GPOR: The Short Case

Gulfport Energy (GPOR) is a darling of Wall Street.  Fifteen out of the 16 analysts covering the stock have Buy ratings, with an average price target of over $50 (the stock closed Tuesday 5 February at $42.27 and opened down a bit today after an early press release included disappointing production figures.)  


Our Energy Sector Senior Analyst Kevin Kaiser calls GPOR “one of the riskiest stocks in the energy sector.”  Kaiser’s analysis indicates a fair value for GPOR shares of between $15-$23 per share, about half of where the shares currently trade, and well below analysts’ optimistic price projections.  Hedgeye hosted a conference call today on GPOR for our institutional clients presenting Kevin’s in-depth analysis of GPOR’s reported earnings, recent press releases and guidance for 2013 and beyond, and comparing the common outlook with Hedgeye’s very different view.  This deep-dive presentation is what we call a Hedgeye “Black Book.”  Produced by our sector heads several times a year, Black Books offer our institutional clients in-depth analysis of a high-conviction idea, such as key developments within a sector, emerging regional trends, or analysis of an individual company.


GPOR: The Bull Case

GPOR owns substantial drilling rights in the Utica Shale, a vast geologic formation underlying 8 US states, including Ohio, West Virginia and Pennsylvania, through New York and up into Canada.  The Utica Shale is a hot target for oil and gas exploration, with drilling permits in Ohio reaching record highs since 2011.  The crux of the bull case for GPOR is its net ownership of 106,000 operating acres in the Utica Shale and projections for tremendous revenues, profits and cash flows as a result.  GPOR’s cost is around $6,000 per acre.  Kaiser says that if GPOR’s boosters are right, and the numbers come in at an equivalent to the highest levels of revenue and profitability their competitors have achieved, the stock could go to $80.  Bullish analysts say GPOR has been very successful – or very lucky – at acquiring “the sweet spot” in what should be the highest producing region in the US.


GPOR: The Bear Case

Kaiser asks a simple question: What do we really know about GPOR’s Utica Shale properties?  The answer he comes up with is: very little.  


It is difficult to model the production, profitability, and projected cash flow from GPOR’s Utica Shale operation.  All the company has released is production statistics as “peak IP rates” – the best rate of flow in the first 24 hours of production of a new well.  Independent industry experts agree you need several months of actual production figures to make a reasonable projection of a well’s output. 


GPOR has not released actual well drilling costs.  Cost data on similar producing wells released by GPOR’s competitors indicates GPOR’s cost projections are very optimistic – Kaiser believes they are unrealistic and will end up being raised substantially.  There are also additional costs associated with bringing a well on-line – construction of roads and storage, and seismic analysis for example.  None of these seems to have been factored into GPOR’s cost projections.  


The economics of drilling are highly sensitive to small shifts in a variety of inputs, but GPOR has only released peak IP rates, which have been enthusiastically snapped up by the bullish analysts.  We are left guessing at actual well costs, geological studies, completion data, and internal rate of return per well data – the actual components of profitability.  In order to make money in the exploration and production industry you have to get a lot of things right, and get them right consistently, and over a long period of time.  GPOR has not given us the data to get comfortable around this complex reality.


The composition of the Utica Shale production is also a factor.  Kaiser thinks the output will have a much higher gas component than other analysts believe.  Kaiser says this morning’s press release from GPOR validates this view.   Perhaps more important, Kaiser notes that today’s announcement confirms what he sees as GPOR’s pattern of issuing enthusiastic guidance, then later lowering their guidance, then confirming the lowered guidance with actual reported numbers – in this case bearing more potentially bad news, as the peak IP production figures were disappointing, and there was surprisingly high gas content.


Dropping The Other Shoe

Perhaps the biggest indicator that GPOR stock is not headed to dramatic new highs is its longstanding relationship with major Connecticut-based money management firm Wexford Capital.  Wexford brought GPOR into existence with the 1997 reorganization of a bankrupt conventional exploration and production company.  Over the years, Wexford has done extremely well for GPOR shareholders.  Wexford’s careful oversight of GPOR took the stock up to more than a 2,000% profit.  This relationship appears to have ended abruptly at the end of last year.  From an all-time high ownership stake of over 60% of GPOR shares, Wexford now owns about 0.2%.  Perhaps more important, Wexford owned substantial acreage in the Utica Shale, having bought in alongside GPOR.  Last year, Wexford sold its entire Utica Shale acreage to GPOR.  Asks Kaiser: there’s no one in the world who knows GPOR better than Wexford.  Wexford would not be likely to sell off their holdings if they believed GPOR was sitting on top of a gold mine – or in this case, an oil well.  The last insider buy of GPOR stock was 10,000 shares in September 20080.


As owners of operating Utica Shale acreage, Wexford has hard figures about well production, actual drilling costs, and profitability.  Their selling of GPOR stock can be tied to any of a number of considerations – notably to taking profits before changes in the tax code.  But selling their producing acreage is a different story.  Here, Wexford appears to have seen the future and said “No thanks.”  Kaiser believes this is the single most important data point, and one the rest of Wall Street is blithely ignoring.



For the Bull Case to come true, it looks like everything has to go right.  All projections – profitability, cash flow, asset value, and stock price – are based on what appear to be a very sparse set of vague statistics of the kind GPOR’s competitors would never use internally to plan their own business.  For the Bear Case to pan out, it should be sufficient for any one of the assumptions to break down.  If the Utica Shale ends up being worth substantially less than GPOR’s acquisition cost, if average production levels run substantially lower than the peak IP levels GPOR has released, if the composition of the resulting production has a high gas content, if the cost of well completion ends up being just the industry average – rather than the aggressively lower costs GPOR says they can attain – any one of these elements could be sufficient to create a major disappointment and a significant decline in stock price.


