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The State of Midstream Follow-Up Interview with Chris Sighinolfi Jefferies Research Managing Director The Stock Podcast, Ep. 48


Um I think with it also has been the movement to say. I don't WanNA WANNA own hydrocare. One of our. Our strategists wrote a couple months ago nate looking at oil and gas and comparing it to tobacco and I didn't realize has she went and SORTA re- ran the performance tip. Tobacco index effectively became too. Many people uninvested in the late nineteen ninety s because of pretty well established and better understood health impacts of smoking but also litigation ripped that hung over the sector from two two thousand and two thousand seventeen with reinvested incident that tobacco and that's outperformed ask about six. It's it's not. It wasn't a small margin so space becomes uninhabitable for certain thematic and traits down to really attractive multiple generating significant amount of cash and and funneling that cash directly back to shareholders at the company. And over the course of more than a decade and a half performance the broad market you look at a dynamic right now where people take me. I don't want to own and space is getting better and so it seems like that might be a useful proxy for us to think about this group if you're not just at the outset in opposition to owning anything. Hello and welcome to the PODCAST. I'm Abercrombie the host of the only investing podcast that gives everyone a chance to hear public company. CEO's CFO's described their business and provide the investment case for their company however not all interviews feature public company company management teams every once in a while I get the chance to interview industry experts. And this is one of those interviews. I'm extremely honored to bring you a follow up interview with Chris Signal on the current state of midstream. Chris is a managing director at Jeffrey's research. He's also one of the top operated Wall Street analysts who covers the midstream space. He's also a friend and I personally hold Chris in the highest regard when it comes to analysts on wall st covering well after but in particular the midstream space. He's an extremely thoughtful and well-spoken guy in it's just really great to have him back on the program. Graham during this conversation we talk about industry developments distribution cuts and the self funding model that midstream companies are pursuing. Today we talk about investor sentiment and we talk about the outlook at a pretty high level. anyways it's a great interview and I really hope you enjoy it. Uh Stop there. Let's get to the interview With Christophe Managing Director Jeffries Research Chris. It's so awesome to have you back on the podcast again. Thank you for coming on the show. Oh absolutely glad to be here. How are things with you? How's work? How how's everything? Well I I. It's challenge With energy markets. How they are you know I think we? We recently moved Thursday but the last several years we sat next to the tech research team and the contrast of their markets after every day in our is going down every day was was difficult to contend with. But we're doing well It's still obviously an interesting an interesting Space Follow And trying to do our best. We have had some changes. Recently we jeffries decided to cease covering the exploration and production space in the oilfield services space so our energy offering is Is more narrow and focused than it once was as a firm and so we're just adjusting to that but but otherwise doing well doing well. Thanks for asking while I I guess with respect to the energy team does that tell you something about just you know investor sentiment sentiment. Does it tell you anything about kind of where things are headed in your world right now. Well I you know. I think it says a couple of things. I think. It talks about out the flexibility of a firmly Jeffries to make commercially driven decisions Rapidly maybe than some of our companies. Do you know I and from our perspective oilfield service isn't necessarily a full-fledged independence sector anymore there's probably names within then that that will carry on and intended to be relevant but to have a standalone research franchise catering to it at our our decision and we don't think that's likely future on the emp front. It's a slightly different decision. Still commercially driven. And and I think the conclusion is that unlike a downturn in two thousand fifteen twenty sixteen. We don't that that space is going to be recapitalized in in a public space the way it was three or four years ago that we can remain active as an investment banking advisory effort on asset. I said transactions or company combinations or bankruptcy workouts but that we don't necessarily need to cover the public players the way we did before. I don't know if that'll be a permanent position but I think that's a runway. That's a view that the management holds for at least as the immediate and intermediate term. And that there's still a market four and a commercial reason to cover the downstream stream energy franchises so as you know government trained with other refining cover gas utilities and my colleague Jason Gammel covers integrated We also you know have expressed desire to pick up names in the space that we don't yet cover you know some of the Canadian players with action companies and and we still find support internally. Do that over time so I think it's really a thoughtful approach to where we can commercially compete. And I think it's a Jeffries to constantly be evaluating where we are GONNA do. We're not and adjust accordingly. I'm not sure it's anything thing more broad than that. Yeah does it make your job harder it. It doesn't it doesn't it. Doesn't I think what it makes. More difficult is is optics. I think there is contention when you don't cover emp. And you don't cover all of us and you used to cover electric Richard Utility and you don't cover that anymore that in some way the Energy Eckert is not a core support or core vertical for the firm. And I don't think that's true and I'm not talking selfishly are I've I've I've I've had conversations internally about this. I think it's really just driven by commercial celebrities now and for the foreseeable future and where we can't where we don't think we can but from a day to day it. I don't think it makes our job more difficult. It certainly puts more onus on us to pay attention to things that we might have just casually relied lied on those teams provide to us. We did pick up. A colleague of mine Tom Hughes joined our team. Formerly he was art of the team so he you know he spent the last six seven years you know building out a detailed knowledge of BNP the fact that he's now part of our team. I think we are frankly. More in tune with what the producers are saying than we were when we were reliant on things being fed to us from an independent in eighteen again one that sat down the hallway from us but not wanting that as closely intertwined as Tom is with him. Now Yeah we did have. We did have can't cancel our global energy conference. So yeah that's maybe the one near term drawback I know that there were clients and so we have that appreciate that. That event You know we'll do something different