JotCast | September 2023 Capitalist Times Live Chat | 9/26/2023

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September 2023 Capitalist Times Live Chat

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Victor

3:25

Hi Guys, on your last report your NGL chart shows a consistent increase in production. On the other hand oil producers are not producing more oil. My understanding is that natural gas is a byproduct of oil production. Can you explain how this is happening?

Elliott Gue

3:25

There are a number of factors at play here. First, NGLs production is a by-product of both crude oil production from certain fields like the Permian and natgas output. Both US oil and natgas production are currently at (or very near) all-time highs, so that has resulted in a rise in NGLs output as well.

I think it's important to understand that the big change between 2021-23 and the shale boom years of 2010-2020 isn't so much that US oil/gas production is falling outright (though it did for a time in 2020) it's that the pace of growth has slowed considerably.

One more factor at play is that the Permian and the Marcellus are both major sources of NGLs production. And as the low-cost source of US oil and gas supply respectively, they've both been growing at a much faster pace than total US oil and gas production. So, basically, the fastest-growing US shale plays are also some of the richest in NGLs content, which is fortunate given the increase in export capacity wthe US has built in recent years.

John C.

3:30

Please comment on WP Carey plans. seems like a lot of negative sentiment from investors
re: -- dividends
-- a taxable event
- concern about investors fleeing and share price decline

Roger Conrad

3:30

Hi John. Well number three has already happened. And as I've indicated earlier in the chat, I think investors are severely undervaluing the sum of the parts that will follow the spinoff of what are still highly leased, cash generating office properties. The statement that this will be a taxable event via a "pro rata special distribution" is unusual for a spinoff, though being one should reduce your tax basis on WPC as well. As for dividends, during the spin off call, management affirmed that it will pay a dividend commensurate with operating cash flows and disposition proceeds "after first repaying the financing associated with the spinoff." That in my view likely means the combined dividend will be in the neighborhood of what WPC pays now--with faster growth at post-spin WPC. But the main point is sum of the parts looks well north of the current low 50s price for WPC. And the new WPC will be on much stronger ground and able to grow much faster.

Elliott Gue

3:37

As for BKR, we've been a bit more aggressive with the buy target there mainly because the stock just got so (ridiculously) cheap late last year, trading down to the low $20s. We maintained the buy target to communicate that we saw that dip as unwarranted.

Victor

3:37

Hi Elliott. SLB is now a buy under $60 in the managed portfolio. That’s a significant change from th old buy price of $47. It’s currently trading under $60, would you wait to add more to an existing position? Also BKR continues to be the same buy under price. No price changes there? Thank you!

Elliott Gue

3:37

SLB was the largest single position in the model portfolio earlier this year, so we actually recommended selling down the positions somewhat over the summer (from 163 shares to 110) to both book some gains and rebalance to other recommendations.

That said, SLB is we believe the best-positioned major oil services company in the world and it's our favorite play in the group. I don't recall which issue it was but recently we wrote about valuations for SLB and, while the stock is a little extended near-term, we could see $80+ over the next 12 to 18 months and eventually $100+ is quite in the realm of reason.

So, it's definitively a name we see as a good longer-term buy under $60.

I would say that if you already own it then we're not recommending you add to the position -- indeed, our most recent move was to book some profits in the model portfolio. However if you're a new EIA reader or have no position in the stock, it's a good buy under $60.

Dan N.

3:39

Hi Roger - all seems quiet in terms of material updates from Algonquin and Atlantica, and share prices languish. Hard to believe that AY is now yielding almost 9%, which is a yield I typically associate with midstream.

1. Any reason to worry about the dividends of either?

2. With AQN share prices down in the 6-s for second time the year, how likely is the prospect of just buying out AQN entirely? AQN has announced plans to sell off unregulated renewable assets and their stake in AY, but right now all of the above could be had by just buying out the whole company, acquiring the much more attractive regulated utilities too. If Algonquin's biggest failure was financial (managing timing/type of borrowing and getting caught flat-footed by interest rates), that's exactly a scenario where a bigger and secure rival should believe a turnaround would be gimme. Thanks

Roger Conrad

3:39

Algonquin has already cut its dividend to a level the utility business alone can maintain and Fitch affirming the rating last month means credit ratings are no longer under pressure--so I don't see a lot of risk there. Same for Atlantica, which has cash flows protected by long-term contracts in US dollars. I agree Algonquin at $4.6 billion market cap with a sum of the parts worth may 1.5 times that??? is a worthy takeover target. This latest hit to shares has nothing to do with anything at the company. It's more selling of stocks that have been hit hard already and AQN is hardly the only company being sold now. Same with Atlantica. It's hard to predict what will reverse this. But I'm comfortable holding both even for a hard landing in the economy. And so long as they stay solid on the inside, both AY and AQN will recover fully as stocks.

