You are viewing the chat in desktop mode. Click here to switch to mobile view.
X
Return toCapitalist Times
October 2023 Capitalist Times Live Chat
powered byJotCast
AvatarRoger Conrad
1:52
Greetings everyone, and welcome to the October live webchat for our Capitalist Times members. As always, there is no audio for this chat. Just type in your questions and we’ll get to them as soon as we can comprehensively and concisely. If you have to leave during the chat, remember we will be sending you a link to the transcript of the complete Q&A tomorrow morning, and it will also be posted to our websites. We will conclude the chat after we’ve answered all the queries in the queue, as well as what we received before the chat.
On that note, we’re going to start with answers to some pre-chat questions.
 
Q. What are your thoughts on APA Group (ASX: APA, OTC: APAJF)? No volume and I have a large load. Was thinking about selling for tax loss reasons but don’t want to sell if it has a chance of rallying in the near term. Thanks--John M.
 
A. Hi John. The Australian natural gas pipeline and renewable energy company had a strong fiscal year 2023 (end June 30), resulting in a mid-single digit percentage increase for the semi-annual dividend paid last month.
1:53
Management also issued FY2024 guidance indicating more of the same, from the same formula of incrementally adding long-term contracted assets. And the company has been able to manage its debt maturities (none remaining in 2023) as well as CAPEX funding needs, with free cash flow covering dividends in FY2023 with about $400 mil remaining for balance sheet strengthening.
 
One major headwind for the stock this year—as I’ve indicated in Utility Report Card comments—is concerns about the cost of acquiring midstream assets in the Pilbara region from Alinta. APA did have to bid for these assets, creating near-term dilution. But it’s also now greatly increased its long-term growth project pipeline, with decarbonization of the country’s vast mining sector now seen as a major opportunity.
 
APA this week again reaffirmed its FY2024 distribution per share forecast, affirming its long-term strengths. And I remain bullish on the stock over the next few years, as the energy price up-cycle continues. My view is there are
still some formidable near-term headwinds for US investors in the stock, Australian dollar weakness being one of them. That makes near-term gains less likely, particularly in light of the pressure on the global economy and risk of a continuing overall stock market slide. Of course, the stock is also quite cheap with a yield now north of 7%, which should limit downside as well.
 
Q. How will the merger of Chevron (NYSE: CVS) with Hess Corp (NYSE: HES) affect Hess Midstream LP (NYSE: HESM)?—Eric D.
 
A. Hi Eric. I hope you were able to check out the Energy and Income Advisor Alert we sent yesterday “Regarding Hess Midstream.”
.” It was a follow-up to the alert from a day earlier “Notes on Chevron and Hess,” which we sent to readers of both EIA and Conrad’s Utility Investor—since Chevron is a member of CUI’s Top 10 DRIPs.
 
The main point in both Alerts is we’re bullish on this deal for all parties. Regarding Hess Midstream specifically, we see three possible outcomes. And each of them should result in strong returns for our positions in EIA.
 
We do think there’s a strong possibility Chevron will eventually buy in the economic interest of Hess Midstream it does not acquire with Hess Corp. That’s the same playbook it followed a couple years ago with the former Noble Energy and Noble Midstream. We believe the offer would likely be made in stock, the currency for both of those deals as well as Chevron’s offer for Hess. It would be at a solid premium to HESM’s current share price to win over Global Infrastructure Partners,
1:54
which has a stake in the company equal to Hess Corp’s. And structured as such, it would not be a taxable event to HESM shareholders, since that company converted to an “Up C” in 2019 and is no longer a conventional MLP.
 
If Chevron simply takes the Hess Corp ownership stake in HESM—or should it elect to sell that stake as part of a $10 to $15 billion asset sales plan—it would still be on the hook for 10 years of contracts to HESM with minimum volume commitments, inflation escalators etc. And unless it decided to sell all the Bakken oil and gas wells, it would have every incentive to expand that relationship. Bottom line: We think HESM keeps growing either way. Also, Q3 results were strong and management raised dividends again.
 
 
Q. Dear folks, I would appreciate your thoughts about Nisource (NYSE: NI). If I am not mistaken, its asset sales seem to have greatly reduced its need for borrowing to achieve its CAPEX goals
and cover its dividend. It seems to be selling at a considerable discount. Do you have a dream price for it? You have often said it may be a good takeover candidate. But how about its future prospects if it remains independent?
 