in in twenty twenty and beyond. Actually we've talked about Trying to participate in our industrial teams conference next year as so many energy companies. Feel like they're from a value perspective on Xtra being energy companies and there may be an effort to sort of rebrand themselves and the fact that so many are preaching capital discipline and free cash flow or movements more towards free cash flow effectively metrics more akin to what industrial companies have have long been discussing and been valued on. I think that's an effort to me. Present to clients or clients and investor clients A forum that would be different than what we've done in the past and certainly when our peers offer so it just requires a pivot and requires us to be a little bit more thoughtful about what we're doing and why we're doing now. That mixing of industrial in energy. I mean as you you probably recall at Janus. We experimented with that but it is interesting within the context of EMP's talking about the manufacturing process. Yeah exactly these. He's paradigm shifts right. I mean you've talked about this on other podcasts. I've listened to it that you posted when different industries go through either self identified or externally identified paradigm shift moments. I think U. S. energy is going through one of these and so there's a retooling of an recalibration effort of everybody involved in it as you know what how. How should we look at it now? Where we wrong to look at it the way we were looking at or are there other sectors that have gone through similar transformations what other learnings of that process and And again just make adjustments accordingly right however we best see fit. Yeah it kind of feels like energy. I mean I'd love to get your perspective on this but it kind of feels like energy has has been going through this paradigm shift for like four or five years now. Yeah I mean well midstream peaked in fourteen. You know we had the OPEC meeting November fourteen where they decided to defend marketshare instead of price and that really led to a tail down in commodity expectations -tations and commodity prices and funny and obviously had a wider impact than I think people thought at the time and then when I talked about a a year and a half ago when I was last on on the cast it exposed a lot of the problems certainly from an interesting perspective in the structure of the NLP LP of some of the abuse characteristics from the GP sponsors. And I think the cleanup trade that has occurred for an L. P. Age large measure. Buying back in again mouthpiece. Subsidiary into the parent corporate and with it creating taxable event intrastructure that was marketed as having really unique long-term tax benefits. It's no surprise to me that we're now without a a home base investor group and we see that process effectively you know alienated the like investor you overlay on top papa. That a pretty significant change very rapid change in investor views of hydrocarbons environments and the rise of sort of more broadly speaking ESPN mandates. and think. About how you know an NLP structure in the energy in a hydrocarbon edrich carbon energy space. It's within that framework. It's no surprise to me that it just takes a long time. Yeah it's funny you mentioned. Es G and I think for many investors when you hear es g the first letter really sticks out which is environment and and obviously energy companies in midstream included. They get lumped into that sort of bucket of companies that don't really care about the environment. Prophets over our kids' future or climate change or whatever and so for me it was just really interesting to see that there is this concerted effort on the part of midstream companies to really ramp up their es. G resume that or not it just to see them talking about espn but it was also because like why do you care I an es. G investor probably isn't going to invest in the midstream company in the first place or an oil and gas company. The in the first place because it doesn't meet goes contradictory to what they're investing in the first place is so wha what's interesting raise because that's the way I used to think too. And then there was I thought really helpful panel discussion at the FBI. See Conference five spraying actually to spring conferences. That I go to the American Gas Association albums and the conference both had animals and they were investors on those analysts who sort of negated that view or or Change that dude for me. Who Said we run money? Globally everything we run is not too nasty mandate and it means that ad within the energy investments we make we we overlay ESPN characteristics. So we're not comparing on. Es G METRICS OIL GAS COMPANY WITH RETAIL Company or no gas company with a Tech Company. We're comparing oil and gas companies with oil and gas companies when we're investing in oil and gas and so what they were imploring. The midstream group to do I mean I see conference was to embrace. Yes she was to public. I wish sustainability reports quantify the best that they could institute sort of You know tracking mechanisms goals. Talk to reduce You know your impact on the environment or you know from a diversity standpoint or a social standpoint. You know some of the inclusion metrics that you might track from an employee base from a community engagement perspective so I used to have the view that you just express which is that that was it worth it. You're already. You're already out of the equation because you enable hydrocarbon production and so and and if you're an NLP certainly you have government that's almost non-existent to why even try but after after you're listening to several panels of investors who invest on inch es she mandates. They've sort of corrected my view to say no. You should care because it's not about out you being more socially responsible than excise tax company. It's about you being more. Socially responsible more environmentally conscious than your peer oil and gas. My earlier comment was more about that. I think a lot of people think the way you and I do or or I used to that. Oh I'm just not going to own anything related to hydrocarbon that's not necessarily an. Es G approach approach. That's just saying much. The same way people said back in the day I don't WanNA own tobacco right. People are now saying I don't WanNA own hydrocare. Yeah as a blanket. I'm out of that. And that's a much more difficult thing to contend with and I frankly think flies in the face of a lot of environmental all goals that we have. I think the space has not done a good job. Some of the companies are now starting to to discuss the significant improvements in you yes. Co Two or Nox or sox reductions from the US electric powerfully over the last ten fifteen twenty years because of an embracing of natural gas and empowering down of like a C- coal fired power plants or or fuel oil power plants. That's a really positive environment lorry that I don't think is being told You know you look at states like the one I live in New York where where we've weaponized the or one water permit process clearly for political reasons. And you now have this fight between the Governor and national grid over the lack of supply natural gas in the New York City and Long Island area. which is I th I think and I know I'm closer