JotCast | October 2023 Capitalist Times Live Chat

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October 2023 Capitalist Times Live Chat

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3:03

Hi Elliott. Where does TLTW fall on the risk scale?

Elliott Gue

3:03

The TLTW is an ETF that tracks 20+ Year Treasury Bonds with a covered call overlay. Generally, over the long haul, bonds are less volatile than stocks or an index like the S&P 500 though we have seen historic moves in bonds of late due to the move from near-zero rates to 15+ year high rates over the space of about 18 months. In my view, bonds will revert to be less volatile than the S&P 500 over the intermediate term. Now, the covered call overlay from TLTW further reduces risk and volatility. To give you an idea, over the past 200 trading days the annualized volatility in the TLT ETF (long bonds without covered calls) is around 18.25% compared to 15.4% for TLTW. TLTW is, however more volatile than shorter term Treasuries -- the iShares 7 to 10 Year ETF (IEF) comes in at 9.6% annualized volatility based on the past 200 trading days.

Elliott Gue

3:03

A different way to look at this is that you've probably read a ton of headlines lately about the huge fixed income bear market in 2023. So, in a historically bad year for Treasuries TLTW is down around 16% year-to-date and IEF is off 9.1%. I did write a piece over on my Substack (I have made it free for all if you'd like to read it), explaining bond math. Basically, there's an asymmetric risk/reward here in my view where the potential loss from an additional 50 or 100 basis points in yield upside is dwarfed by the upside potential for a similar decline in yields.

Eric

3:14

Thanks for holding these sessions! You’ve mentioned previously that based on what happened around 2015, a take under of NEP by NÉE may not occur. Based on take unders of midstreams by their parent in the past decade, e.g., Shell, what is the downside risk in terms of unit price of NEP in the event of a take under by NÉE? Is price to book or some other measure informative between what happened with midstreams taken under by their parent vs. downside risk for NEP?

Roger Conrad

3:14

Hi Eric. Let's start from the premise that I now see this as an even lower probability event than I did when I commented on it a couple weeks ago. Mainly, NextEra Energy confirmed during its earnings call that it still views NextEra Energy Partners as a viable funding vehicle long-term for its expanding portfolio of projects--which in Q3 exceeded 3 GW of new contracts for for the first 3-month period ever. It's going to need a lot of capital to get there and NEP has been an extremely successful option in the past. That said, I would say an offer in stock would be far more likely than anything in cash--and it would have to be at a meaningful premium. NEP's book value is about $40. But there's been really no clear metric for valuation of MLP midstream buy ins--other than the deals done 2-3 years ago at the bottom of the cycle were a lot cheaper for acquirers than more recent ones. Also, keep in mind the need for midstream funding vehicles/MLPs--great in 2014--is now pretty much moot.

Roger Conrad

3:16

That makes winding them up attractive, whereas NEE/NEP still have a massive need for capital that publicly funding dropdowns to NEP can ease long-term.

Hans

3:16

Elliott, With the recent sell of SWN and now the outlook of CHK and SWN merger, is this again time to buy SWN

Elliott Gue

3:16

My discounted cash flow valuation for SWN shows it worth about $9 to $10 per share at a flat $4/MMBtu long-term natural gas price deck. So, it's still cheap. A CHK/SWN tie up is a great deal because their assets fit together so well and a combined company will see significant cost synergies. With more experience in the Haynesville, I also think CHK's team might be able to produce SWN's wells more cost effectively (though SWN is a fine operator in its own right). We held "trades" in SWN in both our trading service CT Trader Commodities and in our Income Options service. And we recommended taking some profits off the table on the initial deal rumor "pop"
higher. The reasons is that from a tactical perspective, I always consider taking some profits when a see gains of that magnitude (50%+) and the underlying stock is overbought. Also, while a CHK/SWN tie up has tons and tons of logic, it could still take some time to put together and I suspect it would be an all-stock deal at a modest premium to the recent peak

Elliott Gue

3:17

price (maybe $8 to $8.50 worth of CHK stock for a share of SWN). So, at the recent peak around $7.50, we just didn't see enough upside short term relative to the risk of a pullback. And if a deal doesn't emerge in the next few weeks, we felt/still feel you could see SWN pull back towards the September peak of $6.85 as the merger mania trade dies off a bit. So, it's definitely a name we'll consider as a trade on dips to around $6.85. If there's no CHK deal, we still see SWN ultimately worth $9 to $10 though it could take a while to get there (1 to 2 years). We also like CHK here -- our DCF valuation on CHK standalone is north of $120 per share.