Jim N.

3:42

WPC: Buy, sell, or hold?

Since the annoucement of the split into 2 companies,
price is down dramatically.

Roger Conrad

3:42

Hi Jim. As I've indicated earlier in the chat, I think we stick with WPC here. This is a good plan for the long-term--a point made even by many analysts who have suddenly flipped bearish. And sum of the parts looks well north of WPC's current low to mid-50s price.

JT

3:47

Hi Elliott, as a follow up question on TLT and TLTW from your earlier answer, would it make more sense to invest new money in TLT at this level, instead of TLTW given the risk/reward and the fact that TLTW would rise much less than TLT due to its covered call strategy limiting it's upside?

Elliott Gue

3:47

I still prefer TLTW at this time. The main reason is that it offers us an additional layer of protection for us against near-term volatility in the long-bond. Yes, if yields collapse, TLT will significantly outperform TLTW but if it's more of a two steps forward, one step back type of scenario, TLTW could continue to outperform and offer a solid income kicker along the way.

Ben F.

3:47

Good afternoon, Elliott and Roger -

Thoughts on Kimbell Royalty Partners?

Thank you for all the hard work.

Roger Conrad

3:47

Thanks Ben. It's a oil and gas royalty trust, so the dividend is going to follow energy prices--both for the realized selling price and volume of energy coming from its lands, which is primarily produced by third parties. We have not to date covered it in our Energy and Income Advisor coverage universe but have tracked other royalty trusts--including Black Stone Minerals (NYSE: BSM), which has been on our High Yield Energy List. We will consider adding it to coverage. Meantime, we view Kimbell's ability to make acquisitions in this environment as positive long-term. The dividend will be volatile but should go a lot higher in this energy up cycle. Thanks for the suggestion.

Doug H.

3:53

Thank you for valuable insight. Do you anticipate either electric utilities or U.S. government will fund protecting the electric grid against an EMP or solar radiation surge?

Roger Conrad

3:53

Hi Doug. The potential impact of events of this sort are definitely on the radar for grid operators and utilities, though I would say that cybersecurity and resilience against against storms (hurricanes, wildfires etc) probably rank higher. A lot of the technology now being rolled out en masse--smart meters, covered conductor wire, drones, micro grids, distributed energy (solar), advanced data systems (potentially AI enabled)--are with those objectives in mind. And the investment is fully supported by regulators. My guess is an EMP event as some in the media are forecasting would wreak considerable havoc, much as a particularly devastating storm would. But I think systems in their current condition would be able to respond.

Jack A

3:53

Hi Elliott:

I am wondering about your optimism about natural gas prices and LNG prices in the United States going forward ..... It's true we have some new export facilities coming on line in 2024, but the figures you gave in your last report show only a maximum of about a 25% increase in LNG export capacity...... Would that be enough to significantly change the price of natural gas in the United States? Thanks

Elliott Gue

3:53

Natural gas prices, like most commodities, are priced based on marginal supply and demand conditions. So, a steady pull from an additional 20%+ of exports can provide a meaningful boost to prices.

As an example, consider the situation from last June through this March. The Freeport LNG facility was knocked offline by a fire and that reduced US LNG exports by about 2 bcf/day for months...on the region of 400 bcf in total lost exports in total.

US natgas prices peaked in August 2022 and hit a low in March of this year. In late 2022 US gas storage was slightly below the 5-year average, rising to roughly 400 bcf above the 5 year average in the spring and early summer. This was the most powerful driver of falling gas prices.

In other words, the outage of a single LNG export facility accounted for the total oversupply of US natgas early this year and was a major driver of the decline in gas prices.

So, the mirror image is that an increase in LNG expoert capacity could have an even bigger impact in the

Elliott Gue

3:53

opposite direction.