to this but I think a fair reading of how that dynamic came to be is a direct result of the fact that we can't build new natural gas pipelines and New York State and as a result of that as populations Sion's grow and demand grows at some point? You just don't have the Safai to be able to continue connecting up new customers. Which is where National Grid is down South and you know in a letter a couple of weeks ago? The governor's now threatening their licensed to continue operating claiming that there at alter that when it seems to me that if we had a fair and functional and legally sound process that might not be the case I mean these pipelines that are coming coming in from other states are getting approved by those other states and by the federal government on environmental reviews. And we're denying them in New York to a significant fanfare on Earth Day to several instances that so it seems very politically motivated and it seems to me a little bit shortsighted because as those customers if they still want to keep their home or something. It's going to you know they're going to have to pursue propane or fuel oil some other author dirtier shorts a did see whatever it was Cuomo Komo's threat to remove their their utility license and A. Ah but I didn't know exactly what I kind of figured it had something to do with just supply of natural gas. But what is National Grid's argument that they could build out the infrastructure build pipelines two houses residences and then they would then not be able to well they were they. They are the Customer I think specific issue is that the customer for a four hundred million dates anchin on on the transport system that Williams has been seeking to trust and that was a project called northeast supply and demand that you Williams started the for refile process or in May of twenty sixteen here. We are in November of twenty ninety three and a half years later on the the original time on it would be in service and so that would provide national grid with a significant news source of firm natural gas. What's struggle if you're a utility company is regulated by the State Utility Commission and they take seriously the fact that you have enough firm supply to satisfy your customer base on calculated e quotes? And so if you don't have that I then and it's a responsible to sign up new customers and so the the problem here is if identified a project and they've been working on it for three and a half years to make sure that they stay ahead of the supply issue. I thought what was most interesting. About the governor's letter. He was sort of chastising them for having pursued sued fuel oil and natural gas conversions in their service territory which frankly speaking is what. Utility commissions have been encouraging the country over because it's a significant improvement in the environmental footprint of that customer. So he was in his letter. He's basically saying well. You encouraged conversion to the fuel supply that you provide and in doing so. You jeopardize your ability to enact new customer. That's true but it wasn't like they were not planning to have additional Safai they were contracting with a major pipeline. I find operator or additional by actress got sidetracked by the New York. DC and the real unfortunate thing and is that you know areas to the north of us. Now I'm from Maine originally. That's a low income stayed at a high energy cost state. That's stay held hostage by scratch. You can't access New England without traversing New York. So you know these issues like I don't WanNa get too little on your podcast on cash but I. We don't have comprehensive policies point and we're talking and disjointed fashion about environment where the natural gas in placement of Coal Joel Story is an incredibly positive environmental story for twenty five years. Should be proud of it. Not embarrassed and so that that is is just perverts take it a step further if emp companies are a problem because they produce hydrocare and midstream companies are problematic. 'cause I encourage or at least facilitate US and why do gas utilities traded historically high multiple omen literally only transport methane or direct consumption. They're not hard of this conversation and I don't know why I think that'll change. What do you think that'll change? I ah because you have states like New York that have said carbon neutral economy-wide targets to be effective thirty years. And so it's not clear to me how you get to that. Point without trying to reduce the consumption of carbon and so if where limiting the ability to produce perhaps and we're frustrated and the ability to transport and make supply available and it would only be natural matter of time before that starts to impact the gas utility group both from a fundamental perspective. Dan from a psychological perspective masturbate. But as yeah. We don't get this question. I asked on every once in a while just to I was asking this action down. We we cover national field guy. Let's say upstate utility. So I was asking on their last call. What are they doing planned for this now? They have a compelling response about the fact that they serve a low on a low income but not a wealthy service territory and the Buffalo and upstate a region that they have huge penetration ninety five percent of the customer heating load in the region and that national gases are more cost effective active and other forms of energy and those other forms of energy are higher co two emission. The point is we've set a lot of goals for ourselves and we haven't ironed no doubt the mechanisms to get from where we are where we WANNA be. When do you think it will change? I mean does it. Does it have to be some sort of event where you know whatever call it a blackout or Brownout or a have to be some sort of fiasco before people I think there. Yeah I think there have to be things that wake wake up the populace to the fact that Having a backup source of on is a worthwhile and that that's not something that you can't let die on the vine and then a man moment's notice I mean. Look I I think back to Hurricane Sandy which hit hit the New York area in the fall twenty twelve. You take away electric power from even the most cosmopolitan liberal society is that that is Manhattan. You take away our thirty six hours and people become savage. It's it's really not not too long before society starts to break down so you know that that was just one example living here if you think about him. I my wife's families in San Francisco. Yeah so you you have issues now with Chichi any and you know the wildfire risk across their their electric grid where facing You know unlimited liability in the event a wildfire wildfire. They find it more effective to or safer more prudent I don't know the right characterization. But shut down the a grid when conditions are ripe For or heightened for for wildfire rex. I don't know if you've ever gone on Zillow. REALTOR DOT COM and look at the property prices in the bay area. But if you were live you know in Marin County and own a home. That's several million dollars. In value and not rate ably probably have reliable electric service in the month of September October November and the utility companies telling you that might be the case for the next ten years. What does it do to