Also, Treasury ETFs have been crashing. I know that Eliot has in the past recommended TLT, as well as a buy-write Treasury Bond ETF. I am wondering you if have any thoughts about a long duration Treasury ETF (25 years) such as ZROZ? Many thanks.--Jeffrey H.
 
A. Hi Jeffrey. I don’t see a lot of risk to NiSource’s CAPEX plans or its long-term earnings growth projection of 6 to 8% through 2027. The utility actually raised 2023 guidance following its Q2 earnings release. And there’s a fair chance it will do so again following Q3 results on November 1.
 
Utilities as a sector took a big hit earlier this month.
And as I’ve commented in several Alerts as well as the October issue of CUI, the catalyst for the selling is basically fears that rising interest rates will derail long-term CAPEX plans, and thereby force companies to reduce guidance growth rates.
 
I would argue such cuts are now firmly priced in—including for NiSource-- despite some recovery in sector stocks following NextEra Energy’s (NYSE: NEE) very solid Q3 results and guidance. But as NEE’s results showed—and as we saw today with CMS, Centerpoint and FirstEnergy—there’s little evidence that’s actually happening, outside of a handful of companies with high levels of floating rate and parent level debt.
 
I fully expect the same from NiSource. In fact, it actually did tacitly affirm guidance earlier this month when it announced FERC approval for the sale of 19.9% of its transmission unit to Blackstone. That deal provides more funding for CAPEX and strengthens the balance sheet.
1:55
I do think NiSource is a good takeover candidate and I think the stock is cheap relative to what are very stable prospects. I would say 20 is probably a good “Dream price.” But it’s a solid buy at the current price.
 
As for the Treasurys, we would regard that is primarily a trade, rather than an income investment. The timing of purchasing a leveraged ETF like TLT basically comes down to when the Fed stops putting upward pressure on interest rates, which we think will happen when there’s a recession. If you’re interested in this type of trade, I would suggest checking out our trading service. Call Sherry at 877-302-0749 for more details.
 
 
Q. What are your thoughts on Baytex Energy (TSX: BTE, NYSE: BTE)? Ben F.
 
A. We track this oil-weighted producer in our Canada and Australia coverage universe on the EIA website, currently as a hold.
There will come a time in this cycle when smaller and more leveraged producers are the place to be. At this point, however, we remain focused on the best of the biggest. Regarding Baytex, the acquisition of Ranger this summer is a sign of strength. And it follows solid Q2 results, including free cash flow that’s allowed the restoration of a rump dividend. I think the stock and the payout eventually go a lot higher during this energy cycle.
 
 
Q. Roger. Is there any objective or legitimate reason why Algonquin Power & Utilities (TSX: AQN, NYSE: AWN) and the convertible preferred AQNU continue to get beat up? Both recently hit lows.—Barry
 
A. Hi Barry. Algonquin common and the preferred are going to move in lockstep until the preferred converts to common stock next year. The company announces earnings on November 10. But given the selling we’ve seen the past month or so, it seems investors are overwhelming expecting little progress on management’s strategic plan
of selling contracted renewable energy assets to cut debt—given the current hostile capital market, especially for borrowing.
 
My view is we're still seeing carry over selling in the renewable energy group overall. In Algonquin's case, it’s a steady reduction in 12-month target prices across a range of brokerages, who largely rate the stock hold.
 
Algonquin did earlier this month redeem all CAD287.5 mil of all of its 6.875% fixed-to-floating rate notes maturing in October 2078. That will further reduce the floating rate portion of its debt, which as you know has been a major objective for management. There's more to do of course, and until there are asset sales to report we're only going to see incremental moves like this one. Management has also indicated it will only sell when it makes economic sense to do so, which could push back execution also. But on the bright side, that's a good indication business is stabilized and we'll see that reflected in Q3 results.
 
