JotCast | Energy & Income Advisor Live Chat November 2020

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Energy & Income Advisor Live Chat November 2020

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Roger Conrad

5:36

I think both of them will be survivors. Vermilion has a very low production cost and contracts that should ensure sufficient cash flows to defend the balance sheet and maintain CAPEX plans. I don't see a dividend restored until there's more of an energy price recovery--which means I see the producers in our model portfolio as far preferable. But the fact that we saw solid free cash flow after CAPEX in Q3 is a very good sign this producer has adapted to $40 oil and is leveraged to a recovery.

As for Western Midstream, I think the recovery in Permian drilling is a very good sign and it's starting to look more like the company will be able to defend this reduced dividend level next year. We also like Occidental's chances, which is a good sign for WES as it's a major customer. As with VET in the producer group, we prefer the midstreams in our Portfolio and the High Yield Energy List. But WES does also appear to have bottomed.

Guest

5:42

Gents, what are your thoughts on vnom, as well as bsm? Thanks!

Roger Conrad

5:42

I think Viper Energy Partners has a reasonably secure future as an affiliate of Diamondback Energy. The dividend is variable--which should also ensure longevity as they will never pay out more than they can afford. I like the $!00 mil share buyback, as that should also improve long-term leverage for VNOM. And I thought the company had solid Q3 results as well as guidance for Q4. It's not a secure income investment, as dividends will follow cash flow and ultimately oil prices. But after the pullback of the past year, we're again rating Viper a buy in our MLPs and Midstream coverage universe--which we track in a table on the EIA website.

We don't cover the unit trust Black Stone Minerals at this time--which also pays a variable dividend that will depend on third party production on its royalty lands as well as energy prices. We prefer VNOM of the two because of its Diamondback support, however.

Andrew

5:51

Happy Holidays to you both, and thank you as always for your chats. I look forward to them

I find it puzzling that EPD and MMP are still so far down, but DLK is basically back to where it early March. That makes no sense given the quality of EPD in particular. What will it take for EPD and MMP to get closer to their March level? On the plus side, I've been buying both monthly (and ET) and locking in 10% yields.

Thanks again for all you do for us!

Roger Conrad

5:51

Delek is very closely held with the general partner's stake now at 80%. There may be some speculation in the share price that the GP will go ahead and buy in the rest when the it deems the price is right. We would be very careful here, however. For one thing, the GP Delek US Holdings is getting pinched by difficult market conditions, suspending dividends and cutting its workforce by 8% earlier in November. The LP's distribution coverage is now very tight at 1.1 times and despite the continued increases it would not be able to sustain its payout if Delek US Holdings became unable to honor its contracts. This really does look like a situation where retail investors either don't understand the risks or are willing to ignore them because of the pace of dividend increases--you don't see that complacency among the 4 research houses covering the stock, who now universally rate it hold I think mostly because the GP has been cagey about its intentions for the 20% of DKL that's still publicly traded.

Roger Conrad

5:53

Adding onto that answer, it wouldn't be hard to see the GP pulling the rug out from under the MLP to get a better buying price--say by trying to reduce contract prices to force a dividend cut. The shares as you say have bounced back but that's another reason why we see a lot more risk than upside in DKL at this time.

5:58

As for why Enterprise and Magellan are still down and what could bring a recovery, we believe these are the kind of names that will attract money on the sidelines that's looking to re-enter energy--once the currently perceived political and macro economic risk diminishes. But in the meantime, they're demonstrating resilience with strong results--which ensures security of balance sheets and dividends, as well as long-term CAPEX plans while we wait. By the way, Enterprise is actually up about 90% from its March lows, including a gain of a bit less than 20% in November. Magellan is up about 40% from March and 20% in the past month--so there has been some recovery.

Hans

6:03

Is SHLX still good to hold on to. Thanks for all the good advice

Roger Conrad

6:03

Thank you for the complement. Our view is there are better buys in midstream than Shell Midstream and we in fact rate shares a sell at this time. The main reason is general partner Royal Dutch Shell still won't commit to any kind of long-term visibility for the distribution or whether it plans to eventually buy in the 31.49% of the MLP that's still publicly traded. The current yield looks attractive at nearly 18%. But there are other midstreams that also have attractive yields without the ownership and governance issues of SHLX. It's also true that Shell is potentially exposed to permitting issues in the Gulf of Mexico long-term--and while it has plenty of other places to invest, SHLX as a unit is wholly exposed. We'd look to the Portfolio midstreams as alternatives.