behavioral change? So you're saying this. Screaming buys out in San. NO NO NO I. I'm saying somebody who who might move there at some point. I was hoping things like this having effect on the real estate market has I don't they don't appear to really okay. Thanks this is. This is my point that I think if this becomes a new reality right. It's happening once now. This is the first all happened. My my point to you is you're asking you know. What will it take to people? Maybe maybe not vilify hydrocarbon quite particularly natural gas being a very clean alternative to a lot of what still consumed in areas of the country. You know what what will take a change in mindset. I think it's a facing an alternative of just strictly going without. Okay okay. Maybe this isn't as bad as I have painted it to be from a safety perspective. It's it's something worthwhile that we invest in. I mean there's a lot that I think is going to be done to electrify and with battery storage. Make sure you have sort of on location storage to cover periods of outage but that's not an immediate conversion either and it's quite expensive so I mean to convert entire grades to electrify intra fiery something. So these are things that you know since the last time you and I talked certainly become more topical more front of mind with folks. ESPN focus has has dialed up. But I think with it also has been the movement to just say I don't WanNa own department and so we've worked one of our our strategist wrote a couple months ago and looking at oil and gas and comparing it to tobacco. And I didn't realize he went and sort of re ran the performance of tobacco companies tobacco index effectively. You know became too many people on investable in the late nineteen nineties because of be now pretty well established and better understood health implant impacts of smoking but also the litigation ripped down over the sector because of either misstatements or abject lives at the group had told to protect. And if you looked at it and this is what he went back and looked at that from two two thousand and two thousand seventeen with reinvested dividends that tobacco index outperformed. The answer is about six and a half times. Wow it's it's not. It wasn't a small margin. He so as face becomes UNIN investable for certain thematic and trades down to really attractive multiple generating a significant amount of cash and funneling that cash directly back to shareholders of the company and over the course of more than a decade and a half trump says the performance the broad market. You look at a dynamic right now where people are telling me. I don't WanNA own hydrocarbon. You're looking at significantly compressed multiples on my group relative to where they used to trade relative to other other groups and space is getting better. We talked about last time. I was on the podcast. About structural simplification transactions. That made things more clearly clear to analyze but also gave better governance. We've seen a lot of that blackout. We've also seen an effort by the producers to move towards free cash flow generation. We've seen midstream. Companies seek to lower leverage and move towards increasingly towards free cash flow host. I cash flow profile and so it seems like that might be a useful proxy for us to think about this Reu. If you're not on just at the outset you know in opposition to owning anything hydrocarbon related. I thought he was rather thoughtful about. How do we think about this now? The cat again one on one major point of differentiation. And I think it's a sticking point in that group right now is that you know the capital intensity of tobacco and the capital intensity of oil oil and gas development or GNP or other elements of the value chain are not equivalent. So I think there's an adjustment factor and that's one of the things going on in space right. Now is a real question from some investors to say how does if the producer group is going to moderate its investments and and as a result it's volume growth is going to be much lower than it once was and the GMT group and the transmission transmission groups. Spend less as well because volume growth is not as significant. What does the cash flow profile? You know for a long time. It's sort of this on the come cashless story. Where at some point cap X.? Would fall down. cashflows would hold up and you could harvest the accents. Now that we're at that point I think there's some trepidation that that may not be true for. Certain operators articulate the GM. Yeah I think that's why that's located as much as it has in the last couple of months which ones come to mind I well. That's what I think's been so interesting. And why I made the comment I did about just aversion only. GNP is really hasn't mattered. Where the company is who it's counter-parties are or really any of those defining differentiating characteristics so you can look at you know? MP LX or Cwm or Williams in the northeast you can think about De in Colorado U N link in the Mid Continent Oklahoma. You about Targa in the Permian right. They have all seen significant multiple compression. They've seen significant deterioration everybody In the last nine months some very severely in in the last couple of months I think people said okay. Well I'm worried about not only the financial health of the e Arner but even if that partner partner is capable of sustaining itself a cash neutral you know profile standing production how much rateable capital is required by Ah the midstream group servicing the GMC group servicing it and does the cash low-profile makes sense to I wind up with enough cash generation Asian to cover a capital budget in a no growth scenario and the current evidence and you see dividend yields on these names widening out dramatically. Some of them are north of twenty percent indicating very clearly. Innate Rod market is saying no. I don't believe I own a couple of I interviewed Berry Davis the CEO of n link midstream just a while back and in that conversation with Berry I I brought up the topic of an links distribution well. He made it very clear that they don't have to cut but he's leaving that door open. I personally personally descends. That they're going to cut but from their perspective at all just really depends on whether or not their stock is getting credit for the distribution which gives me the sense that they're going to cut and clearly a lot of other investors. Are they fill the exact same way. Given where prices and where the distribution yield is. Yeah well if you for example may we go back to what we wrote about them on the third quarter. We've been asked. We advocate that to us with Devon running no rakes in Oklahoma an uncertain sort of volume metric future for some areas where they've invested a significant amount of capital. It doesn't necessarily make sense to us to pay out. Twenty two and a half percent distribution and and there are likely better uses more fruitful more valuable uses for that catch it might be debt repayment. Now they don't have anything to have a term loan do a couple of years there. I long term maturity isn't until twenty twenty four and they have significant availability on your credit. So I I would say I agree with it. They don't have to. But when you analyze the stock trades you gotTa start