JotCast | July 2023 Capitalist Times Live Chat | 7/27/2023

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July 2023 Capitalist Times Live Chat

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Elliott Gue

5:09

I apologize as I appear to have answered that last question in the wrong order, posting the last part of my answer before the first part.

5:12

One last point on that question. The only thing I'd say is that as much as I like energy stocks, I believe in the discipline of not committing too much capital to any one sector. And, particularly too much to any one sub-sector within energy -- i.e. a mix of natgas names, oil names, majors, services pipelines/MLPs, refiners, etc makes more sense that 5 E&Ps with similar business models.

5:17

Question: Have a question from the e-mail Queue: Would you please review and assess earnings report by EQT. My Answer: EQT's production costs are some of the lowest (maybe the lowest) of any US gas producer, somewhere in the region of $2.35/mcfe including CAPEX. Gas prices were weak in Q2, but I think that's the nadir for gas and EQT's free cash flow. They're well placed to benefit from a normalizing gas market in 2024 and using conservative assumptions for gas prices, EQT could be a $70 stock at some point in 2024.

Victor

5:22

Hi Elliott, in a previous chat you indicated that you were considering MRO to be added to the portfolio.Can you comment on that? Thanks.

Elliott Gue

5:22

Yes, I covered MRO a bit in answering a prior question. I still do like the name, I just prefer HES, so I decided to add that to the portfolio first. I think the thing with MRO is that their African gas project is the most unique asset they have and the most likely catalyst for upside. I just don't think that's quite as compelling of a story as HES has.

Sohel

5:23

Hi Roger, Thanks for holding these chats - find them incredibly useful. I am thinking of adding to my ET position, currently, I have it at 1/2 the size of my EPD position. But somewhat holding back due to 1. recession possibility and 2. you have it tagged as aggressive. What are your thoughts? Thanks.

Roger Conrad

5:23

Hi Sohel. I think Energy Transfer has probably done enough at this point to be considered a relatively conservative investment, 9% plus yield notwithstanding. Q2 earnings are August 2, so it may make sense to wait until then to boost a position. But there's certainly every sign the company will post another quarter of free cash flow in excess of dividends, successful synergies with recently acquired Lotus Midstream and steady debt reduction. This company's challenge was never really revenue, which actually proved pretty resilient during the pandemic. Rather, it's been debt. And though it still has work to do--especially cutting into floating rate debt--I think ET should be fine in a recession.

Victor

5:27

When OXY acquired Anadarko I received shares of OXY.WS which I never sold. Over time OXY.WS when up more than 700%. However, it’s been moving sideways for a long time. What do you make out of this? Would you keep this position?

Elliott Gue

5:27

So, those are warrants -- basically they're call options on OXY with a strike price of about $22. So, with OXY near $62 they're worth around $40.

OXY shares have traded at around $62 since early 2022 -- they've really been in a range from $56 to $76 but the average has been in the $60s. So, the warrants, which have value based on the price of OXY, have also traded sideways.

Generally we prefer direct exposure to OXY rather than via the warrants but functionally the two positions are going to be closely correlated.

Sohel

5:29

Hi Roger, I've started a position in CHK since it seems to have corrected quite a bit and it's well below your buy under price. Took your advice and added 1/3 at 80 then another 1/3 at 72 ... trying to decide if I add the last 1/3 now or wait for recession drop?

Roger Conrad

5:29

We actually have a buy on Chesapeake at 115 or lower. The stock has come down this year with natural gas prices, which we think have found their bottom at this point--recession or no. Earnings are next week (Aug 1) and that may be worth waiting for. But in contrast to past downcycles--such as 2020--we think better run energy companies will actually prove pretty resilient to slower economic growth. They just aren't that exposed to a drop in demand and having to rely on internally generated funds for growth has made them less vulnerable to rising interest rates as well.

Roger Conrad

5:29

That includes Chesapeake--not the same company as it was a decade ago.

Sohel

5:30

Hi Roger, I currently have 2 Oil Majors XOM & TOT, 3 Pipelines EPD, KMI, ET, 1 refiner VLO and CHK in my oil portfolio. Do you think PXD is a good addition to round this off - at current prices?

Roger Conrad

5:30

That looks like a good compliment to the other names. And we very bullish on Pioneer, a buy at 230 or less.

James

5:31

When looking at cash alternatives for Creating Wealth, was SGOV considered along with BIL? SGOV has a lower expense ratio that resulted in a slightly higher interest rate. I read an article titled "SGOV vs. BIL: Which Treasury Bill ETF is Best for You?" which did a good comparison. Would like to get your thoughts.

