Lower fuel and a weak Europe were already priced in but a less robust outlook on North America is disappointing.



"The increase in booking volumes indicates that a progressive recovery is well underway and we are catching up following the slowdown in bookings during wave season, our peak booking period. The attractive pricing we have in the marketplace is clearly stimulating demand, especially for the Costa brand. We are pleased to see the resurgence in consumer demand for Costa"


- Carnival Corporation & plc Chairman and CEO Micky Arison




  • 2Q was 13 cents above the midpoint of their guidance range  -- 5 cents came from better close-in bookings and onboard spend.  The litigation settlement (2 cent benefit) was related to the Queen Mary 2 Propulsion.
  • Capacity in 2Q increased over 2%, similar for NA and EAA brands
  • In 2Q, NA brands were up 1.5% on net ticket yields, driven by improved yields and the Caribbean and Alaska, partially offset by lower yields in European and other itineraries. Slightly more than 50% of NA's capacity was in the Caribbean.
  • Excluding Costa, our EA brands net ticket yields were down 2.7%
  • Consumption per ABLD declined 3.2% this Q
  • Stronger USD cost them 2 cents this quarter and higher fuel prices cost them 9 cents this q (compared to last year)
  • Feel comfortable with their level of protection on fuel costs for the next 18 months (through 2013). Will look to opportunistically increase their hedges for 2014 & 2015.
  • Their 2012 guidance already includes 7 cents of derivative losses on fuel costs
  • FY outlook commentary: 
    • Expenses related to the Costa Concordia incident were less then they expected which coupled with one-time costs 
    • 10% change in fuel for the remaining half of 2012 will impact earnings by 13 cents per share but will be partly offset by 4 cents of losses on the derivative hedge
    • 10% change in all relevant currencies for the remaining half of 2012 will impact earnings by 11 cents/ share
    • 30 cent improvement in lower fuel prices, offset by 7 cents of hedges and 3 cents of FX
    • Operating cash flow: $3.2BN; $1.9BN of capex; leaving ~$500MM of FCF
  • The percentage improvement over these last 7 weeks has been evenly spread between NA and EAA brands
  • At the end of March, they restarted their marketing programs for Costa Concordia which included significant pricing initiatives
    • Pricing incentives offered cruises at a 20-30% discount to last year.  The pricing initiatives led to a rebound in volumes in April.
  • Significantly higher air prices impacted NA customers traveling to Europe.  During this past spring, NA brands experienced slightly lower pricing originally forecasted.  European brand itineraries experienced the largest declines in pricing not just because of the slowing of the American market but also because of the challenges in locally sourcing business from the softer European markets.
  • NA revenue yields are now forecasted to be flat for the rest of the year and ticket yields are modestly lower for 2H12
  • Revenue yields are also forecasted to be slightly lower for European brands for the balance of the year. Ibero has suffered a significant decline revenue yields, luckily there are only 3 ships operating there.  Bookings and pricing for the UK and German customers have held up reasonably well.
  • For the last 15 weeks, Costa's booking volumes are running 13% ahead on a YoY basis.  Expect that when occupancies begin to improve, they will increase pricing.  Costa is expected to be down in the mid-teens YoY and their loss for the year will be in the range of $100MM (same as guided on the March call). 
  • 2013 capex: $1.8BN and FCF is expected to improve
  • 3Q12 outlook (ex Costa): 
    • 3Q capacity 2.9% increase; 1.6% in EAA and 3.4% in NA. 
    • Prices and occupancies are lower YoY across EAA and NA brand itineraries
    • NA brands: 38% Caribbean (up slightly YoY) and 24% in Alaska (slighty up YoY), and 25% in Europe (same YoY)
      • Pricing on Caribbean itineraries is flat YoY; pricing for both Alaska and European cruises are lower
      • Occupancies are slightly lower 
    • EAA brands: 85% Europe (vs. 82% in 2011)
      • Pricing and occupancy slightly lower
      • Uk pricing is higher, German pricing is slightly lower, Spanish pricing is significant lower
    • Currency and fuel are expected to negatively impact EPS by 83 cents (YoY)
  • 4Q12 outlook (ex Costa):
    • 3-4% capacity increase; 3.9% in NA and 2.1% in EAA
    • NA: 43% in the Caribbean and 13% in Europe (similar to last year)
      • Pricing is slightly lower YoY  on lower occupancies. Caribbean pricing is higher YoY on flat occupancy, while all other itinerary pricing is slightly lower on lower occupancy
    • EAA: 61% of intineraries in Europe
      • Pricing is slightly higher vs. a year ago at lower occupancies
      • Expect pricing for EAA brands to decline through the year and expect pricing to end up lower YoY for 4Q
  • 2013 outlook:
    • 4% increase in capacity; 3.4% in NA and 4.9% in EAA
    • Fleetwide occupancies are currently lower with pricing slightly lower
    • 1Q13 will be the toughest comp given strong NA performance in 1Q12
    • NA: occupancies flat YoY with pricing lower overall but mix changes will help pricing. 
    • EAA occupancies are lower with higher pricing
    • Expect that lower fuel pricing will provide a boost to EPS - by 23 cents in just the 1H2013