questioning whether they should. GOP obviously is a controlling sponsor. There they ought out Devon's physician about a year and a half go and they took out a loan on that physician. So I mean on our on our calculation you could cut issue bution. Seventy five percent still generate enough and distribution income or GIPSA service that on the steps and loan about and redirect that cash savings either towards debt repayment or purchase or some combination. If you were to do that for example sample code seventy five cents. You know you're still looking at a at a dividend yield at today's price of five and a half six percent and you're freeing up on our on our math on next year after the dividend and after all cabinets you'd wind up with about three hundred billion dollars access act so there's about four and a half billion dollars of debt you start whittling down the debt load those Gipsa News. The company's cashed gradually taking private and execute a share purchase program G.. Sense it. I mean there's about a billion and a half dollar float. I presumably if the cash flows held up at you know roughly speaking nine hundred million cash rob spending three hundred. Seventy five point aren't million dollars. You could take a private and five years in price. I I don't know that's that's this. This is where we're in a really really interesting conversation. Point grew particularly for names where there's a controlling entity can make that decision without sort of broader shareholder by. Yeah and and if you'll allow me just play devil's advocate there just for just one second because I think it's when I think about it from a high level. So how did these companies get themselves in the situation. Well to your point in the last interview you said there are a lot of bad actors and some of those actors valued growth and driving up the share price because of grows and depending upon this model of you've compounding growth by having a low cost of capital and being able to invest in projects that have return at a higher level leveled their cost of capital and that all depends on reinvesting net capital in projects that return a higher rate than their cost of capital in so volumes. Go Down because commodity prices go down and then they're no no longer able to meet their debt obligations or interest payments. And then next thing you know they have to cut the distribution fusion so there's this flurry of of distribution cuts over several years. And now we're in the situation where I don't think anybody really trusts trusts. Midstream management teams in their ability. To either forecast Volume growth is or was there. Cash flows are going to be and therefore were they have absolutely no confidence in the distribution. And then you have these management teams that you know. Maybe they're confident. And and their distribution but because of investor sentiment equity values go so low and distribution yields. Go so high. They say well why I should. We even pay investors this huge amount of cash. So maybe we should cut and so they start going through this thought process and it's public and everybody hears it and next thing you know share prices even lower and then they do cut and you mentioned mentioned divider Van Kampen interview earlier on and that is one of the reasons why I absolutely loved that guy. He is so dead set on delivering. Doing what he feels. Is this implicit promise. Between a management team and his or her investors. which is you know we told you? We're GONNA pay distribution or dividend dividend and we're going to deliver on that and obviously you know D- CPA's partly had some help just with the sponsors that they've had and some flexibility that maybe other companies don't have but I personally get very frustrated whenever I hear management teams get very wishy washy around the distribution even though they can continue to fund payments to shareholders. And I I feel like it's just the teams themselves that have gotten themselves in this situation. I don't know I'd love to hear your thoughts. No I I agree with you. There is something inherently Offensive About Advocating Evaluation Paradigm predicated solely on distribution or dividend. And then not minding your house sufficiently to make sure that that is protected under also and then getting into a situation where you're over your skis. Where maybe it's only for a period of time right equity mark the prices go up and down? I mean clearly. You've got a twenty two and a half percent yield and you say oh you should cut it going. Back to DC DC forty three percent yield in two thousand nine it did not come right and the shareholders who stopped with them at thank you them differently as a result of that is also the interesting dynamic between MLB and cheaper. And I think this is manifesting itself in enterprise more than any other story which is to say if you are in them l. p. you are a a uniquely structured to deliver a highly tax efficient cash distribution. So we come to the refining group. Nate everybody's sort of using the refining group today to say Oh that's the blueprint or best and read shareholder returns or shareholder within the energy group or shareholder their returns to Cheryl. There's livered not only from an improving Christ but because of a framework that's radio it too in terms of dividend payments growth. Sheriff purchase. Read a lot of them articulated and adjusted operating cash flow payout rich. Well if you put enterprise on that they have a more impressive adjusted operating cash pound ratio than any of the refiners but it's all represented by the distribution Asian. They don't really buy back they have the authorization now too but they haven't store. Okay why do they do it that way because their position and do that in a really tax efficient manner and that was that has been the premise so own EP equity or twenty one years since the IPO and they honor that commitment. It's also that you know if you let's say you own that for ten years and they suddenly start doing big buybacks and the share price goes up a lot in order to realize it you have to sell out of your underlying security and if you do that you realize all along. They never captured tax and other things associated with it so this is an interesting debate right. Now that I don't think people people who sort of casually talk about buybacks and buybacks are talked about now all the time on earnings calls it's sort of nauseating asked about companies that don't even have the ability eight to But the idea is I think we need to really appreciate the fact that a C. Corp where yeah he's still got a treatment on your on your dividend in terms of qualified dividend income. Where people might it'd be trading in and out there's not this like you know recapture tax consideration versus an NLP structure to really deliver that cash access to you and inefficient Estrin? It's the difference between April and the NFL is structured specifically to deliver cash in their pocket. But yeah a lot of people now want them to pit it and start doing sheriff purchase until I meet me for one. I share repurchases interesting as pertains to how do you evaluate adversity investing in new infrastructure. Dowd worthwhile conversation. A what is the return on shit back. A share today and permanently eliminate cash distribution