Elliott Gue

5:31

I did look at SGOV. At the time I was evaluating the ETFs BIL had a slightly higher trailing return (I think SGOV does now) and BIL was the first/oldest and had the most trading volume. But I think these two ETFs are pretty similar -- my main goal in adding those to the portfolio was just to make sure readers didn't just let their cash sit in their accounts yielding nothing.

At the Orlando Money Show last year, I talked to a number of investors. It struck me that the last 10+ years of near-zero rates have lulled investors into thinking cash is basically just stored buying power but earns nothing. That's of course no longer the case.

Sohel

5:32

HI Elliot, If a recession is on the way and rates have peaked is it time to consider some longer duration assets like preferred stocks paying qualified dividends?

Elliott Gue

5:32

I have been considering some preferred exposure in CW. What gave me pause was that a lot of the preferred ETFs were heavy on the bank exposure and that worried me. I have been looking at some individual preferred names and it's something I'd consider for CW.

Arthur

5:36

Hi Elliot, Thoughts on TLTW? Still a fan? I am down close to 6%, but probably close to break even given the payout. Just thinking about adding a bit more.

Elliott Gue

5:36

Yes, in fact I recently added to the name in CW. It's all about the distros on this one -- year to date for example, the price is down, but it's up 8.13% including dividends. That's almost as much as the S&P 500 Equal Weight and with a fraction of the volatility.

Bill G.

5:36

Dear Roger: I am considering reducing my Utility issues due to the Federal Reserve holding on to higher rates for a longer time. I'm looking at FE and NFG and wondering what you think about each longer term? Keep both, Sell both, or if keeping just one - Which one has better prospects longer term?
Thank you

Roger Conrad

5:36

Hi Bill. There's actually no real correlation between utility/dividend stock performance and Federal Reserve tightening cycles/rising benchmark interest rates. In fact, utilities and dividend stocks have actually rallied longer and harder during tightening cycles than they have when the Fed has been cutting rates. That's because tightening cycles are linked to stronger economic growth, which in turn generally means higher earnings and faster dividend growth. You can check out my research in the June 6 Utility Roundup "Income Stocks and Interest Rates: Myth and Fact."

That said, National Fuel Gas is going to move with natural gas prices. I think we're at a bottom and that rising prices will be bullish. FirstEnergy meanwhile will report August 1 and the key to moving the stock is a return to dividend growth, which has been suspended since Q1 2020. I intend to stick with both stocks.

Mari

5:50

Hi Roger, TC energy came out with the news of splitting into two companies and then spinning off liquids pipelines business. What is your take on this decision - is it beneficial for shareholders? The stock hit 52-week low. Sell or hold? Thank you

Roger Conrad

5:50

Hi Mari. This was really earnings day with a lot to digest. But here's what we know about TC's restructuring news so far. First, it came out after the market had closed. And while the after market is generally a murky place to discern trends, the stock actually jumped a couple points since the news was announced around 5 pm. Second, this will be a tax-free spinoff that will need shareholder approval--but it's likely the sum of the parts for TRP is greater than the current share price, just as MDU's were in its spinoff of KNF earlier this summer. The oil pipelines are just 14% of earnings, and will likely be a takeover target as well. And management says the combined dividends of the two companies will continue to grow. Third, the big concern for TRP before reporting Q2 results--as I noted earlier in the chat--was progress on Coastal GasLink and management affirmed the project is on track 91% complete and on budget for startup by year end. And asset sales to pay for it are locked in.

Roger Conrad

5:51

Bottom line on TRP, these appear to be good moves by management--and a good reason to keep holding the stock particularly from this discounted price.

Victor

5:58

ENB has been on a downtrend for almost two years. Do you expect a reversal at some point? What's your opinion on this one?

Roger Conrad

5:58

Actually, I think it would be more accurate to say the stock has been more or less rangebound, really going back to the peak of the previous energy cycle in 2014-15. That's a huge outperformance of most of the midstream business: A positive 25% return since 9/30/2014 versus -12.3% for the Alerian includiing dividends. But in my view, investors do tend to treat it more like a utility stock. The yield is safe and growing, the balance sheet is secure (Baa1/stable outlook) and there's a clear path to modest cash flow growth with asset additions. I think that eventually takes ENB at lot higher in this energy upcycle and I think we'll see a new high north of 60 eventually. But remember that midstream is always the last energy sector to rally in upcycles. And ENB is also priced in Canadian dollars, a benefit in past cycles but not with the USD still strong.