  • Estimated that Q3 and Q4 net yields (ex Costs) will be down in the 3-4% range (so a similar amount). 
  • They are about 80% booked for 3Q and around 50% booked for 4Q
  • Feels good about their guidance based on everything they know today.  They are taking all the stimulas programs into account, which are working well for them
  • 2013 should have more FCF and less capex. Thoughts on share repurchase? 
    • They only bought back 150k shares last quarter, right now $330MM remains on the program
    • It's the board's decision on how much to buyback. Still expect to buyback stock and issue dividends next year.
    • $300-400MM FCF for 2012
  • The marketing program is only a little more expensive than what they thought after missing a significant portion of wave season because of the Concordia issue.  They are heavy with the promotions on programs with an air ticket component.
  • AIDA's business has come back nicely.  They picked up a lot of booking momentum recently.  Normalized quite nicely. 
  • Promotional activity is filling the Costa Concordia ships. Even though the ships are filling well, the loss from the ships is still projected to be unchanged, so it's been a tradeoff between price and occupancy
  • All of their brands are being more creative to stimulate onboard spend. Hard to tell how much of the higher onboard spend is due to better programing or truly better consumer spending. Higher onboard spending was skewed towards the NA brands. 
  • Seeing a little bit of challenge in Australia. Lots of capacity increases so pricing has been down, but that market is still profitable.  Maybe the worst of the capacity increases is over.
  • In Asia, it's a really positive situation.  Expect to be break even to slightly positive from a FCF basis there this year. Bringing the Costa Atlantica to Asia next Spring and bringing Princess to Japan.
  • South America business for them mostly begins this winter, but it's shaping up nicely
  • Summer quarter is usually the strongest demand quarter in the business. Q4 is more of a demand struggle - so 4Q is always more of a challenge for demand stimulation. In terms of the capacity mix it's not as different as you would think. Med is 28% in 3Q going to 29% in 4Q,  Caribbean is 25% going 28%. 4Q includes September for them, which is still peak season for the Med 
  • Cost declines? 
    • Significantly less dry docking fees this quarter than last year, and Euro was 1.43 vs. 1.31.
  • UK held up pretty well throughout this whole process, Germany took a hit and bounced back. Italy is still being impacted though. Spain is still terrible.
  • First time cruisers have been more impacted by the Concordia accident. First time cruisers declined post event.
  • Not clear if the bookings are closer in or if it's just that they had a bigger whole to fill created by the incident. See no reason why the booking curve won't normalize once occupancies recovery. 
  • Costa is selling at 20-30% below prior year levels. Expect yields to be down in the mid-teens for the year on Costa.
  • Don't think it's realistic to expect Costa to go back to normal next year, although they expect to see improvements. Will take a few years for things to get back to where they were. They also have 3 less ships so they won't get back to where they were in 2011.
  • Direct bookings were 19% of their total bookings last year. Expect that over time that number will creep up. Have no plans to reduce commission rates. They don't actually believe that they reduced comp in UK - they just changed the way that travel agents were being compensated and it was just specific to the UK. Travel agency distribution system is still a critical part of their strategy.
  • There are still surcharges for fuel in Germany and the UK on some of the itineraries
  • They haven't increased the marketing budgets of any of their brands aside from Costa
  • Originally they didn't want to do price stimulus because they didn't think it would work to stimulate demand for Costa. However, they continued to do pricing surveys and by April their surveys indicated that stimulus would work. The marketing they did was pricing centric - simple message of 75 euros a day/pp for May, 85 for June and 95 for July -- and it worked.
  • A lot of 2013 pricing in Europe will depend on how fast occupancies come back.  Not likely that things will improve enough to make Q1 positive