associated that chair today and any growth associated with it the future versus is the execution risk of building a new heart asset. You Know Energy Asset The the issues around permanent instructing at operating and longer-term recontracting. How do you quite those two things? And at a certain point. And if the equity prices low enough and the distribution yield is high enough. I think that you know it's swings back in favor of buying shares when it may never have before but cutting distribution effect the buy I back it really really strange thing to say or management team particularly if they advocated distribution as promised to shareholders. There's for a long time and that's I think the difference between an like an enterprise for just say there are so many differences companies like that in the narrow framework that we're talking about right here like that's why I think and like could do it. Maybe do it. They also have had a major change in the underlying fundamentals and their business with a major producer counterpart walking away from a play that had been a real point of focus for them and for as recently as year and avenue or no. I didn't realize that they've did you say that. They cut all their rigs in. They're not they're they're not running any rigs in Oklahoma. Wow so and and that's I think that's the issue is that and I think that's the soft underbelly of GMT. Is that you know yeah. Are you have contract. You might have seized you might have dedications. You might have other things you know. There's still some gathering contracts out there that are cost service based but you are following the producer. And you're never gonNa have better information about what the producers going to do then. The producer has cells. So that's the other thing about handling stories that when it was owned and controlled by Devon who was its signature counterparty already. That's one thing. When Devon exits at position and private equity firm comes in? There is a bigger information gradient now between the key producer and the company and it sticks to a more conservative approach to cash flow. But that's not what they did. And you started to see distribution growth emerge because it goes back to it goes back to what you're talking about you know cost of capital and executing plans that you think will help Oscar capital and what our our yeah and it is it any different now within the context of commodity prices where they are. EMP's having having their own long multi-year paradigm shift of you know focusing on cash flow and margins and producing and growth expectations. Has that and I know that's been kind of a big dynamic. A big factor in terms of at least least within the midstream space but especially within emp. And as well is it any different now than it has been in the past. I don't think so. It feels differ for now. But I'm not sure is different now. I mean the the businesses are still operating. Ours is speaking the same way they were before I think the one notable changes that. We're seeing an allegation and a number of joint-venture formation. I look at that. As a healthy development so companies are trying to spread out their risk on individual projects by hi partnering with Each Other. I think the projects themselves are rendered a better as a result of that but also from a company specific perspective. There's just less in the way of concentrated concentrated risk so structures made me a little bit more difficult to follow. Just because of you know heightened. JV Av group that we need attention too but other than that it's pretty pretty straightforward you know. We leverage strict prices in our models. Commodity prices exist zest. We always have been doing that. There's a lot of people who have talked about a lot of investors have asked about you know some of the dynamics that changed now the. US hydrocarbon production growth slowing down and boom. It was boom times for for the last close close to fifteen years Barnett started no five and it was sort of off to the races and so now that things are being rain back in and we're having to think more about Out A you know runflat scenario or very muted growth story. What is what is that Linda Tell? Did you finally get more consolidation amongst their party players A you have this cash flow nirvana that people have talked about for a long time. When cap ex dries up you know? Do we actually actually get excess cash to harvest and and put to use into either programs or were you know really significant deliver stories. That's so the narrative changing a little bit just because of that. Change those tell you from a broad perspective. It's not terribly different and all. Yeah and what about investor sentiment today versus Twenty fifteen twenty sixteen well the midstream sentiments feels as poor as it did and in sixteen but in fifteen sixteen there was a view. ooh that an actor at one played out this way that the EMP group would be recapitalized. Would continue as sort of a going concern earn sector you will and that we'd returned to grow smell at some point and I feel like that's the signature difference this time. Is that people view the he space differently gently than they did at that time. The companies themselves talk about themselves differently than they did at that time. You know. It's no longer grocery grow sake. I think that's a really healthy development but by the same token you know it means that there's a shift afoot now people think about midstream entities that are being fed by those producers. And so it's just less certain and it and I would say less home and it was before and then you know as as we were talking about a previously nate. You have this if it away from just hydrocarbons and so I think to the extent where week back in fifteen sixteen because of or performance performance of the equities. You're having that compounded by the fact that you know mandates are being old and People are just deciding not to invest unspent. Yeah what are you hearing most from the investors and speak to spark investors excluding me but but What what are you hearing most from the people that you respect the most within the industry on the investor side so not management not companies? Well I think there's this interesting debate. You know what to do with the cashless. The company following on from an earlier discussion. That's that's an interesting point A debate or people who have been in the space for a long time again. I think it breaks down a little bit based on you know LP versus or and what people Oh thank best Hafer Cheryl returns is the other element is around duration the fact that the market that seemingly has no duration anymore people that are the incremental buyer or the incremental seller of these security tense increasingly be hedge funds that are trying to make performance over a very short term time frame and so we've had interest recently from firms that invest over much longer time. Say are these values. I'm looking at are these cash flow multiples the direct result of the fact that there's just abject abject fear there's no bid therefore there's no circuit breaker on some of these stories and they can just be pressed craft press from your perspective but if you play Out through the course of two thousand twenty conceivably catalyst that reverse that