I think this stock (along with other renewable energy companies) could go lower the rest of this year. But I intend to stay with it, on the basis that its recovery plan is still on track and the current dividend level and investment grade credit rating are well protected--in part because the company already pulled off the band aid earlier this year.
Mary
2:02
How about your thoughts on WPC and NLOP.
AvatarRoger Conrad
2:02
Hi Mary. As I wrote in this month's REIT Sheet, I'm considerably more positive on the future of WP Carey and its office portfolio spinoff NLOP than the current consensus. Spinning out most office properties and selling the rest to cut debt/fund CAPEX leaves the new WPC much leaner and better focused on stronger growth areas of real estate such as industrial and logistics properties. The dividend will be reduced next year to reflect the office properties being gone and management's desire for a lower payout ratio. But the current price of WPC appears to assign negative value for NLOP--and certainly no dividend from the spinoff though one is highly likely. The spin will occur at the beginning of November. And I would expect to see selling of NLOP when that happens. But I like the new WPC and believe the price grossly undervalues its prospects.
Kevin C.
2:06
Hi Roger,

When will you be updating the list of high Yield bonds with recommended prices? Thanks.
AvatarRoger Conrad
2:06
Hi Kevin. My intention is to explore fixed income/high yield in the November issue feature article in Conrad's Utility Investor. For the first time in a while, there is interesting fixed income, though I will be keeping the recommendations conservative. My view is the Federal Reserve is going to bring down headline inflation in the near term, probably by bringing on a recession. But by crushing investment, it's ensuring there will be more long-term inflation--just as the Fed did in the late 1960s, 70s and 80s. That means we want to stick with short duration and preferably securities with a growth component. But there is a lot of opportunity.
John R.
2:09
Would you discourage the infusion of fresh monies into HASI or T at these levels?
AvatarRoger Conrad
2:09
Hi John. I never recommend anyone really load up on a particular stock or stocks, even if they trade at attractive valuations as both of these stocks do. AT&T has already reported strong Q3 numbers, so there's probably less risk buying now as opposed to Hannon Armstrong, which doesn't report until November 2. I do think HASI will report another strong quarter with stable margins and strong order backlog. And there's strong potential for a short squeeze with 15.64% short interest. But so long as the Fed is pushing up borrowing costs, this is the kind of stock that will face headwinds. So while I see an eventual strong recovery for HASI (as well as T), I think we're going to have to be patient a while longer.
Jim N.
2:20
What are your latest thiught on WPC spin out of office building.

Do you think the stock of both of these are worth holding?

Is it your understanding that the value of the new stock will be considered a taxable dividend?

If that the case, our basis on the old stock will remain the same?

As always thanks for your insightful help.
AvatarRoger Conrad
2:20
Hi Jim. As I noted answering an earlier question, I think WP Carey is grossly undervalued relative to what are actually pretty solid prospects. And I think there's basically negative value in its current price for the NLOP office property spinoff. I intend to stick with WPC as well as NLOP, at least until we see what sort of dividend it will pay. Management has indicated the spinoff will be treated as a taxable dividend. That would seem to imply your tax basis in WPC would remain the same. As for the tax on the spinoff, the ratio is 1 NLOP per 15 WPC and the assets are 10% of AFFO--so I would not expect a large tax bill relative to holdings.
Phil B.
2:30
Hi Roger,

Could you please give us your latest view on MPW in light of their recent earnings announcement.

Many thanks
AvatarRoger Conrad
2:30
Hi Phil. Medical Properties appears to have outperformed  consensus expectations for Q3, though with all the transactions it's difficult to compare numbers with previous quarters. Trailing 12 month EBITDARM coverage of 2.7 times by Steward is encouraging, 2X for Priory a bit less so. And it's clear these tenants are still seeing considerable cost pressures that are a risk to their ability to keep paying rent. The asset sales have helped reduce debt, also a big plus. But the so-called 2023 forecast boost comes with a -13% revenue decline, 21.2% higher interest expense and -15.6% AFFO per share. Bottom line, this is still a REIT facing life threatening pressure with numbers going the wrong way. With so many much lower risk REITs cheap, why own this one?
Jack A.
2:32
Hi Elliott:

You certainly seem to have a knack for picking desirable oil companies, witnessed by the targets of recent takeovers. Thank you and congratulations!
A few questions:
1. What do you make of the recent oil price slide? Although it recently went up with the turmoil in the middle east, it seems to be sliding again. Do you think the Saudi's are increasing production to curry favor with Biden for their nuclear goals and help with their military defense?. You would think with the worsening situation in the middle east, oil would have continued higher.