Roger Conrad

3:54

Hey just so everyone knows, we've just posted a new issue of Energy and Income Advisor.

JT

4:00

Hi Elliott, you mentioned the need for sustained investment to grow production output. Assuming the investment is eventually committed, do you think that SLB can get back to its highs of around $120 in this cycle? Based on your previous comments, it sounds like this cycle may take 5-10 years to finally reach its peak?

Elliott Gue

4:00

Basically yes I think $120 is reasonable eventually. I also expect SLB to increase its dividend over time, layering in some upside to total returns beyond simple capital appreciation.

Generally, the length of an investment cycle (upcycle for energy prices) is related to the depths of the down cycle that preceded it. Global CAPEX in oil and gas has barel budged from the 2015/16 lows; global discoveries of new reserves is just coming off the lowest since at least 1946.

So, I think you need to see an investment cycle of at least equivalent duration to bring new supplies online to offset the base decline rate and meet growth in demand.

Sandy W.

4:02

Hi Roger, I've kind of given up on buying ABBV, so I am thinking about buying something else. A while back you talked about getting back into WDS. Have you got a buy under price? I've a long term position in MAIN. What do you think? Neil George recommended ATCO/PRH 7.87. The company has been bought out. I inquired, but got no information on the fate of the preferred. Any thoughts on keeping it? Thanks

Roger Conrad

4:02

Hi Sandy. It's nice to have a stock that seems immune to what's happening in the broad stock market. But I do still see Abbvie as well as Merck as being too high priced right now to chase. And while ABBV did dip below the buy price for a very short time in July (135), I want to be patient before recommending anyone take a new position. In fact, it we did see a rise much above the current level, I'd be tempted to take some more off the table.

I do like Woodside as a buy up to 25. The dividend is going to move up and down with energy prices. But as we still see this as the early innings of an energy up cycle, both payout and share price should move much higher.

I'm wary of most business development companies now including Main Street, especially those focused on debt finance. The only exception is Hannon Armstrong (NYSE: HASI) because of its specialized niche in energy efficiency and conservative focus.

Roger Conrad

4:08

As for ATCO, I guess you're referring to the financial company Atlas Corp. The company still has four preferred stocks traded, including the 7.875%. I have a current price of $21.61 per share for it, with the last quarterly dividend of 49.2188 cents per share paid on July 31 to shareholders of record July 28. The dividend payment history is uninterrupted. As the company has been acquired, it's tough to get a read on its financial strength, however. That to me is always a reason to move onto to something else. The "ID Number" of the security is "EP0586750."

Kerry T.

4:14

MAA is a little below its dream price. Good time to buy or do you anticipate the price dropping more? Regards

Roger Conrad

4:14

Hi Kerry. REITs across the board are seeing stepped up selling pressure, as concerns about recession risk and still higher interest rates percolate. But more important, Mid-America Apartment is coming off a boost in 2023 guidance indicating business is on very solid ground and a dividend increase is likely in December after four quarterly payments of $1.40 per share. The share price stabilized today. But the point about Dream Buy prices is so long as the company's underlying business stays strong, buying a level under the Dream Buy has never failed to generate an explosive return. And while I think MAA could certainly drop further, that should be the case this time as well, as we're now at a level now seen since the pandemic year.

Victor

4:17

Elliott, the Biden administration recently blocked drilling in ANWR. Which is unbelievable since this area was designated by congress decades ago. I also heard in the news that the EPA is now blocking the transportation of oil via railroads. We know about the non-stop litigation on pipelines to restrict delivery of oil and gas. And finally, Gavin Newson in California launching a lawsuit against "big oil" asking to pay reparations for "damaging" the environment. It's basically a shake down. They are trying to put oil companies out of business. We've never seen this level of government interference with the free markets. Biden and his handlers are determined to destroy this industry. This non-stop attack on the industry sooner or later will impact revenue, Should we be worried about it? Your thoughts. Thanks

Elliott Gue

4:17

Clearly, the world needs more oil and natural gas supply or the price of these commodities would be a lot lower than it is right now. And it makes sense that the US would seek to supply more energy from domestic sources rather than imports -- that makes more sense both economically AND from an environmental standpoint. The US energy industry is one of the cleanest in the world and US producers keep makin g improvements; I can guarantee you 1 BCF of gas from Russia is far, far dirtier than 1 BCF from the Permian. So, in my opinion, opposition to new drilling and pipeline permitting is counterproductive for the economy and the country.

