Valuentum Exclusive Analysis for the Discerning Investor

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Jun 1, 2021

ICYMI -- Video: Exclusive 2020 -- Furthering the Financial Discipline
In this 40+ minute video jam-packed with must-watch content, Valuentum's President Brian Nelson talks about the Theory of Universal Valuation and how his work is furthering the financial discipline. Learn the pitfalls of factor investing and modern portfolio theory and how the efficient markets hypothesis holds little substance in the wake of COVID-19. He'll talk about what companies Valuentum likes and why, and which areas he's avoiding. This and more in Valuentum's 2020 Exclusive conference call.

May 10, 2021

Inflation! How to Think About Value Duration
Image Shown: Longer-duration free cash flow stocks are more impacted by changes in inflationary expectations and interest rates (up or down) than stable and/or stable and growing free cash flow generators. This example shows the impact of falling interest rates (10%-->5%) on stable versus longer-duration hypothetical future free cash flow streams, all else equal (the opposite would directionally be applicable in a rising interest rate environment). There's nothing 'all else equal' in the real world though. In the event of rising inflationary expectations, we would still expect speculative technology stocks to take the biggest hit. On the other hand, we would expect strong and growing free cash flow powerhouses that can price ahead of inflation such as big cap tech to handle the environment well. Though banks, energy, and the metals and mining sectors may lead the market for some time, we still like large cap growth and big cap tech for the long run. What many may be overlooking is that, for those with pricing power, higher inflationary expectations translate into higher product and service prices, too. Big cap tech (and their pricing power) is well-positioned to handle such an environment. We’re not overreacting in any respect, and we’re not going to chase commodity prices or commodity producers higher. Commodity prices are simply too difficult to predict in almost all cases, and banking entities are far too susceptible to boom-and-bust shocks for us to get comfortable with their long-term investment profiles. All in, we’re sticking with companies with strong net cash positions and future expected free cash flows (and solid dividend health, where applicable). Some of the strongest companies that have these characteristics can be found in large cap growth and big cap tech. Facebook remains our top idea for long-term capital appreciation potential. In the meantime, we’re comfortable watching the market chase a rotation into more speculative areas.

Feb 14, 2021

Earnings from Our Two Favorite Midstream MLPs: EPD and MMP
Image Source: Enterprise Products Partners L.P. – Fourth Quarter of 2020 IR Earnings Presentation. The distribution yields on the units of both Enterprise Products and Magellan Midstream are quite lofty, and while we caution that these midstream MLP’s have hefty net debt positions, they may be best-in-class. Still, both entities need to retain constant access to capital markets to refinance their debt burdens, ideally at attractive rates. Declining capital expenditures and rising utilization rates, if realized, should go a long way in improving both firm’s abilities to generate free cash flows this year and beyond. In our view, we see Enterprise Products and Magellan Midstream being able to maintain their hefty payout obligations going forward. We continue to like exposure to both Enterprise Products and Magellan Midstream in the High Yield Dividend Newsletter portfolio.

Jan 11, 2021

Energy Sector In Shambles, Looks to Recover But Headwinds Persist
Image Source: ConocoPhillips – November 2019 Analyst and Investor Meeting IR Presentation. Though raw energy resource pricing is on the rebound, the outlook for the oil and gas industry remains stressed. Global demand for oil and related refined petroleum products remains subdued due to headwinds generated by the ongoing coronavirus (‘COVID-19’) pandemic. The OPEC+ oil cartel has responded by pledging to keep a significant amount of oil output off the market for an extended time. However, raw energy resource prices need to go much higher and be sustained at elevated levels before the space could become attractive from a longer-term perspective. In our view, the US upstream industry (specifically those in the shale patch) need WTI to move and stay north of $60 per barrel to be in a position to generate meaningful free cash flow while also investing enough to maintain their production bases. We think the dividends at the oil majors may be at risk, even Exxon’s, and we include two high-risk midstream stocks in the High Yield Dividend Newsletter portfolio to capture a relatively benign risk-reward scenario when it comes to their respective yields. We maintain a cautious view on the MLP business model, more generally, however. For now, we are keeping a close eye on the energy sector considering things are slowly moving in the right direction. However, given the collapse in raw energy resources pricing witnessed during the first half of 2020, the industry still has a long way to go before it is out of the woods, so to speak.

Nov 17, 2020

Chevron’s Forward-Looking Dividend Coverage is Becoming Stressed
Image Shown: Chevron Corporation reduced its capital expenditure expectations a couple of times this year, though that still has not enabled the firm to generate meaningful free cash flows given the various headwinds facing its businesses. Image Source: Chevron Corporation – November 2020 IR Presentation. On October 30, Chevron Corp reported third quarter earnings for 2020. As expected, it was a brutal report from Chevron. The ongoing coronavirus (‘COVID-19’) pandemic decimated global energy demand and severely weakened raw energy resources pricing at a time when refining margins are quite weak. This double whammy saw Chevron post a $0.2 billion GAAP net loss in the third quarter of 2020 as its revenues tanked.

