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Jim Cramer: Oil and Bank Stocks Are a Toxic Mix and Uninvestable


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His view is

- oil / nat gas / pipelines are uninvestable

- banks are close to being called uninvestable

 

The article is a good read because it likely summarizes why these sectors and stocks are so hated right now.

 

The surprise for me is the pipelines. Yes, some have way too much debt. And some will be impacted should the economy slow further. But some of pipelines should get through the current recession just fine with dividends intact.

 

- https://finance.yahoo.com/m/752765ae-4c54-3d0c-b3f9-d2ebe39404eb/jim-cramer-oil-and-bank.html

 

 

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The Williams Company CEO was recently asked about renewables displacing natural gas for electricity generation.  Here is the first part of his response:

 

"Yes. I think it's really important that we actually look at the facts as opposed to kind of the messaging that goes on within the space these days because it's obviously very popular to talk about renewables addition, and it's not as popular to talk about natural gas. And so -- but if you really look at the details, in fact, EIA just put out a report on August 25th that shows the amount of gas generation capacity additions, actually shows all of the generation capacity additions that have been filed for and in long-range plan process. And if you look at that closely, you'll see that Virginia and North Carolina together over 50% of the capacity that's being added is from natural gas...If you take it and look at it on a utilization basis, in other words, how much of the capacity is capable of being generated by those facilities and expected via a planned utilization, it's 77% of the planned additions in Virginia and North Carolina. So almost 80% of the new capacity is on natural gas"

https://seekingalpha.com/article/4373336-williams-companies-inc-wmb-ceo-alan-armstrong-presents-barclays-ceo-energy-power-2020?part=single

I've been looking for this EIA report, and haven't found it yet.  But it looks like the EIA expects renewables to displace coal and nuclear generation.  Natural gas is projected to continue to grow and retain market share.  Their projections are sensitive to gas prices.

 

Richard Kinder has been providing similar messaging during Kinder Morgan's quarterly conference calls, but apparently nobody is listening or cares.

 

To me, natural gas pipelines are the most obvious value in plain sight.  The easements and right of ways become more valuable overtime as it is becoming nearly impossible to build new pipelines in the face of green-washing backlash.

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I agree pipes like Williams' are cheap in a zirp world, but terminal value is a bit trickier. EIA and BP expect, I believe, natural gas demand to grow to 2035 before starting to decline. But there will obviously be major regional differences, and 15 year energy forecasts are mostly crap. Look at something like offshore wind - demand is increasing rapidly and making forecasts done 2 years ago look ridicilous. Since financing is a big part of the total cost of renewables, low rates should be a major tailwind.

 

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I agree pipes like Williams' are cheap in a zirp world, but terminal value is a bit trickier. EIA and BP expect, I believe, natural gas demand to grow to 2035 before starting to decline. But there will obviously be major regional differences, and 15 year energy forecasts are mostly crap. Look at something like offshore wind - demand is increasing rapidly and making forecasts done 2 years ago look ridicilous. Since financing is a big part of the total cost of renewables, low rates should be a major tailwind.

 

Unless they have published something new, they expect natural gas to start to decline around 2045-2050 timeframe.  In fact, worldwide natural gas use is still expected to grow 50% from 2020-2030.

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To me, natural gas pipelines are the most obvious value in plain sight.  The easements and right of ways become more valuable overtime as it is becoming nearly impossible to build new pipelines in the face of green-washing backlash.

 

Bond investors seem to agree with you.  Williams recently issued Holdco level 10-year debt at 3.5% (https://investor.williams.com/press-releases/press-release-details/2020/Williams-Prices-1-Billion-of-Senior-Notes/default.aspx) and OpCo (Transco) level 30-year debt at 4%:  https://investor.williams.com/press-releases/press-release-details/2020/Williams-Transco-Prices-Private-Debt-Issuance/default.aspx.  Meanwhile, the equity trades at a DCF yield well into the double digits.

 

You can find similar things with refined products pipelines.  For example, Enterprise Products Partners recently issued 10-year OpCo level debt at 2.6% and 30-year debt OpCo level debt at 3.2%:  https://www.enterpriseproducts.com/investors/news-releases

Meanwhile, the equity units currently have a distribution yield of ~10.5% and a DCF yield well into the double digits.

 

Something seems amiss in those numbers. 