Guest

3:24

Better buy now - HESM or ET? Both listed as aggressive, HESM with possible CVX or "other" buy out premium...

Roger Conrad

3:24

Investors tend to prefer takeover targets to acquirers. And while Hess Midstream is now very much on the table as a target, Energy Transfer is most definitely in the buyer camp--with the Crestwood acquisition now expected to close November 3, following the wind up of the shareholder vote October 31. Energy Transfer was my top midstream pick at the start of 2023, and as expected it's now paying dividends meaningfully above its pre-pandemic rate. I still like it as a buy at 15 or less, with upside 2-3 times that during this cycle at least. As for HESM, I don't see much of a takeover premium in the current price. As I said, I think any offer from CVX will be in stock and I would look for a value in the 35-40 range--but only after CVS closes on the parent HES.

John C

3:26

Several analysts, Citi Group’s Ed Morse and Morningstar come to mind, have said that the price of oil will go lower and stay lower as a result of non OPEC producers, over producing. They state that many more barrels than anticipated will come to market. Your bull case sounds reasonable, their case sounds reasonable. What say you?

Elliott Gue

3:26

We remained pretty bearish/cautious on oil for most of the 2014 to 2020 era for just that reason -- the overhang of non-OPEC (mainly shale) production at that time. But, I just don't think that's a compelling risk at this time. The fact is that US shale is mature -- even the Permian basin -- and recent consolidation, including XOM/PXD appears to be mainly a function of trying to grab more premium drilling locations to sustain production over the next 10 to 15 years. Even at the highs in 2022, you just didn't see major producers like PXD talking about out output growth much over 5% annualized, because they're focused on free cash flow not production growth. They also don't want to "drill through" their inventory too quickly. Just look at the rig count -- US producers aren't chasing growth any longer. Even with WTI at healthy levels north of $80/bbl, the rig count has plummeted from a peak of 627 last November to 502 oil rigs today. Outside of shale, I just don't see many non-OPEC projects that are going to

Elliott Gue

3:26

come online in the next 5 to 10 years for the simple reason that there hasn't been enough investment in exploration and production for years. Guyana is one of the only exceptions and everyone know it, which is why you saw that CVX deal to buy HES -- it's all about resource access. OPEC also doesn't seem to see the threat -- they've been cutting production to support prices with little worry about a flood of new non-OPEC production (that was their chief headache back in 2013/14). And i don't think Saudi Aramco, a company which has unprecedented insight into global supply and demand, would be talking about spending to boost capacity if they didn't think the supply/demand balance supported it. To be clear, I'm not really calling for a spike in oil prices to $150/bbl but I do think that you'll see prices average $90/bbl+ over the long haul because that's what needed to incentive new supply.

Eric

3:29

What’s more attractive from a long term perspective between NÉE and NEP taking into account the take under risk vs. the very high yield of NEP?

Roger Conrad

3:29

If you look at the price history of NEE and NEP since the latter's 2014 IPO, you'll see periods of dramatic outperformance for NEP followed by equally stunning underperformance--such as this year. NEP is more valuable when it can absorb a greater number of asset sales or "drop downs" from NEE--and that pace depends heavily on cost of capital. I think NEP will outperform NEE again when capital market conditions improve. Until then, it's vulnerable to another relapse, depending on how far the Fed pushes interest rates. The most important thing, however, is NEE is still quite healthy and therefore so is its very dependent affiliate NEP. I like them both, though the rule of thumb right now is NEE shares will probably remain more stable.

Karl

3:30

Elliott - how would one navigate to your Substack?

Elliott Gue

3:30

It's called "The Free Market Speculator" and it's here: https://freemarketspeculator.substack.com/

I post twice weekly and a lot of the content is free (you can "subscribe" by entering your e-mail if you want to receive the twice-weekly commentary. Roger also has one titled "Dividends with Roger Conrad" and it's here: https://rogerconrad.substack.com/

JVA

3:34

Guys--the MPLX that I bought over 10 years ago cranks out a sweet return. Continue to hold? Thanks.