  • "Since March, fleetwide booking volumes have continued to improve and are running well ahead of the prior year at lower prices. For the last seven weeks, booking volumes excluding Costa have increased 8%..., while booking volumes for Costa....are up 25%. For the remainder of the year, cumulative advance bookings excluding Costa are three occupancy points behind the prior year at slightly lower prices while cumulative advance bookings for Costa are at lower occupancies and lower prices compared with the prior year." 
  • "Excluding Costa, the company forecasts full year 2012 net revenue yields, on a constant dollar basis, to be down slightly. The company has slightly reduced the mid-point of its 2012 yield guidance as the price incentives required to drive the booking volumes needed to close the occupancy gap was more than had been previously anticipated for the second half of the year.  Full year 2012 revenue yields for the North American brands are expected to be in line with the prior year. Full year 2012 revenue yields for the European brands, excluding Costa, are expected to be lower than the prior year." 
  • "Lower net revenue yield expectations have been offset by greater than anticipated cost reductions. The company expects net cruise costs, excluding fuel, per ALBD for the full year 2012 to be down slightly compared with the prior year on a constant dollar basis. In addition, lower fuel prices (net of forecasted realized losses on fuel derivatives) partially offset by changes in currency exchange rates are expected to increase full year 2012 earnings by $0.30 per share compared to March guidance."
  • FY2012 EPS: $1.80 to $1.90, compared to the March guidance range of $1.40 to $1.70
  • "The long term fundamentals of our business remain sound. As we look toward the future, we are excited by the prospect for continued global expansion beyond our established markets in North America and Western Europe. We are pursuing multiple opportunities to develop emerging cruise markets including positioning a second Costa ship in China and through a series of Princess cruises dedicated to the Japanese market in 2013." 
  • "CEO Micky Arison noted that non-GAAP earnings were better than anticipated in the company's March guidance due primarily to a combination of higher than expected revenue yields and lower than expected costs, partly attributed to non-recurring items, in the second quarter."
  • Non-recurring items in 2Q12: "included $17 million, or $0.02 per share, of insurance proceeds in excess of net book value which were previously expected to be received in the third quarter, and $17 million, or $0.02 per share, received from a litigation settlement."
  • "Cruise ticket prices (excluding Costa) held firm close to sailing which, combined with stronger than expected onboard revenues, drove yields above prior year levels. Our North American brands performed well, achieving a 3% revenue yield improvement..., which more than offset slightly lower yields for our Europe, Australia and Asia brands (excluding Costa).  In addition, continued focus on cost controls and fuel consumption helped to mitigate the impact of higher fuel prices in the quarter."  
  • 2Q highlights:
    • On a constant dollar basis net revenue yields per ALBD decreased 1.4% (vs. March guidance -2.5% to -3.5%)
    • Excluding Costa, net revenue yields: +1.1%;  higher than March guidance of flat to down slightly
    • Gross revenue yields:-4.2% in current dollars.
    • NCC per ALBD (excluding fuel and non-recurring items): -2.2% (in constant dollars), better than March guidance of 0 to -1%. 
    • Gross cruise costs per ALBD including fuel and non-recurring items: -3.6% in current dollars.                  
    • Fuel prices increased 12% to $756/metric ton, costing CCL an additional $71MM. Fuel prices were slightly lower than March guidance of$772/ metric ton.
    • In March, the company entered into zero cost collars for an additional 19% of its estimated fuel consumption for the second half of fiscal 2012 through fiscal 2013, bringing the total covered to 38% over this period. The company also has zero cost collars in place that cover 19% of its estimated fuel consumption for fiscal 2014 and 2015. 
    • 3 new ships were delivered:  Costa Fascinosa, AIDAmar and Carnival Breeze      


In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.



