JotCast | Energy & Income Advisor Live Chat October 2020

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Energy & Income Advisor Live Chat October 2020

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Roger Conrad

3:22

This is another Portfolio company that reported its Q3 after we were in the production process for Energy and Income Advisor. We are in process of assessing it. But I agree with you that the results were strong and really do back up what appears to be a commitment from management to hold the current rate. As was the case for ONEOK--which has also reported since EIA went into production--the key was revived drilling activity in the Bakken. We got an indication that would be bullish for midstream when Kinder reported about a week earlier. In CEQP's case, that good news seems to be paired with progress by management taking steps to permanently reduce costs and debt--thereby making the dividend less susceptible to future cyclical pressures. Same with ONEOK. In any case, look for an update on the companies that have reported since the EIA issue posted shortly--which quite possibly will include a bump back to buy for both CEQP and OKE.

Jim N

3:23

What is renewable Diesel? How does it differ from the diesel truckers have used for decades?

Elliott Gue

3:23

I am not sure what you're referring to though maybe it's biodiesel? Biodiesel is basically a fuel made from plant oils like, for example, palm oil. The problem with it is that it's expensive and relatively energy-intensive to manufacture.

EricF

3:29

Are there any lateral moves you would make with a big loss in OXY that would keep exposure to the company or similar in the industry? Maybe move that money into XOM or an ETF? Im just starting to plan for the end of the year, but I'm not afraid to keep holding OXY if you think thats best.

Roger Conrad

3:29

We still believe Occidental offers real value at this price. Q3 results are due out on November 9 and our view is we'll see some solid progress on the company's restructuring plans--i.e. debt and cost reduction--though tough year over year comparisons owing to weaker oil and gas prices. We think we'll see plenty of good reason to keep holding the stock. We're now getting into the time of year when investors sell stocks for tax losses. And given what's happened to energy stocks like OXY, this is a sector that's likely to see some selling on that basis. But we believe this is a cyclical sector that's at a bottom after having pretty much everything possible thrown at it. When things do turn, a lot of stocks are going to rise and very likely in a hurry--and our view now is that OXY will be right in there.

harry

3:35

you like enable up to 6 dollars but have it on the endangered divide list. which is a better buy emblazons or et?

Roger Conrad

3:35

Energy Transfer--which announces earnings Nov 4--was also on the Endangered Dividends List for a long time before it cut this week, even though we've rated the stock a buy for aggressive investors. The rationale for the advice was the likelihood of a cut was well reflected already in the unit price, which was at a cyclical low and set to go a lot higher over the next 12 months whether there was a cut or not. In Enable's case, the next dividend declaration and Q3 results are both due November 4. Shares are pricing in a dividend cut, which we see as a legitimate risk and have the company on the EDL as a result. But as with ET, we believe there's a lot of upside for the company the next 12 months, whether it cuts again or not. Bottom line is these are not conservative investments for income--they're cheap stocks that are a bet on an energy sector recovery we still see in the next 12 months.

Steve

3:44

DKL just increased distro. Still endangered?

Elliott Gue

3:44

Parent DK "saved" DKL temporarily by ending incentive distribution rights as part of a transaction agreed over the summer. However, given the narrowing inland crude oil discounts, the swoon in shares of parent DK and the less robust outlook for shale volume growth around DKL's core assets, I think it's s temporary reprieve at best.

Mark

3:47

Based on everything that you know right now what would be your projection ( with a probability of 65%) of the unit price by Q4 next year of the following EPD, KMI, MMP, ET, OXY , SLB, and XOM.

Roger Conrad

3:47

That's quite a question. I honestly think all of them could easily double by that time--OXY and SLB are actually pretty good candidates for eventually tripling. What has to happen is the underlying businesses of these companies must continue to adapt to this worst of all worlds energy market in the near term--those that have reported Q3 so far have provided abundant evidence that they're doing so. We expect the rest will, though again we're not taking anything for granted either.

The other thing that has to happen is a calming of investors fears that somehow Democrats are going to end use of fossil fuels in the next couple years. That could happen with election results next week. Or it could happen in a few months when a prospective Biden administration takes power and makes clear its moves on energy are going to be incremental ones that give the industry time to react. Either way it works, it's our expectation and why we're bullish.

Mack

3:55

The recent earnings report from HESM looked good. Payout increased 5% annual and sounds like they are promising another 5% for 2022. Coverage ratio 1.2x (or 1.3 in another part of their report.) Projecting year end leverage of 3x. I wish payout coverage was a little higher but at the same time companies usually don't raise payouts unless they are confident they won't have to cut them. Do you guys have any hesitation about recommending HESM? Thanks...

Roger Conrad

3:55

Hess is another one that's reported since the EIA issue went into production--and your question is yet another good reason why we'll be issuing an Alert/Update this week with highlights on those results--though most details will be in the next issue.

Regarding Hess Midstream, we've had a buy recommendation on the stock all year. And that's certainty not changing following these very strong results, which you've pointed out. And distribution coverage actually improved on a seasonal basis from 1.1x a year ago. No hesitation here.