and maybe. It's an interesting time to start dipping talent water if if I work got a firm where I measured on much longer. Term performance time horizons or have the ability to incubator position for much longer period of time. Those are probably The most topical issues right now so often. I think a person who's listening to this. podcast might think that that whatever the conversations with management team are always one hundred percent superficial end meant to just push the story corey but if you have conversations that are more thoughtful and I'm not looking for names or companies i. I'm curious what those conversations are. And and what are they about. I mean I've had conversations that range from Anatolia retirement ages. You know debate that to hugh what types of businesses make sense and why you know we had a really interesting conversation with one. CEO About the water business you know when water disposal was becoming much bigger issue and some of these oil place and at a really the conversation went to direction. I did not anticipate where he was. Educating on the risks of salt water disposal as being being bigger in his mind then oil gathering or gas scatter saying effectively if we contaminate a Drinking Water Reservoir or something. Because they'll be. I'm not sure how to clean that up. Yeah whereas if we I know what to do we have a liquid I know what to do. We have a gas rupture I know. And so he was painting a picture for me that some of the companies that were engaged in that space where to cavalier about arrests of what they were doing and as a result of having studied that it was something I expect that his company never would engage and it was eye opening because it was this is a very complete answer and it was one born from a lot of study and I appreciate it. I never really thought about it in those terms. Yeah I mean those are those are the nature of some conversations. I think all too often people wanna know or walk away with some sort of quantifiable edge. That they think they've gotten that's you no immediately impactful. That's not the approach we tend to take. I mean not that I'm not interested in those data points but I don't not always just showing that. Yeah and then you know there's a big focus just on you know access as you know and I think sometimes come I always laugh where I get reversed brokered. You know some some investor calls me as they were at. They met with a company management team at a conference. I wasn't that and each year. She got told this and I should. I should run with that. And it's like well okay. You're telling me something that you I heard your recounting to me. I'm already removed from it where I wasn't present. Like what are you going to do with How do I know that that's accurate? How do you? I know you interpreted that correctly. Yeah so I I think an and that's that's the interesting component now is. Is that if you're on the cell if you're on a cell side and you you meet with the Management Team on say you are restricted in what you can and say to whom you can say it how you can say it when you sure ahead Sean that that would that management team you can. Yeah you have very limited restrictions and I worry sometimes that more information is now being traded around outside of those limits you know berry very sort of guarded channels that the sell side provided for a long time and that leads to hide movements and certain security. Do you get this phone phone. Call often where you're reverse brokered really all the time. Well but I also find thing is when I listened to somebody. One of my peers was on a conference. Call Ask a question that I've been told that I've been asked to ask or expressive you in a note at i. You know I don't read everybody's research I don't have access to but I see some times things that are said That I've heard somebody say to me directly directly in very similar language. Yeah you know. So there's you know that's up to you know. Independent thought is really important. And I think knowing that you have these forces that are trying to shape your opinion all the time. Yeah what is speaking of independent thought you and I previously. We talked a little bit about social media and you know the influence of of or at least the impact that social media has had on management mint teams how they think about interacting with folks kind of like myself who are in a sense media end how it's really changed. It's something that's new and it's it's changed the dynamic. Would you mind just sharing kind of what you're seeing and what you're hearing from management teams or investors well it's more investor than management teams. I think management teams are more careful nate now about who they meet with particularly if it's a known Internet Internet personality. I've seen that happen or I've heard you know. Irs told me about certain people that you know you. And I know they have an active social presence and that that there are less comfortable having them in the room because they might be live tweeting at or a might Their own spin on what's being said to what's being said and again just respecting the fact that when the research teams do that. There's very just protocols on how we go about publishing that reviewed by ISER staff in supervisory analysts minds department legal and before you guys ever see it so there's like multiple layers of folks folks that are professionally trained to make sure that we're not using sensationalized language that everything's reasonable and sound and grounded in the fundamental on a mental approach that we're taking if you're live tweeting a meeting. I mean there's no restriction on that so I do think that's changed the dynamic a little bit but it's more a conversation with investors because you know you and I've talked about this for a long time that there were very they were bad. Actors in space and social media has been one of the areas where they've been all out and they've been pretty pretty entertaining in some cases but You know they've been taking task or those action and I think rightfully so some you know some of these folks have said thanks. I wish I could say and but the problem is that then that just you know we talked earlier about just the the sector view and and the idea that there's already reasons not to engage in energy it's a very small waiting sector mainstream. The asked me if I own or something like fifty basis points it's almost non existent so it's tough to get people to want engage in energy to begin with and then when you start talking about or abuse the shower everyday by social media it just tough to break that cycle of cynicism actually attract new interest. Yeah and in. Are there any names that you want to set a call out right now and and and you know expose them to the world. Oh No I don't I don't know any of these people I mean. I'm sure I know them. I don't and I have hunches. As to who some of them are. Based on conversations I've had with different investors on what appeared. You know from different handles but I I don't I have no knowledge of it and do you think it's overall overall. Do you think it's a healthy thing or do you think did end of the day it's just creating it's compounding the problem I think early on it it would I think when they were couple in there were couple handles