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Best of Breed: MLPs to Renewables
02/09/2015 9:00 am EST
Roger Conrad, editor of Conrad’s Utility Investor, sees long-term opportunity for investors willing to buck the headwinds of a rising US dollar and declining energy prices.
Steven Halpern: Joining us today is Roger Conrad, editor of Conrad’s Utility Investor. How are you doing today, Roger?
Roger Conrad: Really good, Steve.
Steven Halpern: Well, thanks for joining us. The energy sector has been hit really hard in recent months. You suggested evaluations in the MLP space are now becoming more attractive for long-term investors. Could you share your outlook?
Roger Conrad: Yes, certainly. You know, I think what people will discover—certainly the next six to nine months—is that not all pipelines or midstream MLPs are created equal.
You’ve got some of them that I think are coming down in a pretty good bargain range and these are the companies that are larger, they have stronger balance sheets, they have better customer contacts, they are diversified over more energy production basins, they have indispensable assets, and in most cases, they were among the first people to the party in terms of building out American midstream infrastructure.
While there is a lot of potential out there—for building a lot more projects and so forth—these are the companies that are really well positioned to do it.
Now, on the other side, you have a number of smaller companies, companies that are more concentrated, they are focused on one or two customers, and in many cases, these customers—which are producers—are extremely stressed by low oil prices.
With these companies, I think we could see volume diminishing, we could see actually some contract defaults, so I think that’s a group that you don’t want to be involved with. But there are, again, if your investors are willing to do a little differentiating, I think, are starting to find some really nice bargains out there.
Steven Halpern: Now, for the portfolio in Conrad Utility Investor, you really emphasize the importance of focusing on best-in-class MLPs and separating those from the run-of-the-mill players. Can you perhaps briefly highlight some of the MLPs that you feel represent the best-in-class for investors to consider now?
They are a very acquisitive group, but they are also very large and they have been able to make a number of very good deals over the past several years that have, more or less, bullet-proofed Energy Transfer against many of the challenges you see in the energy space that are going to affect other midstream companies.
I really like the deal they just announced with a company called Regency Energy Partners (RGP) and this is an affiliated MLP that had the same general partner. But, by consolidating, they are going to realize a lot of efficiencies.
They are going to reduce the cost of capital to the organization, and I think eventually once we get past the close of the deal, it’s going to make Energy Transfer group much more able to do a number of other acquisitions.
Again, I think we are going to see a number of midstream companies in trouble and the opportunity to buy the stress—good assets from the stressed—I think will present itself in a big way to companies that are ready. So I think they are in really good shape.
I like the newly constructed Kinder Morgan (KMI), they acquired their MLP affiliates, Kinder Morgan Energy Partners (KMP) and El Paso Pipeline Partners (EPB) and have created a company with about $90 billion in market capitalization.
It’s actually up about 20% since oil prices started falling, so they are in very good shape to begin making a series of acquisitions. Again, there is no rush for these companies.
I think we are only starting to see some of the fallout from lower energy prices hit the midstream sector but I think as that starts taking place, you know, as some of the companies start posting rather poor results and these opportunities open up, this will be a company that can really take advantage.
Steven Halpern: Now, in your latest issue, you point to a related company—related to the MLPs—and that’s Brookfield Renewable Energy Partners, LP (NY: BEP) (TSX: BEP-UN), which you recommend as a buy for conservative investors. What’s the attraction, here?
Roger Conrad: Well, this is a company that’s a power producer, so it’s in a business that has been volatile for some of the players. Their power plants are all either hydro or wind power plants so they’re advantaged in terms of pollution and so forth, in terms of carbon dioxide, which is an emerging issue around the world.
And this is also a company that’s backed by Brookfield Asset Management (BAM), so they have been very acquisitive.
When they add new projects, when they add new power plants either by acquisitions or by building them, they had the cash flow and they are able to pay a higher dividend, raise that dividend.
Towards the end of last year, they raised their long-term dividend growth target rate from 3%-5% to 5%-8% and that’s, again, a sign that they are having a lot of success finding new projects.
They have projects in Ireland now, also Brazil, US, and Canada. And again, they have a deep pocketed parent, a very focused expansion plan, and are also very shareholder friendly in the form of paying more and more dividends.
Now, they are also priced in Canadian dollars, and they have a dividend in Canadian dollars, and that has made a difference—with the Canadian dollar weakening here—particularly in terms of share price. If you look at the share price in Canadian dollars, it’s taken off, it’s skyrocketed.
In US dollars, it has moved up a lot more slowly so I think that’s going to actually work out to your advantage if you bought stock now—with Canadian dollar showing some more strength—but, at this point, you can certainly buy it cheap with your US dollars.
Steven Halpern: Now, along those lines, you mentioned in your latest letter that despite the headwinds and the rising dollar, several international companies have used this period to strengthen the business and it has made their stocks better buys now than ever. Before we leave, could you perhaps highlight a name or two in the international arena?
Roger Conrad: Well, if you include Brookfield Renewable Energy Partners, I mean, that’s definitely one. Also, in Canada, there is a company called Pembina Pipeline Corp. (NY: PBA) (TSX: PPL) that I have talked a lot about in the past and same story, same chart, basically.
The stock has done very well over the past year in the terms of Canadian dollars but has been hit by the fall in the Canadian dollar and the US dollar price.
But it is growing its dividend, growing its asset base, and that’s also in the midstream space that we were talking about, but they are very strong in Canada, and again, I think in very good position there.
Now, looking to another industry, I like a company called Telefonica (TEF), which is a big Spanish telephone company. It is based in Spain, but also nowadays, it has much more of its business is in South America.
They, of course, had a tough time in some of their markets, a lot of currencies fluctuating around, weakness in some of the developing markets, and also, particularly in Europe, where there has been competition as well as weakening economies.
But this is the company that seems to have made its way through, they have a great portfolio of assets, and I think are turning around in terms of profitability, cutting debt, and so forth.
This company is priced in euros and so a lot of people look at the price and say well, it’s come down over the past year but again, in terms of the home currency, it’s actually performed pretty well, and I think we will see a lot more of that going forward.
Steven Halpern: Well, thanks for taking the time today. We always appreciate your insights.
Roger Conrad: Well, thanks Steve. I appreciate the opportunity.
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