Mack

4:00

Do you see any material risk difference between PAA/PAGP and HESM ?

Roger Conrad

4:00

Hess carries somewhat less risk, in large part because the capacity-based nature of its contracts with parent Hess Corp makes it less sensitive to volumes than Plains. Basically so long as Hess is in good shape--it is weathering weak oil and gas prices--it can pay Hess Midstream--and it's clearly incented to because it owns such a large piece of the partnership. Hess does not have a supply and logistics unit, such as the one Plains depends on. And Hess also has the advantage of having now reported quite resilient Q3 results--Plains won't until November 2. The offset is Plains probably has more upside to a cyclical recovery in the energy sector.

Mack

4:07

RDS raised its dividend today. Does this affect your view on SHLX ?

Roger Conrad

4:07

Not really. What I want to see for Shell Midstream Partners is finally some clarification from the general partner of what its long-term plan is for the MLP. Are they doing to support it by continuing to drop down assets and thereby allow the dividend to start growing again? Are they going to buy in the shares they don't now own? Just keep things as they are? Maybe we'll find out tomorrow when SHLX reports Q3 results. But until they finally do come to a decision, we'd rather own MLPs that either own their general partner (EPD) or are supported (HESM).

It's nice to see Royal Dutch the super major have the confidence to bump up its payout--however so slightly (half a cent per share) after cutting so deeply earlier this year. It's a likely sign they see things stabilizing, though here too I think there are more attractive super majors.

Jon B

4:22

Hi, can I have your thoughts on Altagas? Seems like exports are going great. But folks have alluded to operational issues at the utilities. Is this a problem? What trajectory do you see for the shares? Thanks.

Roger Conrad

4:22

I haven't had a real opportunity to look at Altagas' Q3 numbers since they came out today. But I don't see a lot to be worried about. They affirmed their 2020 earnings per share guidance, and swung to a gain in a seasonally weak quarter for their regulated natural gas business. EBITDA was up 23%, including 40% at utility operations excluding one-time impacts. The Ridley Island propane export terminal had record throughput, which it will continue to expand after winning a license to do so from Canadian regulators. The Mountain Valley Pipeline is delayed but still looks like a good bet to enter service early next year. There was a regulatory issue in Virginia that now appears behind the company. I'm not sure what "operating issues" there are at the utility or who's talking about them--they were not a subject asked about by analysts on the earnings call. The company does have some upside improving allowed returns at Washington Gas to the level of its units in Alaska and Michigan. And there's a question it might

Roger Conrad

4:23

Continuing on Altagas, that management might at some point spin out the US utilities from the gas midstream operation. But if that happens, it would be done in a way that's positive for shareholders. Bottom line, it's not something to worry about with this very solid name,

Jon B

4:31

Also, wondering about your thoughts on UGI (utility, but also energy co). SPH seemed to catch the imagination of day traders on speculation that outdoor dining could drive propane use. UGI should benefit as well, no? Do you see any other more durable catalysts for this company? Seems like valuation is reasonable for what should be a pretty steady business. Why is it trading so poorly?

Roger Conrad

4:31

I've been rating UGI a buy in EIA's sister advisory Conrad's Utility Investor for quite a while--on the basis of a low valuation as well as the solid fuels distribution franchise. The stock always trades on some seasonality, and I expect worries about a potentially warm winter and fall are weighing on it now. The same is true of propane distributors like Suburban Propane--with the key always the winter when the vast majority of demand occurs for heating. The idea that SPH may get a nice kick this year from outdoor dining is an interesting one and it would benefit UGI also. The company reports the seasonally weak Q4 (end Sept 30) on Nov 12. UGI will go on Nov 18. The most important thing for both will be cost controls and the impact of strategic expansion moves--since scale in fuels distribution increases ability to withstand weather-related volatility in demand. All things considered, I prefer diversified UGI at this time--but SPH is probably more interesting as a takeover target.

harry

4:32

exxon, total, and conoco. which is your Best Buy?

Elliott Gue

4:32

We currently recommend XOM in the actively managed portfolio. And, pending the CXO/COP merger, we'll have COP in the portfolio as well. I would say that XOm is probably the most controversial pick due to all the commentary out there about them "borrowing money" to pay their dividends but we see that as wrong-headed. They're borrowing money to invest in expansion that will add to free cash flow and dividend power later

BobD

4:48

Any current thoughts on PSXP? The shares have taken quite a beating over the last 90 days or so.

Roger Conrad

4:48

The big issue with Phillips 66 Partners is the Dakota Access Pipeline, which contributes about 20% of its annual EBITDA. That's a very steady source of income but it's also at risk of immediate shutdown if the lead developer Energy Transfer is ultimately unsuccessful in its appeal of a federal judge's ruling that invalidated a US government permit that allowed the pipeline to open two years ago. We'll likely get an update on that issue when PSXP announces Q3 earnings and updates guidance tomorrow--and another when Energy Transfer does November 4. And there's a risk the MLP will cut its distribution to hold in more cash on the risk DAPL is shut. Our view is that the current price reflects risk of a DAPL shutdown and distribution cut--it's still on the Endangered Dividends List. And we rate PSXP a buy for more aggressive investors on that basis.