Hans

6:07

ENLC , what advice can you give me. Thanks

Roger Conrad

6:07

We rate the stock a hold at this time in our MLPs and Midstream coverage universe. The company's fortunes appear to be bottoming with drilling activity picking up in key areas like the Permian, which should limit further downside including the reduced dividend. But we prefer the midstreams in the Portfolio that have avoided dividend cuts this year and offer more upside to the recovery by virtue of stronger business models.

James

6:12

Gents, it seemed that you previously favored chevron over exxon. Did your preferences change with the big drop in exxon's share price? Thanks!

Roger Conrad

6:12

I don't know if I'd say our preferences or at least our view of these companies have changed. Our three favorite super oils are still ExxonMobil, Chevron and Total SA, as they've been over the past year. And we remain very bullish on all three as a conservative say to ride the energy recovery.

What I would say is that of those three, we believe XOM offers the most upside to the oil price recovery to $50 a barrel over the next year. That is in large part because of the decline in its share price, which does appear to be because of so many overblown doubts about its dividend. We also like its aggressive investment plan. But again, that's not taking anything away from Chevron or Total, which remain strong recommendations at this time.

6:21

Roger, going back to CEPQ preferred. Wouldn’t CEQP have to eliminate the dividend on the common before they could cut the preferred dividend and hence the preferred dividend is significantly more secure than the common.

Roger Conrad

6:21

It is true that Crestwood must pay 100% of the dividend due on its preferred stock before it can pay a penny of common stock dividends. This is also a cumulative preferred, so if the company ever did suspend preferred dividends it would theoretically have to make up all back payments in full before it could resume paying a common dividend.

But while that theoretically makes Crestwood preferred dividends safer than its common dividends, in practice the same factors that force companies to cut common dividends also undermine credit quality--and ability to maintain preferred stock dividends. That's the price of Crestwood's preferred dropped along with the price of its common this year, as risk to the common dividend rose--just as diminishing risk to the company the past month has pushed both common and preferred prices higher.

Roger Conrad

6:25

Don't get me wrong. Our view is that Crestwood has proven its resilience as a business this year--and as oil prices move higher that should bring back buyers to both the common and the preferred stock. But if there is a relapse and the common stock drops again, it's a serious mistake to assume the preferred would produce a favorable return--just because on paper its dividend would be cut only after the common dividend is. And just as important, the common has considerably more leverage to a recovery than the preferred. That's why in our view it's a much better choice if you're going to place a bet on Crestwood.

Hans

8:03

If it is not to late, any advice for WPX energy Thanks

Roger Conrad

8:03

Hey Hans. it's a name we've looked at in the past and while we haven't held it in the Portfolio for a while we do like the prospective merger with Devon Energy. Management says it expects to close that deal in January. The company did post positive free cash flow in Q3, which bodes well for the company post-merger. We're currently rating WPX a buy up to 7 on our E&P and Services coverage universe.

Hans

8:06

With all the need for Lithium to make batteries is a stock like LIACF a good investment for the future. Thanks

Roger Conrad

8:06

I think there's a high likelihood we'll be using lithium for batteries for some time--possibly a lot more of it if grid level energy storage is to take hold as well as electric vehicles. On the other hand, American Lithium Corp is the definition of a penny stock. There are no earnings and you know the old saying in the mining industry about a mine being a hole with a promoter at the bottom. End of the day I'd look for a more substantial mining company if you want to bet on resources, like for example BHP Group.

8:07

I'm amazed that your still answering questions, Thank you.

Roger Conrad

8:07

You're welcome. Thanks again for participating today.

8:12

What is your current evaluation of Enerplus and Peyto?

Roger Conrad

8:12

We cover them both in the Canada and Australia coverage universe, which is also tracked on the EIA website. At this time, Enerplus is a buy up to 3, while Peyto is a hold. Both have been successful driving down their costs to adapt to oil and gas prices that because of a lack of pipeline infrastructure are much lower than US benchmarks, which is how they've survived the current environment. Enerplus is actually a major player in the Bakken in the US as well as the Marcellus Shale in Appalachia, where it's focus on liquids rich natural gas. Again, it's not rocket science that the biggest headwind these companies face is weak oil and gas prices. They're a lock to survive in my view, even as many of their peers evaporate. But as cheap as they are, it's going to take some patience I believe to benefit from a recovery.

8:12

Thanks

Roger Conrad

8:12

Once again, you're very welcome.

Roger Conrad

8:34

Well that looks like all we have for today in the queue. Thanks again to everyone who participated. We really do appreciate your feedback, questions and comments.

8:35

As a reminder, we will be sending you a link to the complete transcript of the Q&A shortly after I sign off here. If for some reason your question was not fully addressed, please feel free to drop us a line at service@capitalisttimes.com

8:36

Have a great holiday season everyone!

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