However, I think it's crucial to remember that politics is basically marketing (only much slimier). I posted a chart up on Twitter and my Substack a few weeks ago showing Biden's approval rating and the national average price of a gallon of gasoline -- there's a compelling negative correlation. In short, price of gasoline goes up, Biden approval goes down. Not to stray too far

Elliott Gue

4:17

into the realm of politics, but I think it's clear that was one major motivation behind the decision to release so much oil from SPR ahead of the mid-terms. So, my point is that I don't worry as much about political intervention because, as we've learned over the years, efforts to "kill" the energy industry have a tendency to result in a loss of elections and new policies. Indeed, the more hostile governments are to fossil fuels, the longer the needed investment cycle will be delayed and the higher prices will go. In the very near term, policies related to ANWR have very little impact on any of the companies in our coverage universe because none had significant plans to drill there near-term. Pipelines issues are a problem, but we mainly focus on names that already have access to sufficient infrastructure to meet their near term business needs. Bottom line: Despite the headlines I am not too worried about the impacts of these policies on our recommended names.

Joe N.

4:20

Roger:

Thanks for this, your articles are very insightful.

Let me run this by you.

Interest rates go up: Utilities get relief from regulators to increase rate of return, so profits and share prices go up.

Interest rates go down: Utilities look better vs T-Bills, cost of capital goes down, so profits and share prices go up.

What do you think?

Roger Conrad

4:20

Thank you for your questions today! We are already seeing some upward adjustment in allowed return on equity for utilities, even in states where relations between companies and regulators has been at times strained. Offsetting those increases now are obviously the higher cost of debt finance--and debt is an essential part of financing infrastructure expansion. And the selling we're seeing in utilities now is obviously on the concern that interest rates are heading higher. But it is very encouraging that regulators are seeing the need to keep utilities financially healthy, even at a time when inflation is crimping consumers' buying power.

As for utilities--or really any high quality dividend stocks--versus T-bills and cash, it's no contest for total return over any period of time relevant to income investors. And that's especially true for anyone who takes positions during a downturn like this one. Again, I don't know where the bottom is here. But we are getting to some great entry points.

Sohel

4:22

Hello Elliot, Thanks for holding these chats. What's your outlook on the soft vs hard landing and when do you think it's likely? I know it's impossible to be predict precisely but would like to get your thoughts.

Elliott Gue

4:22

Thanks for the question. I think a recession is inevitable, it's really just a matter of timing. Most likely, the economy has proved more resilient than in a normal cycle because of the lingering impact of coronavirus-era fiscal support (excess savings). Most estimates are that excess savings are now depleted, which means we should start to see the consumer weaken more by year-end. Also remember that monetary policy works with a lag, so some of the hikes the Fed did a year ago are only just now starting to hit the economy. The most likely start for a recession would be late this year, maybe early 2024 in my view.

Frank

4:24

Your thots on CEQP-. Thanx

Roger Conrad

4:24

Hi Frank. Crestwood Equity Partners' proposed merger with Energy Transfer LP actually cleared a major hurdle today--with the expiration of the Hart, Scott, Rodino Anti-Trust Waiting Period. That basically just leaves shareholder approval from Crestwood as a needed step for an on schedule Q4 close.

As we've written in EIA, we view this deal as very positive for both companies. For CEQP, it means a faster growing dividend and being part of ET's considerable long-term upside as a stock. We continue to recommend CEQP as a buy at 30 or less, as well as a yes vote for the merger.

Terry

4:28

Sometime ago, I believe Alcoa was recommended in one of your services. It is down substantially since then. Do you have a current opinion on it?
Thanks

Roger Conrad

4:28

Hi Terry. We've definitely written about Alcoa in our Capitalist Times metals coverage, though quite cautiously in recent issues because of our concerns about global economic growth. You still have a very solid company. And there's still a good chance the dividend will be increased next month. But metals companies are considered cyclical and as recession concerns have grown stocks have come under increased pressure. If you're a long-term investor, we would not be sellers now. And we believe this stock will return to much higher levels. But in the current environment, it's going to require patience to own it.

Hans

4:33

Elliott, Since ENB is not in any of your portfolios, what is your take on this stock. Thanks

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