Roger Conrad

4:51

Following up on that question a bit more, what happens here on the distribution is basically at the discretion of the general partner--a unit of Phillips 66 that owns 74.35%. Probably the biggest risk is that they try to buy the remaining 25.65% in, taking advantage of the lower price. That would be a premium for anyone buying in now, however.

BobD

4:57

Thanks for the update on PSXP, Do you have any insight into why NU (NewStar) has also been beaten down in the last 3 months.

Roger Conrad

4:57

Really what's happened to NuStar isn't much different than what's happened to other midstream MLPs as well as corporations like Kinder. Management's decision to maintain the quarterly dividend at 40 cents per unit this week is to me a vote of confidence that the underlying business is weathering the current environment--and I expect that to be reflected in Q3 results to be released November 5 as well. The company is very concentrated in the Permian Basin, which may have raised concerns with some investors given the publicized cases of producers trying to renegotiate contracts in the region. But I expect to see a generally stable results this time around as well as guidance. We're still staying with NS as a buy for more aggressive investors patient enough to play a sector rebound.

Jack A.

5:03

I see from one of your previous answers, that you're tending to recommend holding on to COP after it takes over CXO, is that correct? Thanks.

Roger Conrad

5:03

Yes, we believe the merger will prove to be shareholder friendly in the long term by creating a much stronger producer. As Elliott said, the premium isn't much to write home about, as is the case with other M&A we've seen as well. But in this case, not paying a big price likely means this deal pays off faster for the acquirer COP, which will benefit CXO shareholders since the currency is stock. That should also be true for the targets of the other deals announced.

Guest

5:38

Hello Roger/ Elliott, thanks for having your monthly chat. In Kinder Morgans Q3 conference call, Steve Kean CEO said this about natural gas. Can you please explain what is associated gas and dry gas in regards to this forward comments he made. Steve Kean: 'So supply is drifting down (natural gas) because of the associated gas plays and demand is going up. And of course, that's what we're beginning to see. I think the other phenomenon, though that has to be factored in there is that, I think that there is a bit of a lag in reflex time or response time here in terms of making the switch from associated gas to the dry gas plays and the people are getting their plans together'. Second, should we be looking at how we invest in natural gas on the areas of the country?

Elliott Gue

5:38

Sure. So, associated natural gas is natural gas that's produced alongside crude oil and/or other hydrocarbons. Quite commonly, in a field like the Permian you'll have an oil well that produces 60 or 70 percent crude oil, some volume of NGLs like ethane/propane/butane and then some natural gas on top. So, what he's talking about is the idea that with oil prices down, and drilling activity down in oil plays like the Permian, the supply of associated natural gas produced goes down. Dry gas simply refers to gas without other hydrocarbons like oil or NGLs like ethane
/propane and butane in it. I hope that helps.

Guest

6:04

In response to dry and associated gas. Elliott, if the overall production of oil begins to gradually reduce, at the same time demand for natural gas remains the same or increase, what will happen and at that time? Would it be wise to give more attention to the dry natural gas companies for investing? Confused by this, it is like looking into a crystal ball. Thank you.

Elliott Gue

6:04

The best way to think about it is this. In a healthy commodity market, demand, supply are adjusted by price. So, a rising price brings more supply and less demand. This is how the market balances or clears.

The natgas market has been broken. That's because the supply of associated gas -- gas produced alongside oil -- is driven by the price of oil, not gas. So, this is why the price of gas could be very depressed for years with little or no impact on gas supply.

The bull case for gas is that hte price of oil has collapsed and shale companies have gone ex-growth -- they're not planning to increase oil production meaningfully until we get back to $60+/bbl sustainably or higher.

This should mean lower associated gas volumes, lower gas supply and higher prices.

I see 2 main problems with the bull case, at least over the next 6 to 12 months. First, there's an economics term "ceteris paribus," which is Latin for "all else being unchanged." In this case, that doesn't hold -- natgas demand is being depressed..

Elliott Gue

6:05

...because the US economy is in recession or, at the least, not booming. This impacts demand, particularly industrial demand.

6:06

At the same time, we have near-record natural gas in storage and, unless there's a very, very cold winter and consequent surge in heating demand, I just don't see any decline in natgas associated volumes bringing down that excess storage by next spring when winter heating season ends.

ron

6:14

What is your outlook for MRO. Is it an acquirer or will it be bought out

Elliott Gue

6:14

Haven't really liked this name for a while now. I think, given their asset base, it's going to be tough for them to be competitive until oil is well up in the $40's.

Roger Conrad

6:40

Well that looks like all we have for this month in the queue, as well as from email received prior. Thanks again for participating everyone, and especially for being an Energy and Income Advisor member. We will have a link to the transcript of the Q&A shortly. If for some reason your question was not fully answered, please drop us a line at service@capitalisttimes.com.

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