definitely the hallmark of a group we want to accumulate rather than pare back.

One strategy tax loss sellers could try is to simultaneously sell and then reinvest the funds in other energy stocks they either don't own or are under invested in. That way, one would retain the upside that we think we'll see by the end of the year. But in our view, all of the stocks you list have multiples more upside than downside at this time.

herm

4:09

With the pending merger of CXO due you have any interest in COP?

Elliott Gue

4:09

The simple answer is yes. We're going to cover it at more depth in an upcoming issue; however, our inclination is to hold CXO, accepting shares of COP when the acquisition is finalized.

COP is a conservative producer that's one of the least exposed to commodity price downside. That means that in a more bullish price environment for oil, you're likely to see less upside compared to another major name like XOM. That said, COP has a solid 4.32% yield and we believe it would participate in a broader energy stocks rally. That yield plus some capital gains upside is a pretty solid conservative value candidate in our view.

As we've written previously, we also see the CXO/COP merger as a solid deal. While some CXO holders were likely disappointed with the lack of immediate deal premium, we believe the payoff is that the combined company has lower costs and a lower oil price breakeven, which adds up to more cash flow, more dividends and more upside in the coming up-cycle.

jj.

4:11

Your updates in this Live Chat have put a smile on my face in that "a turn around for energy holdings" may be in the offing! Thanx for your continued insights & guidance.

Roger Conrad

4:11

And thank you for participating in the chat today!

Hans

4:30

Any advice on XLE and XOP

Roger Conrad

4:30

We'd consider them to be decent trading vehicles for the energy sector, and obviously we have a bullish view on that score. The major difference between them is XOP is the full S&P Oil & Gas Exploration and Production Index, which includes a large number of natural gas producers and is equally weighted. XLE is more focused on larger cap energy stocks, so there's less natural gas exposure.

As a substitute for buying individual energy stocks, we're not really keen on either. Yes, many of the holdings are also part of our model Portfolio and High Yield Energy List. But as with an sector index, you get the bad and ugly as well as the good. And as we've said here, our bullishness on the energy sector doesn't extend to every company. We'd rather focus on what we want to own--the best in class. And with so many large companies trading cheaply, there's not reason to dilute.

RBB

4:58

Generally speaking in terms of 'energy', do you anticipate there will be a battery company that will be of interest to invest in in the years ahead ? TIA . . . Hope your holiday season is a blessed one.

Roger Conrad

4:58

Same to you, thank you. Not surprisingly, battery development and manufacture is right now one of the most competitive businesses on the planet.

The biggest misconception is it's a technology business--where a winning player can establish an unassailable market position by developing a superior product. Rather, it's a perpetual race to the bottom, where the winners will be those who can push costs as low and efficiency levels as high as possible--or at least far enough to make possible a critical mass for adoption of electric vehicles and intermittent sources of renewable energy like wind and solar.

Winning that game means having scale to mass produce and deep pockets to adapt your production line. So not surprisingly, the leaders are all global giants, many of them Chinese. It's possible we'd recommend one of them at some point. But we see a lot more value in successful adopters--for who lower costs and greater efficiency mean higher earnings

Roger Conrad

5:01

One more point on that one. My best guess is the winning manufacturers from battery adoption for EVs etc will be those now dominating the market for batteries for cellphones, laptops and the like. They have the infrastructure to mass produce and R&D to keep making those cost savings innovations. It's going to be next to impossible for anyone to break into their market on the scale needed to really compete with them--though I suspect we

we'll see plenty of hype to the contrary from stock promoters and the like.

Michael L

5:05

I saw that OPEC couldn't reach a deal today among members. I know they meet tomorrow and think they need a deal before the OPEC+ meeting, but I'm concerned about the possibility of a very short term agreement ( months?) among OPEC. Are you guys concerned, any thoughts? Thanks for all the great work!

Elliott Gue

5:05

The consensus is looking for a 3 month extension, through the first quarter of 2021 and I think most members are aboard for that. And remember, the decision isn't whether to reverse ALL of the cuts they've done, it's really just to not phase out the cuts as quickly as they'd previously agreed. I still think they come to an agreement because I don't think OPEC wants to risk another plunge in oil like they saw in the spring when they balked over a deal. Regardless, what I think is most important is what the market is saying -- look at the shift in the oil price curve over the past month. A month ago, at the end of October, we were in steep contango and today the curve is flat. What that means is that the market was looking for continued glut a month ago and is now forecasting a balanced to tight market. Even with OPEC's usual meeting drama, that picture hasn't changed much over the past week.

Hans

5:06

What is your thought on EOG since you do not have it in the Managed Portfolio

Elliott Gue

5:06

Simply put, we like it. Their breakeven is around $36/bbl and it's one of a group of names we'll be looking at in the next issue.

Hans

5:06

I still have AMJ in my portfolio is it advisable to sell this and put the money in some of the Managed Portfolio stocks. Thanks!

Roger Conrad

5:06

Yes. For one thing, the JP Morgan Alerian Index ETN is based on the Alerian MLP Index and the sponsor of that index no longer publishes its holdings even to Bloomberg users. It's still a fair bet they're holding pretty much the biggest MLPs. But that kind of black box in a sector like North American midstream that has so many deadbeats isn't the kind of exposure any investor should take on. And the Portfolio stocks we have are the best of the best.

Hans

5:36

Is VET and WES still good to hold on to

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