out there on twitter that based on their knowledge of space based on the historical perspective offer. It was quite clear that they had been engaged in the subject matter and with companies for very along and I thought what they were saying even in the most you know even if it was devastating to the people that they were writing about largely. I thought it was accurate was worth worthwhile having I think as as a number of handles have proliferated it and now it's just this could coffee of negativity I feel like maybe transcended to be harmful probably comment comment more broadly on twitter anyway. Yeah definitely I don't know if you've watched any of the testimonies for the impeachment hearings but twitter is become again. I don't know if you watched any of that but it was pretty nice. I I haven't you know and I I mean I think this is actually a really interesting debate. Weren't we were talking earlier about how my I team used to sit next to act like you know. Everybody has view of energy and hydrocarbons just you bad and at the same time I think social platforms out there much arm. They are actually doing. I'd environmental harm but psychological or much false information just gets which adult there and the company is responsible for this. Don't do anything. And yet traded really really nice valuations. I mean I don't even know what the Valuation Framework is. Some of them are used to joke with our tech team that they didn't know how to model ramming incident matter. But you know it's like this is the thing thing like what are the social harm is being done by these companies. What the policing of that not even really part of the conversation you had although it starting to be and at the same time the the energy companies are oh? I don't WanNa own at at the apartment. I do think there'll be a normalization this. Yeah Yeah so just a couple of closing questions for you. At what point in terms of valuation. At what point do you quit your job and and decide you just going to go all in with your savings in midstream. You know me well enough to know. There's probably not point which I do that. I I like what I do. I have a responsibility to people here but I don't think I don't think we're there yet I they have. It's interesting that the December of last year I was I sort of put together a mock for Roy in my head of if I were not doing feeling that's what what I want to own. And how much income generate annually from those positions by structured at the way I had contemplated. Ns let's see. I mean there's a significant amount of income offered some very high forty name today cast out because there's options about elements of the business or because just fear companies are in a batch base and they get caught up in just being but I don't you know there's there's there's not a point. I wish I'm planning on quitting my job and just best investing eventually so for management teams. If you had one single piece of advice to give them what would it be well. I don't know if there's a piece of advice that is rod enough to be over everyone. I think I've been a little bit. I found a little interesting pursing. How view of them she? My Council in terms of we followed these aims for a long time. We're running independent in an analysis on them and we're interfacing with the Brew Berry few of them ever reach out and want to better understand how we're thinking about something and importantly why we're thinking about it that way yet. They'll go to fifteen conferences a month and see the same Johnson. Astrum is or at least you. It's not asked yet what they should do. And again I think. The difference in duration of Ukraine is a little bit problematic America in that respect. So you know there's some management teams that I frankly asked you know if I were them. I would ignore a lot of when I hear and I would just operate based on you know internally generated plans that I think are best you know have a strategic reason forbid have a worldview executed. I think at some point as you were saying earlier it's been five years downturn it at some point charter passenger yourself and if investors don't want to beyond the bus you know how this is what we're doing if it's not appealing you are I just I think i. I think certain companies can be strong enough to say it in those journal and ride out a multiyear strategy or strategy like just one final final question. was there a critical moment in your professional career. That you look back on and you say you know. Hey that's had the greatest impact in terms of you know where I've gotten to where I am today. Well it's it's a series of sort of lucky encounters that I think it's a combination of hard work and a lot of luck but I mean honestly made in coming to Jeffrey's from eds. There were some things that happened late in my tenure ups and I kept asking why you know and and I and I'm a fetus some degree. I do think things happen for a reason. That's what those reasons are and some of those things and my tender just made me wake up the fact that it's okay to leak you know I was sort of naive again was gonNA work for one company my whole life and then as soon as I figured out that it was okay to leave within two weeks I was your jeffries literally happened fast and I just you know I feel like the opportunities that you're for me it's just been a really great got a lot of support internally and my team has been retouched a couple times but every member of it's been great course of that time so I don't I don't know if it was you know the things that catalyzed my decision to leave I don't know if it was jeffries decided to hire army but I I I do think that single point I was back to where I felt like a different On a different path was was the change from that from. And that's bad to say about the chance out of school when I've always been corporate out but it just felt like you know we we went from one plateau in other flatow and How I felt about myself in the work that was doing and then you know how other people reacted Chris? It's been awesome from speaking to you. It always is I enjoy it on a personal level and a professional level. So the double whammy for me. I know it is from listeners to because your previous interview was one of the most popular ones that that I've been able to record so I can't say thanks enough. Always a pleasure to talk to you in so thanks so much which absolutely happy to be here and Maybe we can do it again. under much better circumstances for eighteen months. Well that's IT folks. I really enjoyed the interview. Sincerest thanks to Chris for coming back onto the show. It's always really awesome to have him back on here and I appreciate him sharing his thoughts more than anybody realizes especially him a huge huge thanks to Dan. Heim Mike it Dan Hi gave me permission to use his music. So if you like what you hear you should check it out. That's Dan Heim D. A. N. h. e. i. m. and then finally. I'd like to ask just one more time for your support. If you get any value out of the stock podcast please please consider making donation. Click subscribe five submit a review or spread. The word all right. I'll leave it there. I really hope you enjoyed the interview. and well take care and good luck with you. Were portfolio

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