OVERALL:  SLIGHTLY WORSE: Lower fuel and a weak Europe was already priced in but a less robust outlook on North America in 2H 2012, which we addressed with Alaska in "2012 MARCH CRUISE PRICING MATRIX" (4/12/2012), is disappointing. 

  • FY 2012 GUIDANCE
    • SLIGHTLY BETTER:  The midpoint of guidance was raised from $1.55 to $1.85, driven mainly by lower fuel expense.  The guidance band has been reduced from 30 cents to 10 cents.
    • BETTER:  better revenue yields (higher booking volumes) and better controls on net cruise costs resulted in a 12 cent beat. 
    • WORSE:  For NA brands, CCL lowered the NA pricing outlook with Alaska and Europe having a greater impact.  EAA brand pricing is also weaker across all itineraries.
    • WORSE:  Higher capacity, lower pricing across the board relative to March guidance
    • SAME:  $100 million loss is expected for the Costa brand.  Higher occupancy offset lower deeper price cuts.
    • SAME:  higher airfares to North America resulted in lower itinerary prices
    • "Higher airfares between North America and Europe have been a challenge"
    • SAME: UK and Germany revenue yields continue to hold up reasonably well
    • "Our U.K. brands are holding up relatively well as compared to our Continental European brands. We have recently seen ...improving trends in Germany so we're hopeful that we have finally turned the corner there."
    • SLIGHTLY WORSE:  Q2 close-in bookings were good but they are incentivizing more going into Q3 as they have more capacity to sell than historically
    • SAME:  AIDA is picking up more booking momentum and maintaining pricing.
    • [AIDA] "I think they're starting to see business come back. But there will be some level of hit because... in order to fill close-in, they've had to take pricing down a little bit."
    • BETTER:  CCL raised onboard guidance by almost 1%, relative to March guidance

HNR: The Venezuelan Pop


Kevin Kaiser, Energy Analyst (@HedgeyeENERGY)



Back on March 8, we put out a hot ideas sheet on Harvest Natural Resources (HNR). At that time, the main focus of HNR was what would happen in regards to a core asset sale related to the firm’s stake in Venezuela’s state-owned Petrodelta. We had the following ideas laid out over all three of our durations:


TRADE (Duration = 3 weeks or less)

HNR is a special situation where we see value and risk differently than the market.  We have been waiting for HNR to sell its core asset in Venezuela – on March 6 the Company announced that it has entered into exclusive negotiations with a 3rd party to do just that.


TREND (Duration = 3 months or more)

HNR has for sale its 32% equity interest in Petrodelta, a state-owned oil E&P in Venezuela.  We value the asset at $10 - $12.50/share, versus the current market valuation of $4/share.  The 23% short interest will continue to get squeezed.


TAIL (Duration = 3 years or less)

The key question is can HNR sell the asset?  We think yes, here’s why: HNR has successfully monetized assets before (Utah to NFX), TNK and Rosneft have both bought into VZ recently; HNR’s resource is large enough for an NOC to be interested (3B boe in place); Chavez would rather deal with a Russian, Brazilian, or Chinese partner.






Fast forward to present day and the stock is up over 70% in regular trading after an 80% pre-market pop. Despite the TAIL duration concerns over a definitive agreement, HNR signed one after hours yesterday to sell its 32% stake in Petrodelta to Indonesia’s Pertamina for $725 million in cash. Net proceeds from the sale are estimated to be approximately $525MM (2.9X HNR’s market cap) after deductions for transaction costs and taxes.


To those who found a solid entry point between our March note and today: congratulations.



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