Victor

6:00

WES has been trading in a tight range for a long time. Do you see it breaking out from this range at some point?

Roger Conrad

6:00

Western is pretty much Occidental Petroleum's midstream company, a legacy of the Anadarko acquisition. That means it has a steady business in a company with improving financials. But it's restrained growth as OXY has focused on debt reduction. I don't see a lot of risk at this stage of the cycle and the dividend was increased this month by a solid percentage. But there are other midstreams I'd rather own.

Dan

6:07

Hi Roger, With reference to MDU, it's current market cap is about $4.5 Billion, with the spin off/ out of construction services that could drop the remaining market cap of MDU down to say $2.5 billion. At that lower level market cap would/ could that trigger a takeover bid for this well run utility? Thanks for your thoughts.

Roger Conrad

6:07

Hi Dan. I think MDU as a pure utility would make an interesting takeover target. and we may not have that long to find out with management now pursuing tax-advantaged separation of the construction services business as it already has Knife River (NYSE: KNF) the former construction materials unit. Basically what you'll have is a company operating a series of small electric and gas utilities in favorable regulatory environments with above average customer growth (1-2%) and $2.5 bil in rate base investment opportunities the next 5 years. And as you've pointed out, the market cap is basically an inhale for a company like Berkshire, for example--though a better fit in my view would be Avista Corp (NYSE: AVA) which has a similar geography and business plan. Another good reason to stick with this solid name.

James

6:12

Some are saying that we are entering a golden age for fixed income investing after the 10+ years of near zero percent interest rate. Would you agree with this statement and how do treasury bills/notes, TIPS, I-Bonds, cash, and CDs do during high inflation periods like what some are anticipating in the years to come?

Roger Conrad

6:12

Hi James. I think bond yields are a great deal more attractive than they were say 18 months ago. But I'm not really an advocate of going that far out on the maturity spectrum now--really anything maturing in 5 years or more--for a couple reasons. First, the Fed is still pushing up rates, putting upward pressure on bond yields. Second, the longer it keeps tightening, the great the risk of recession, which means increased credit risk for pretty much everything other than Treasury securities and again upward pressure on yields. And finally, I'm not convinced anything the Fed has done addresses the root causes of inflation--mainly lack of investment in key areas particularly natural resources. In fact, it's likely worsened them, which means more upward pressure on rates when growth returns. I like what cash is yielding now and short term bonds of utilities are attractive. But other than that, we're still better off with stocks that can outgrow inflation when it does return.

Jerry

6:15

Any thoughts on PAA. Good dividend at 7% and priced well below your buy up to price. Thank you & Elliott for the monthly chats.

Roger Conrad

6:15

We like it Jerry. I think there's another big dividend increase ahead next year, as well as a bump up in credit ratings to BBB. Plains' cash flow is volume sensitive. But it's focused in the right places (Permian Basin especially). And I expect to see more progress on debt reduction when it announces Q2 results and updates guidance on August 4. We have a buy up to 26.50 on PAA as well as its general partner PAGP--two ways of playing the same stock. And we think both will go a lot higher than that by the end of this energy upcycle.

JT

6:19

I don't know if you got my earlier questions. Do you have any advice on the JNJ spinoff? And do you have a buy up to price for STAG?

Roger Conrad

6:19

Hi JT. I rate STAG a buy up to 35 in the REIT Sheet--it's a solid industrial property owner that just announced reasonable solid Q2 results, though cash available for distribution was flat. I prefer Prologis in the space, however. As for JNJ, I do own the stock. I don't track it in our advisory services and have recommended Abbvie and Merck instead in the pharma sector. My plan is to hold through the restructuring and make a decision on the component parts at that time.

DAS

6:23

Buy EPD and ET now or wait for a possible recession associated downdraft? Your educated guess.

Roger Conrad

6:23

I think they're both good buys now. It is possible a recession that really hit the whole stock market could take them each a few points lower temporarily--along with everything else. But despite solid performance off the lows of 2020 as noted in the most recent issue of Energy and Income Advisor, they're well off their highs of the previous cycle. Midstream always rallies last in energy upcycles. But we think both will make new highs this time around and then some--both are larger and stronger than they were in 2014. Also if there is a downdraft, their yields will reward your patience.

Janet

6:25

What are your thoughts about holding MB

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