Roger Conrad

3:34

Absolutely. MPLX affirmed its business strength this week with a 9.7% dividend increase in advance of Q3 results and guidance, which we'll see on October 31. At that time, we'll likely push our highest recommended entry point a bit higher to reflect the dividend increase. And longer-term, this MLP traded north of $85 in 2015, when it was arguably a much less valuable company. There's still the issue of what 64.66% owner Marathon Petroleum will ultimately do--and I would expect that to keep the stock at a discount to EPD etc for that reason. But this is a stock whose price and dividend are almost surely headed a lot higher as this energy price upcycle unfolds.

3:39

Hi Roger, what are your thoughts on NEP (NextEra Energy Partners) the company/business and the stock, after the devasting stock price collapse? What is your recommended strategy for those who have held it through this crash?

Roger Conrad

3:39

Hi JT. I really don't have a whole lot to add to what I've said here today, and in yesterday's Income Insights "Guidance vs Interest Rates: Score One for Utilities," in which I analyzed NextEra Energy and NextEra Energy Partners Q3 results and guidance. Bottom line is you'll only lock in the lower price and resulting loss by selling. And despite the headwinds including high interest rates, NEE and its dependent affiliate NEP are still strong as businesses--which means recovery if we're patient.

Victor

3:42

Hi Elliott,
I read your analysis on HES. After the CVX announcement I was expecting that it was going to trade higher, closer to $170. However, it’s just doing the opposite. Can you touch on that? Thanks.

Elliott Gue

3:42

Thanks for the question. YEs, the CVX takeover of HES is an all stock deal at a rate of 1.025 shares of CVX per share of HES. So, HES trading is now solely a function of where CVX trades -- since CVX has pulled back since the deal was announced, HES has also pulled back. Some of the CVX pullback is likely due to a knee-jerk reaction to sell the stock of a company that announced a major acquisition and some if an industry-wide stock pullback due to oil prices. Since this is an all-stock deal, however, the question I ask myself is always "Is the combined company worth more than the sum of its parts?" In this case, the answer is yes.

Elliott Gue

3:42

I did like CVX before this deal but the main criticism I hade with them was that there production growth outlook wasn't as good as Exxon's, particularly for oil (rather than gas). That's why I've preferred XOM for the last 3 years. However, this deal does address that -- it's not an exaggeration to say that Guyana is the most exciting non-OPEC project of the past 20 years and given the discoveries they've announced to date, I think you'll see production growth potential for years beyond 2027-30, which is where a lot of the analyst models stop. SO CVX is a good company that's buying stronger production growth. I liked HES as a standalone company but the main "knock" here is that they're a small company to have a 30% stake in a project of this scale. CVX/XOM is like the "Dream Team" of production projects on a project of this scale. SO, I think CVX owning HES is worth more than HES + CVX.

JVA

3:47

Stay with BEP?

Roger Conrad

3:47

Yes. Brookfield Renewable is expected to report earnings at the end of this month or early next. And despite the drop in the share price--which mirrored the rest of the utility and renewable energy sector--there's every indication we'll see very steady results supporting guidance, the balance sheet and the dividend. It also looks like we'll hear significant progress on the pending acquisitions. The Westinghouse deal has been cleared by the EU. The acquisition of Duke Energy's renewable energy assets in the US closed on Oct 25. And the Origin Energy deal now needs just a shareholder vote. All three will lift earnings. The stock may take longer to recover as investors focus on interest rates' potential impact on the bottom line. But the business looks healthy and so long as that's the case, we can expect recovery.

JVA

3:52

Pick up more D while it is down at this level?

Roger Conrad

3:52

I think Dominion is at a very good long-term entry point--for those who don't own it or are under weighted. The stock's near-term outlook is somewhat more cloudy as we wait on the strategic review results. That may come as soon as Q3 earnings and guidance on November 3 (before market). Or management may again delay, if there's nothing to announce about for example a financial partner at the Coastal Virginia Offshore Wind facility. We do know a lot about this deal already, the sale of natural gas distribution utilities to Enbridge for example. But until all the answers are in--including dividend policy--there is some risk of more selling even at this price. I'm staying in but prepared for at least near-term downside on a negative reaction to the strategic review results.

