JotCast | September 2023 Capitalist Times Live Chat

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September 2023 Capitalist Times Live Chat

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Roger Conrad

4:33

Hi Hans. Since I track the midstreams I'll take your question. I like Enbridge at these levels. The dividend is high, safe and likely to continue rising at guidance 3-5% a year. And the business model is recession resistant, combining midstream energy, renewable energy and regulated natural gas distribution utilities--with the utility business set for major expansion with the acquisition of Dominion Energy's US gas utilities over the next year or so. It may not move very fast. But ENB should generate strong, safe total returns over the next few years.

Victor

4:38

Elliott, the HES buy under price changed from $155 to $175. Do you feel that some names will not drop to lower values even if the overall economy softens?

Elliott Gue

4:38

We still have some concerns about the overall economy, which is why we're maintaining a sizable cash position in the model portfolio.

HES is one of our favorite names right now mainly because it has some serious company specific upside drivers/catalysts related to the start-up of additional phases of the Guyana project.

Basically, we're nodding to recession risk by recommending an elevated cash position while "circling the wagons" around names with company-specific upside drivers like HES.

I would say that I believe there's a meaningful risk, we're actually a bit too cautious. In recent cycles, 2000-02 and 2007-09, a weaker economy leads to a demand-led decline in oil prices.

However, the coming recession won't be like 2000-02 or 2007-09...it's an inflationary, supply-led cycle like 1973-75. And in the recession cycles from 1965 to the early 80s, commodity prices had a tendency to accelerate to the upside just as the economy slipped into recession.

One reason for that is recession/higher rates

Elliott Gue

4:38

discourage and impede investment in new supply, which prolongs the cycle. So, I suspect energy stocks have limited downside this cycle amid a recession and might actually see significant upside as supply-side forces overwhelm the decline in demand.

Mari

4:39

Roger, Is there any reason DEA continues to slide? Thanks

Roger Conrad

4:39

Hi Mari. I don't think it has anything to do with actual company results or dividend safety. In fact, Easterly today completed a major acquisition today on time and budget--a Dept of Veterans Affairs facility in Texas--bringing total properties leased to the VA to 10. Acquisitions are how DEA grows. Shares got a downgrade from one of the few research houses covering the REIT in mid-August. But management actually increased guidance for 2023 last month--the best assurance the dividend will hold. Still rating it a buy at 16 or lower--though again given the across the board selling of REITs, you should be prepared for more downside.

Sohel

4:43

Hello Elliot, What's your outlook on refiners like VLO? Time to take profits in VLO or continue to ride it? Is there better option in the refining space?

Elliott Gue

4:43

Thanks for the question. We did actually recommend taking some money/profits off the table in VLO a few months ago. It was mainly a matter of rebalancing the portfolio to make way for CCJ and some other recent recos rather than a specific fundamental issue with VLO.

Regardless, while I think CCJ has outperformed, frankly it was still a mistake to sell any VLO. Refining margins have remained solid due, in large part, to the fact that the world just doesn't have enough refining capacity to meet demand. Now, the US refiners are supplying increased volumes to export markets like Europe due to the fact the EU has lost a ton of refining capacity in recent years. On top of that, Russia exported significant refined products prior to the Ukraine invasion and those have been disrupted.

So, we still think you could see some softness in refining margins from time-to-time, I think we're in for a multi-year period of rising crack spreads and we'll likely regard dips as an opportunity to buy more VLO and other refiners

Victor

4:48

Elliott, on the last chat you mentioned that CHK could benefit from gas production and prices as we get closer to the last quarter. Do you still feel good about this one? It pull back a little, is this a good support level?

Elliott Gue

4:48

I really see very few changes in the fundamental outlook for gas. I think perhaps the market got a little ahead of itself last months amid very hot summer weather and the strikes at Australian LNG facilities. However, I look at the natgas curve in the US and I still see prices expected to recover to above $3/MMBtu to $3.50/MMBTu this winter and then to average north of $4 by the second half of 2024 as new LNG export capacity comes onstream.

CHK is well-placed with hedges near term to preserve cash flow and then will be in a position to ralp up output after 2024 to take advantage of better prices. At $4 MMBtu gas I see CHK north of $120.

Technical support for CHK is a bit below the current quite in the $80 to $82 range.

erricx

4:52

Roger, i held on to MPW against your judgement. Is it wrong to think they will survive? I don't want to let my emotions make my decision for me, and sell at this low fearful time.

Roger Conrad

4:52

Hi Eric. Medical Properties Trust's price is certainly getting low enough where only eliminating the dividend entirely would seem to justify another big drop. That said, there are a lot of headwinds here--starting with the fact that this is a relatively small company that depends on being able to access credit on reasonable terms, in an environment where interest rates are rising. There's also the fact that multiple tenants are under financial pressure from rising costs, which is threatening their ability to pay rents--and could worsen in a real recession. Management has launched a plan to cut costs and use the dividend cut savings--as well as possible asset sales--to pay down debt. And we'll get a better idea of how they're faring when Q3 results are released late next month. I think if you're going to hold onto MPW at this point, you need to be prepared for a drop to $2-$3 this fall.