2 . We always hear about oil fields eventually petering out. What's behind the seemingly perpetual Saudi Arabia oil reserves?. You'd thik their fields would be running low by now. Look what happened to the North Sea.

3. There have been recent reports about gasoline consumption in the United States being lower than it was pre-pandemic. What do you make of this, and does this concern you? Thanks
AvatarElliott Gue
2:32
Thanks for the questions and the kind comments. I definitely think we're in the early stages of what's likely to be a consolidation wave. Let me cover your questions as numbered.

  1. Re: the recent oil price slide. Despite the conventional wisdom to the contrary, historically, geopolitical unrest is only a short-term transitory driver of oil prices -- even real, direct attacks targeting oil infrastructure in Saudi Arabia back in 2019 only caused a rally for about two days that was quickly reversed. So, I think the "round trip" we've seen from  $82.50/bbl WTI to $90+ and back again is primarily a function of the knee-jerk rally post attacks on Israel followed by the normal retracement of that pop higher. Now, oil prices are still well under their late September (pre Hamas attacks) highs near $95/bbl and I suspect the pullback from there mainly reflects concerns about demand. As you mentioned in your 3rd question there has been some evidence of a weakening in gasoline demand  of late and I think there's a general
AvatarElliott Gue
2:32
feeling the US economy isn't as strong as some of the incoming data would suggest. My general view on oil this cycle is that we're in a 1970s type of environment -- in inflationary cycles oil has traditionally not seen bear markets during recessions because the rallies are driven by lack of supply rather than demand. So, I think this is a supply cycle and oil will see relatively restrained pullbacks in the context of a higher-for -longer price environment. 2. Re: Saudi oil. Yes, all conventional oilfields eventually mature and see declining production. Peak production can be delayed by responsible development (or accelerated by irresponsible development)  but peak is inevitable.  Saudi has some truly huge oilfields but their largest fields like Ghawar, probably are past peak. They've been responsible in their developments over the years and it's likely they've been producing fields like Ghawar at well less than peak potential production rates for some time. I also think it's important to remember that Saudi
And other Middle Eastern producers were among the first to accelerate their spending on new oil and gas field developments this cycle. They’re doing that because they know that global oil demand is growing and their existing fields are mature – they need to keep growing their productive capacity and identifying new fields and projects to maintain their oil production capacity and grip on global supply.
Don
2:38
Hello team,

1) Do you still recommend the swap of AQN to AQNU and will this pass the wash sale test so I can take a tax loss on AQN.

2) MPW- did you get a chance to review the earnings this morning and did this report change your outlook in any way?

Thank you
AvatarRoger Conrad
2:38
Hi Don. AQN and AQNU are both Algonquin issues but they're also two different securities so should pass the wash rule test. The appeal of this swap has somewhat lessened with the June 15, 2024 conversion date approaching and just 3 dividends of 96.875 cents per share remaining. But I think both securities should be on much higher ground 12 to 18 months from now, when the recovery plan/contract renewable energy asset sales are further along. And as I indicated in answering an earlier question, I intend to stick with each.

I don't have a lot to add to my answer about MPW in the previous question I answered. I know a a number of readers didn't sell last year as we did. But while I would view today's news as hopeful--reflected in today's bump--the REIT still faces the same problems, which could greatly worsen in a real recession. I'll keep covering it in the REIT Sheet on the possibility of a real turnaround.
Mary E.
2:43
I am having trouble wrapping my head around taxable and non taxable events.

Could you please explain and give examples?