Hans

3:56

Roger Is ENB a good buy now with their acquiring of Dominions Natl Gas Utilities

Roger Conrad

3:56

Hi Hans. I think Enbridge is a very solid value and would be a buy all the way up to 45. I see the Dominion purchase as win-win for both parties--it restores Dominion's balance sheet and greatly adds to Enbridge's stable cash flows by adding natural gas distribution. Obviously, this is a fearful market for anything to do with debt financing--which is always critical in any infrastructure business. And that's why both ENB and D are lower on this news. But ENB's dividend is very safe and balance sheet pressure from this deal is very manageable--Fitch still has a stable outlook for the BBB+ credit rating.

JVA

4:01

AETUF hold or sell?

Roger Conrad

4:01

We rate ARC Resources a buy at $16 or less. We track the company in our Canada and Australia coverage universe, which is posted on the EIA website. The Canadian oil and gas producer has been extremely successful the past few years developing very low cost reserves and production in western Canada (Montney shale), which is well positioned to supply Canada's rapidly growing export sector--with LNG as well as NGLs. The company is also buying back stock and has increased its dividend twice this year.

David O.

4:02

Elliot,

Retired, need income! Wouldn’t royalties (BSM) always be the safer route to go rather than a corresponding E and P company? No matter what happens price / volume wise, you get your piece of the action. How does BSM handle the depletion problem of its property…raise capital to buy new properties?

How can I invest in Guyana offshore other than my XOM / CVX (HES) positions?

Thanks

Elliott Gue

4:02

BSM typically receives an upfront cash payment when its acreage is leased but also gets a percentage of production or revenue from production over a roughly 3 year term. So, this frees them from cost inflation risk but they still do retain some commodity price risk -- if the price or oil/gas falls, so does their ongoing royalty payments. They also have a sort of indirect commodity price risk because when commodity prices decline, drilling activity slows so they're able to sign fewer leases.

I like BSM and the long-term returns have been strong -- I can remember first writing about them many years ago after speaking to management at the MLP conference. However, a high quality producer with acreage in the right plays can outperform, and generate tons of free cash flow to pay dividends. In my view income investors should consider a mix of high quality variable dividend E&Ps (like CHK) and royalty companies like BSM and some of the better midstream names.

Re: Guyana. The three partners will be XOM (45%

Elliott Gue

4:02

and the operator), HES (soon to be CVX at 30%) and China National Offshore Oil Company (CNOOC) which used to trade as an ADR but doesn't because of sanctions. The other way to invest this theme would be via the services firms (SLB is an example) that do a ton of work down there. Another stock I am looking at carefully is Petrobras of Brazil (PBR), which is doing some exploration work on the same basic trend offshore northern Brazil. If they find similar deposits there that could be a longer term theme to watch though we're not yet ready to recommend that for the model portfolio. One thing that's interesting is that if you look at a map you can see how South America and Africa used to fit together millions of years ago -- both offshore Africa and offshore South America have, of course, been solid deepwater prospects.

Victor

4:05

Elliott,
WTI oil prices are around $83 a barrel. Is this an acceptable level for OPEC or do you expect that they will manipulate prices to move it even higher in the next few months? Thank you.

Elliott Gue

4:05

Most estimates show Saudi needing $90+/bbl to balance their budget. That doesn't mean they'll try to push it there short term -- they can run a deficit and borrow money short term and they are usually cautious about pushing prices too high, too fast and the associated risk of demand destruction. But, longer term OPEC is in control (due to lack of non-OPEC investment) and I think you'll need to see $90+ bbl oil to balance supply and demand.

John C

4:20

Your thoughts on CF and CCJ would be appreciated.

Thanks.

Elliott Gue

4:20

FMC Corp (FMC) is a chemicals company that makes and sells crop protection products like herbicides, fungicides and insecticides. They get about 35 to 40% of their revenue from Latin America (mainly Brazil) and the stock got hammered recently when they reported weak results driven by inventory destocking in Brazil. It also seems there may be some price competition underway in Brazil, which hurts their margins. CF is a nitrogen fertilizer company (totally different market), but CF and other fertilizer names like Mosaic did get hit in sympathy with FMC. In CF's case, the stock pulled back to around $80, which is basically the low end of a small trading range it's been in since early September. I don't think there's much read-through for CF at all because FMC's problems are stock and industry-specific and CF has far less exposure to Brazil (some three-quarters of their revenues are in the US). Urea prices (basically nitrogen fertilizer) bottomed in June and CF is a low cost producer because it uses cheap US

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