4:53

On 9/20 SH @ 11:30am EST fell -1.35% while SPY was up only 0.13%. I would expect SH to be 1x the inverse of SPY. I could not find any news on SH, such as a dividend, to explain the dramatic relative loss. Anyone known what happened?

Elliott Gue

4:53

SH went ex-dividend on 09-20-2023 for a payout of $0.165241 per unit. That's the most likely explanation since SH closed that day a little over $14, the percentages line up with those you quoted in your question.

Jeff T.

5:15

Were do you stand still on UBT I have gotten beat up a little over the last 2 weeks on this one.

to add to my question on UBT at what level should we buy more or do we wait for an alert?

Elliott Gue

5:15

From a trading perspective, bonds are extremely oversold here. TLT, the unlevered version of UBT has an RSI below 30, which is rare and generally results in at least a short-term rally. Also, volumes have been light (the Yom Kippur holiday is one likely reason) and we're approaching month-end. Sentiment is also very negative. So, in our view all the conditions are in place for at least a short term rally in UBT/TLT. We'll be watching that rally closely -- if it's weak, we will probably recommend exiting UBT for a loss and waiting for a new entry. However, if there's some sort of a meaningful reversal, we would likely send out a flash alert to boost the position. In short, it really depends more on the action in bonds rather than any specific price level.

Over the next few weeks the key to significant rally in bonds would be some sign of weakening economic data (some data may be delayed due to a government shutdown) and or ongoing weakness in the stock market that prompts a flight to safety.

Elliott Gue

5:25

pullbacks and profit-taking. That said, when the energy industry is in a steady uptrend, it tends to look overbought frequently and experiences only shallow/short-live pullbacks.

Buddy

5:25

Elliott, Why is DVN acting so poorly? Do you recommend buying HES here? The DSI for the energy sector is currently 92. Over 90 is in the overbought category and signals a correction. Please comment. Thanks for your reply.

Elliott Gue

5:25

Over the long haul, I think DVN will be OK. They're a quality producer. However, the company has not been in our model portfolio or among our favorites lately for a few reasons.

One of the most important is simply that the stock is fully valued. We value producers based on their ability to generate free cash flow at moderate oil/natgas prices. Based on that analysis we think DVN is worth more than the current quote but a lot of other producers in our coverage universe trade at even deeper discounts. My guess is that this is due to the perception that DVN is a high quality producer.

I think their relatively high leverage to natgas, particularly in regions were gas prices are well below Henry Hub, has been another headwind.

Also, we don't seer many stock-specific upside catalysts for DVN right now unlike, for example, HES which should benefit from the start up of the next phase of Guyana.

The S&P 500 Energy Index is retesting its 2022-23 peak levels. So, certainly, there's the potential for some near-term

Elliott Gue

5:26

Bottom line: In the model portfolio we're keeping some dry powder (cash) but will continue to regard pullbacks as buying opportunities as we think the bull market has years to run.

salvatore

5:27

Afternoon Guys

Roger Conrad

5:27

Hi Salvatore

Victor

5:29

Guys, Donald Trump said if he gets reelected that he would go back to the period of his presidency when US oil production was abundant with low prices. Obviously he would remove all the red tape but that could take time. How do you feel about that?

Elliott Gue

5:29

In think you're right -- any changes would take time. The President, really has less direct influence over the sector than many believe. More benign regulation and less anti-oil rhetoric could certainly help to encourage investment but that takes time to show up in the form of increased production.

salvatore

5:35

Any new thoughts on aes ,as the price keeps slowly sinking .

Roger Conrad

5:35

AES had some good news to report today--the successful sale of a 10% interest in its Dominican Republic operations and a 20% interest in Panama assets for proceeds of $190 mil. Those deals expand local partnerships in both countries, which should ease regulatory and financial burdens as well as spur growth. The stock is under pressure for its foreign/emerging market exposure at a time of economic uncertainty, as it's been since late spring. And there may be concerns about debt, though credit ratings are holding firm. But really the stock is behaving as it has in the past when there's threat of recession, though the company itself is arguably the strongest financially and most recession resistant it's ever been as a business. I have no problem recommending the stock at this price for those light in it--no real risk to the dividend and an increase on the way in December.

aaron24@cox.net

5:41

Good afternoon gentlemen. I am a subscriber to many of your publications. What is your current view on ES Eversource Energy ? This utility keeps getting cheaper and cheaper.