Thanks for sharing all of your knowledge!
AvatarRoger Conrad
2:43
Hi Mary. Let me start by saying that if you own something in a non-taxable account like an IRA, whether what a company does involves taxing investors is irrelevant. You won't owe a tax. Examples of taxable events outside IRAs would be when a company acquires another company for cash. Your tax would be the difference between what you paid for the stock and what the takeover price is. A non-taxable event example would be if that same company acquired a company by offering shares of its stock rather than cash. That's the case with Chevron's buyout of Hess Corp, as well as ExxonMobil's buyout of Pioneer. Because you get stock, your investment effectively rolls over into that new stock--so there's no tax. Does this help?
AvatarElliott Gue
2:43
3. re: US gasoline demand. Each week, as part of its petroleum status report, the Energy Information Administration reports refined products supplied, basically a measure of demand. And starting in September we have seen a stretch of weeks with gasoline demand below the 5-year seasonal average. Last two weeks it has rebounded to roughly the 5-year average.
Part of that is likely a function of price – when oil prices are high and gasoline prices rise, people do tend to cut back on driving where possible. Look at a chart of products supplied in the summer and fall of 2014 – the peak of the last big bull cycle – and you’ll see the same effect – weaker demand after summer driving season.  
As I said, I also see the US economy as likely weaker than some of the incoming data might suggest – consumer spending, for example, may be starting to weaken as credit conditions tighten. This could also be behind the gasoline situation.
I also find the gasoline demand data a little bit suspect. After all, total refined produ
Bill G.
2:53
Hello Elliott: Much has been said about investing in XOM and its investment in Guyana. What if something goes wrong? Could a government takeover happen and all the oil assets be ationalized? I have not read any balanced articles. Your thoughts?
Thank you.
AvatarElliott Gue
2:53
I don't think the oil assets will be nationalized as Guyana's main fields are deepwater plays and the country just doesn't have the technical expertise to produce these complex reservoirs. Really, there are only a handful of companies that can manage a project of this size -- your big US and European majors with help from services firms like SLB.  I think they're well aware that should they try something aggressive with a country like Exxon, the gravy train of oil revenues would quickly dry up and no companies would be willing to invest there. The Guyana project has spanned multiple governments there with different ideological leanings as well so my view is that major political factions in the country all have "ownership" of these projects. To their credit, they've also been cooperative by, for example extending the exploration license to offset COVID-related disruptions. As far as something going wrong in terms of technical issues with the reservoir, my view is that risk has receded as XOM and its projects
AvatarElliott Gue
2:53
into their commercial production phase and some of these projects are actually outperforming plan.
Kerry T
2:54
Hi Roger:

Altria (MO) is having a bad day - price is 40.395 as I write this. Will
you be revising your recommendation or is it still a buy up to 50. Is
there a dream buy price for MO?

regards
AvatarRoger Conrad
2:54
Hi Kerry. I'm still looking at Altria's results. But at this point, the selling looks to me like an overreaction. The main catalyst for selling was soft revenue declining -2.5% excluding excise taxes--with smokable products declining by -3.7% and more than offsetting 2.7% growth in oral tobacco. On the other hand, margins stayed strong particularly for oral tobacco and Q3 earnings were flat despite headwinds on volumes. The company reduced the mid-point of 2023 guidance for adjusted earnings to $4.945 per share from $5.005. But that still covers the recently raised dividend by 1.26 times. And projected free cash flow still covers the dividend with about $2 bil left over for debt reduction and buybacks. The NJOY acquisition appears on track, though management complained about lack of FDA enforcement on illegal vaping products. Bottom line is these results don't appear to change the story of this company as a very high dividend bet--though I'm not contemplating adding to the position in CUI Plus/CT Income now.
Ron
3:01
Thoughts on NEP after their earnings call. Good opportunity to add?
AvatarRoger Conrad
3:01
Hi Ron. As I noted in the Oct 25 Income Insights "Guidance vs Interest Rates: Score One for Utilities," I thought the NextEra Energy family's Q3 results and guidance  pretty much put to bed for now the worries investors had following the NextEra Energy Partners' cancelled drop down announcement a month ago. And while it may take a while for NEP shares to recover to the $50 range they held prior to that move, they are up about 40% from the lows of earlier this month with today's trading. My advice hasn't changed for either NEP or NEE--and the prices are a great time to take positions, though with the caveat that no one should really ever load up on a single stock and the fact that risk of a recession and much larger market decline are considerable.
JVA
3:03
Would you add more HESM? I read your thorough explanantion
AvatarRoger Conrad
3:03
Hess Midstream is still a buy up to 32. And we continue to own it both in our EIA Model portfolio and High Yield Energy List. The decision to add should really depend on your particular portfolio. But for those without positions or are underweighted, this is a good time to buy.
Load More Messages
Connecting…