 

 

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I agree pipes like Williams' are cheap in a zirp world, but terminal value is a bit trickier. EIA and BP expect, I believe, natural gas demand to grow to 2035 before starting to decline. But there will obviously be major regional differences, and 15 year energy forecasts are mostly crap. Look at something like offshore wind - demand is increasing rapidly and making forecasts done 2 years ago look ridicilous. Since financing is a big part of the total cost of renewables, low rates should be a major tailwind.

 

Yes, terminal value is the real issue here and, as you note, projecting energy demand by source in 10-30 years is beyond probably anyone's capability.  The risk is mitigated in part by the high current yields and the ability to not reinvest your dividends/distributions. 

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Cramer is generally a pretty good contrarian indicator. Not to say he isn't capable of valuable insight, but he tends to avoid ever taking unpopular positions with respect to what investments he recommends.

 

"Dont buy C because it cant buyback stock for a year"? I mean thats the definition of short sighted. I'd probably add real estate to this list. Its quite bizarre when you see things like VNO or SPG, clear cream of the crop companies with best in class assets and you still have people finding excuses even at these valuations not to invest. On one end the top performing companies are "too expensive", on the other end, value stuff has "too many problems"...the stock market isn't for everyone I guess.

 

The bull market has probably psychologically scarred a lot of people in ways they dont even realize. Its so common now to see even "investors", avoid things because "they might go down" next week or month. But this should be to the advantage of the patient and astute. Banks, while not my favorites, will continue to gush cash. I typically avoid any type of energy stuff but even there, its definitely appealing and if I was sitting on cash I'd certainly be looking in that space.

 

So in summary, I think Cramer is just catering to the obvious...not many people know how to invest anymore, and even those that think they are, have 1-3 month time horizons...

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I agree pipes like Williams' are cheap in a zirp world, but terminal value is a bit trickier. EIA and BP expect, I believe, natural gas demand to grow to 2035 before starting to decline. But there will obviously be major regional differences, and 15 year energy forecasts are mostly crap. Look at something like offshore wind - demand is increasing rapidly and making forecasts done 2 years ago look ridicilous. Since financing is a big part of the total cost of renewables, low rates should be a major tailwind.

 

Unless they have published something new, they expect natural gas to start to decline around 2045-2050 timeframe.  In fact, worldwide natural gas use is still expected to grow 50% from 2020-2030.

Yep, I went from memory and it seems like I was wrong. I think this is one of the most recent forecasts from EIA: https://www.eia.gov/outlooks/aeo/pdf/AEO2020%20Natural%20Gas.pdf

 

They've been far off before though, but I agree pipes look interesting and bought a lot of Williams myself in March (sold most but still have a chunk in an account with low dividend taxes). There's just such a huge disconnect between public market valuations and what private infrastructure funds are willing to pay for these kinds of assets today.

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Yeah I think he is just echoing the consensus view that the short term and long term outlook isn't good. But that can often create good opportunities for patient investors with say a 3-5 year investment horizon by creating attractive prices.

 

Take oil. Short term demand is going to remain weak and enough oil is economic at today's prices to keep a lid on prices. Longer term alternative energies will take a lot more share. But in the medium term prospects are quite interesting. Demand will recover and while alternative energy will continue to take share it will be a much more gradual process than the market is expecting. Capital constraints and lack of confidence about the future is going to limit investment and European oil majors are already reallocating a lot of their budgets towards long cycle and uncertain alternative energy projects. And shale productivity is already showing signs of declining and has a natural high decline rate and it will take much higher prices to bring a lot of other production back online. So there seems to be a nice set up for higher prices in the medium term and much more rational competition. And so long as supply is reasonably balanced with demand and adjusts for declining demand over time then companies should earn reasonable returns especially in relation to today's prices.

 

I'm less optimistic on banks. US banks are trading at similar levels to a year ago when interest rates were higher and there were very little worries about credit losses and a soft landing expected.

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His view is

- oil / nat gas / pipelines are uninvestable

- banks are close to being called uninvestable

 

The article is a good read because it likely summarizes why these sectors and stocks are so hated right now.

 

The surprise for me is the pipelines. Yes, some have way too much debt. And some will be impacted should the economy slow further. But some of pipelines should get through the current recession just fine with dividends intact.

 

- https://finance.yahoo.com/m/752765ae-4c54-3d0c-b3f9-d2ebe39404eb/jim-cramer-oil-and-bank.html

 

Jim Cramer’s show is toxic and unwatchable

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