Roger Conrad

5:41

Hi Aaron. Eversource is certainly not alone as a utility stock under selling pressure. But as with AES, I have no problem recommending it at this price for patient investors who are prepared for more downside in near-term. There's no risk to the dividend, which is in line for another increase in February. And the company just reduced its exposure to offshore wind project cost inflation by selling its 50% stake in leases owned with Orsted A/S for $625 mil in cash. The company also reached a tax equity deal with Orsted that substantially reduces risk to earnings from the South Fork Wind project, with a close expected this month. The company focus on a final sale of its 50% interest in three projects under construction with a deal expected in coming weeks. And it will then invest solely in transmission infrastructure, a far lower risk business. ES may get cheaper but I like this entry point for long-term investors.

Jack A

5:43

Hi Elliott:

I know you've written a lengthy presentation on why BOIL currently is a terrible investment........ Unfortunately, I invested in BOIL a while ago, before having the benefit of your input.......... What I'm currently dealing with is what to do now........... I guess I'm hoping for a very cold winter, or a black swan event (like we had with Russia's invasion of Ukraine) to raise natural gas prices and rescue me from some of my heavy losses.................What are your thoughts about the chances of BOIL eventually increasing in price from the current level, and if so when? Thanks

Elliott Gue

5:43

So, right now BOIL tracks the November 2023 US natural gas futures which sell for around $2.85/MMBtu and starting in the middle of next month (October) the fund will roll to track the January 2024 futures, which sell for $3.52/MMBTu.

There's a cost on this roll as BOIL will be selling the cheaper contract and buying a contract at a (much) higher price.

Starting in the middle of next month then BOIL's fate will become dependent on expectations for the coming winter heating season. But, remember, BOIL will be tracking futures trading at $3.52.MMBtu not the front-month contract in the $2.85/MMBtu region.

If its a very cold winter, you could certainly see a bit of upside for January futures from $3.50 to $4 or even $4.50. But with storage still above normal I have my doubts there will be much upside for January futures in a sort of average winter scenario.

So, it's certainly possible you could see some sort of spike in the next few weeks based on something like NOAA's latest winter weather forecast.

Elliott Gue

5:43

But, I regard BOIL as similar to an option -- it's a wasting asset that will generally lose money over time even if gas just trades sideways. That's particularly true around contract roll periods like mid-October. Right now, as we near shoulder season for gas, I just don't see a lot of near-term upside catalysts for January futures.

Alex M

5:47

Hi Roger. As the cost of equity rises for utilities and renewable companies (BEP, CWEN, etc.) due to falling stock prices, do you foresee companies reducing dividend growth or earnings growth forecasts? Many are expecting 5-7% over the next several years, and I'm wondering if those may be dialed back to 3-5% or so. Thanks.

Roger Conrad

5:47

Utilities tend to finance CAPEX with as little new equity issuance as possible. And to the extent they do sell more stock, it's generally through much less disruptive means such as dividend reinvestment plans (which reduce cash outlays for dividends) and ATM (at the market) sales, which are timed to capture the best prices at the company's discretion. I do think the rising cost of debt finance is a risk--but only to the extent regulators don't allow recovery of rate base investment through other means such as surcharges, and companies can't offset it with Inflation Reduction Act tax credits. I will say we have NOT seen a big cut in guidance yet, but it is a possibility I'm always on the lookout for when companies announce earnings and update guidance. And it seems pretty clear to me that some sort of guidance reduction is already priced in for the sector as a whole.

Sohel

5:50

Hello Roger, Very much appreciate the chats. One of the important benefits of this chat is to see the questions that others have that I may have not thought about. My strong preference would be that you post the emailed questions and responses. Thanks

Roger Conrad

5:50

Thanks for that comment Sohel. Just FYI, the questions we did receive and answer before the chat have been pretty much repeated today. But we can definitely post the pre-chat Q&A in the October chat.

5:54

Roger, AY down 30% over the past year, how do you see the future of AY.

Roger Conrad

5:54

I think Atlantica is going to be limbo until Algonquin Power & Utilities either sells its 42.15% ownership stake as it's now indicated or declares definitively it will not, along with a plan to grow that business. I think the sale is by far the more likely scenario, though management may wait to make a move until capital markets are more favorable to would be acquirers. Until then, Atlantica has a very stable portfolio and cash flows that it will continue to increase incrementally, most recently with storage facilities. There is an ongoing strategic review but again until there's a new sponsor, growth is going to be slow and the share price likely range bound. We're just going to have to be patient, but at least the dividend will reward our wait.

Bob W

5:57

Thoughts on holding WPC spin off ?

Roger Conrad

5:57

Hi Bob. I intend to hold WP Carey through the spinoff and the post-spin WPC--which will be heavily industrial/warehouse and other faster growing property types--long after that. I also think the sum of the parts here is well above the low to mid-50s price where WPC trades now. What I'll recommend for the spun out REIT will likely depend on its price when it starts trading. I'm not a big fan of office properties generally, with few exceptions. But these are heavily leased and shares could be attractive depending on the dividend.

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