Nov 4, 2020

Our Thoughts on Magellan Midstream’s Latest Earnings
Image Shown: Keeping the many headwinds facing the energy infrastructure space in mind, Magellan Midstream Partners LP remains one of our favorite midstream master limited partnerships. Image Source: Magellan Midstream Partners LP – October 2020 IR Presentation. On October 30, Magellan Midstream Partners reported third quarter 2020 earnings that beat both top- and bottom-line consensus estimates. The midstream master limited partnership (‘MLP’) space has faced enormous headwinds due to the ongoing coronavirus (‘COVID-19’) pandemic, though the firm was still able to generate sizable free cash flows during the first nine months of 2020. Magellan Midstream is a modestly-weighted holding in the High Yield Dividend Newsletter portfolio, and as of this writing, units of MMP yield ~11.1%. Though that yield is quite high, given that the firm’s free cash flows should grow significantly going forward, we are optimistic the firm will be able to continue making good on its payout obligations for the time being.

Oct 20, 2020

ConocoPhillips Is Buying Concho Resources
Image Shown: An overview of the pro forma asset base of ConocoPhillips and Concho Resources Inc. Please note that Concho Resources’ main operations are in the Permian Basin in West Texas and Southeastern New Mexico, a region that ConocoPhillips seeks to grow its exposure to. ConocoPhillips has an expansive upstream portfolio with operations worldwide, though its North American position is set to become a much larger part of its company-wide profile. Image Source: ConocoPhillips – ConocoPhillips & Concho Resources Transaction Announcement IR Presentation. On October 19, ConocoPhillips announced it was acquiring Concho Resources through an all-stock deal. If the deal goes through as planned, each share of CXO will be exchanged for 1.46 shares of COP, and as the press release notes, this represents “a 15 percent premium to closing share prices on October 13.” However, please keep in mind shares of CXO have fallen by roughly two thirds since October 2018 as of this writing, indicating ConocoPhillips is really not paying much of a premium for Concho Resources.

Oct 15, 2020

Our Thoughts on the Potential Acquisition of Concho Resources by ConocoPhillips
Image Source: ConocoPhillips – November 2019 Annual & Investor Meeting Presentation. According to Bloomberg, the super-independent ConocoPhillips is currently talking with Concho Resources about acquiring the company. We do not expect that such a deal will come with a significant premium, and furthermore, and we expect that such a deal will likely be funded with equity. Our reasoning is underpinned by recent M&A activity in the oil patch, such as the all-stock acquisition of Noble Energy by Chevron Corporation through a ~$5 billion deal that was completed in early-October. That deal involved Chevron paying a ~12% premium (based on ten-day average closing stock prices) at the time of the announcement, though please note shares of Noble Energy had cratered beforehand indicating that Chevron did not have to pay up for the company. Noble Energy, like Concho Resources, also had a significant position in the Permian Basin (though its Mediterranean assets were Chevron’s main target, in our view). We covered that deal in great detail. As it concerns our view that ConocoPhillips would likely use equity instead of cash to acquire Concho Resources (should such a deal materialize), that is largely due to ConocoPhillips’ sizable net debt load at the end of June 2020 and its inability to generate meaningful free cash flows in the current pricing environment for raw energy resources. Additionally, Concho Resources had a net debt load at the end of June 2020 and is also unable to generate meaningful free cash flows in the current environment. The oil patch is contending with serious financial constraints and all-stock acquisitions/mergers with minimal premiums are likely going to continue being the norm for some time.

Oct 2, 2020

Our Thoughts on the Oil & Gas Industry
Image Shown: Crude oil prices, measured by the WTI benchmark, plummeted during the initial phases of the COVID-19 pandemic and have yet to fully recover. Declines in global crude oil prices have depressed prices for natural gas, natural gas liquids, and liquified natural gas as well. We expect that it will take some time for the oil and gas industry to truly recover, and hefty net debt loads combined with onerous dividend obligations are making that a very tough task. Juicy dividend yields are a sign of the headwinds facing the oil and gas industry and are not a sign of strong underlying strength in those firms that are paying out generous dividends. Most of the juicy dividend yields within the energy space are a sign of the stress facing those companies and the industry at-large, and we caution that the chance other oil majors follow Shell and BP in cutting their payout remains very likely. For instance, Exxon Mobil’s payout is simply not well-covered in the current raw energy resources pricing environment and the firm is taking on a lot of debt to cover those obligations. Chevron Corporation’s payout is also on shaky ground as it generated negative free cash flows during the first half of 2020 while carrying a large net debt load at the end of June, though like Exxon Mobil, Chevron’s management team has stuck with its current dividend policy so far. Like Shell, Chevron also grew its natural gas and LNG business meaningfully over the past few years, but that strategy did not pan out as intended.

Sep 3, 2020

Schlumberger and Liberty Oilfield Services Make a Deal
Image Shown: Schlumberger NV is combining its OneStim business with Liberty Oilfield Services Inc. The picture above is an overview of the combined company on a pro forma basis. Image Source: Liberty Oilfield Services Inc – Schlumberger to Contribute OneStim to Liberty IR Presentation. On September 1, Schlumberger and Liberty Oilfield Services announced that Schlumberger would combine its onshore hydraulic fracturing business in the US and Canada, OneStim, with Liberty Oilfield Services. That includes Schlumberger’s pressure pumping and pumpdown perforating businesses in the relevant regions, and its frac sand business in the Permian Basin (West Texas and Southeastern New Mexico). In return, Schlumberger is getting a 37% equity stake in Liberty Oilfield Services (on a pro forma basis) which primarily offers pressure pumping and other oilfield services to upstream companies operating in onshore US markets. The day the news broke, shares of LBRT were up 36% during normal trading hours while shares of SLB were down 1%, as investors clearly saw Liberty Oilfield Services as the big winner from this industry consolidation.