Kaiser points out there is a relatively small short position of about 8%, not enough to offer the hope of a major short squeeze.  All but one of the analysts covering the company rate the stock Buy, leaving little bullish reserve.  Options premiums appear very expensive on both the put and call sides of the market, which indicates the market is anticipating volatility.  Under most circumstances, a volatile outlook tends to lead to lower stock prices.  If GPOR breaks down because of a disappointment, there may be no safety net.


You can follow Kevin Kaiser on Twitter at @HedgeyeENERGY


Takeaway: We no longer consider Brazilian equities or the BRL good investment opportunities on the long side with respect to the TREND duration.



  • Not much else needs to be said other than the fact that it has recently become clear to us that Brazilian policymakers refuse to address the country’s growth/inflation imbalance – which they themselves  have perpetuated through currency debasement – with an adequate amount of exchange rate appreciation (we already know Dilma won’t budge on rates).
  • As such, we no longer consider Brazilian equities or the BRL good investment opportunities on the long side with respect to the TREND duration and are now looking to explore other asset classes within the region. Email us if you’d like to get a dialogue started on such.
  • At first glance, Mexican equities, the MXN, Peruvian equities and the PEN all look like more favorable replacements, but we need to more work on each prior to endorsing a fundamental long bias(es).




  • Losing the “war” at home: Brazil is flat-out losing what Finance Minister Guido Mantega dubbed in SEP 2010 as the “Currency War” – mostly because of Brazilian policymakers’ own doing. The ~2yrs of capital controls (which are now slowly being reversed) did little to boost economic growth; 2012 real GDP should come in at roughly +1% YoY – the slowest since 1999 outside of the -0.3% YoY decline in 2009.
  • Inflation is not growth: The weak BRL did, however, boost inflation, which has exceeded the median central bank’s 4.5% +/- 200bps target for 29 consecutive months! The aforementioned bastardization of international capital also contributed to a drop in investment, which shrank to ~20% of GDP last year (vs. ~48% for China), according to preliminary IMF estimates.
  • Small measures won’t cut it: Now, in order to combat the now-obvious ramp in CPI that has stemmed from burning the BRL over the past ~2yrs, the Brazilian government has just resorted to scrapping all taxes on the basket of staple foods (after Rousseff herself vetoed a similar measure back in SEP). This latest counter-inflation measure out of the Brazilian government is in addition to their recent use of forceful negotiation tactics with Brazilian utilities in order to drive down energy tariffs for Brazilian consumers and businesses.
  • Too little; too late: We were giving Brazil and its meddling policymakers the generous benefit of the doubt on the long side of certain pockets of the equity market and the real, but Monday’s TREND-line breakdown on the Bovespa Index was our signal to get off the horse here and we no longer like Brazil or its currency after telegraphing this potential shift last week.
  • Mantega doesn’t get it: The breakdown was confirmed by Mantega’s latest statement on the BRL: “The government is ready to block exaggerated gains in the currency… the exchange rate isn’t an instrument to control prices and a weaker currency helps to protect the domestic industry from foreign competition.”
  • Pigheadedness ≠ policy: With a hint of arrogance, these comments show Brazilian policymakers haven’t learned anything from the past ~18-24 months of “exaggerated” policy failures. As such, Brazil is no longer on our Asia/LatAm Best Ideas list after having been there from 12/5 to 2/5 (upon confirmation of the 2/4 TREND line breakdown). Please see our 1/31 note titled, “WILL BRAZIL HOLD THE LINE?” for additional details on why we’re not looking to overstay our welcome here.
  • Great trade while it lasted, though:Over that duration, the following price deltas were recorded in the sectors and asset classes we liked:
    • MSCI Brazil Consumer Discretionary Index: +6.6% vs. a +9.2% gain for the MSCI Brazil Index
    • MSCI Brazil Consumer Staples Index: +13.9% vs. a +9.2% gain for the MSCI Brazil Index
    • MSCI Brazil Industrials Index: +14.8 vs. a +9.2% gain for the MSCI Brazil Index
    • BRL/USD: +5.2% vs. a +2.6% gain for the Bloomberg/JPM Latin America Currency Index
  • Unfortunately not a robust short opportunity:We wouldn’t necessarily short Brazil here because its forward-looking growth dynamics look to continue improving over the intermediate term. This signal is being confirmed by the first batch of JAN growth data:
    • Manufacturing PMI: 53.2 from 51.1
    • Services PMI: 54.5 from 53.5
    • Services PMI: 54.5 from 53.5
    • Exports: -1.1% YoY from -10.7%
  • Underweight Brazil: There are likely better ways to play the long side of Latin American equities and currencies over the intermediate term – a view that implies being underweight or zeroweight Brazil is the most appropriate strategy for the time being. 
  • Any replacements?: Looking to other opportunities within the region, we continue to like Mexican equities and the MXN and Peruvian equities and the PEN with respect to the intermediate-term TREND, though neither is currently a Best Idea. We’re currently doing more work on both. A bearish TAIL-duration bias on the Argentine peso (ARS) is our sole Best Idea remaining within the region now. We’ve held that view since NOV 4, 2010 and it is down -20.6% vs. the USD since then (vs. a much smaller -8.2% decline for the Bloomberg/JPM Latin America Currency Index). Email us if you’d like to dig in deeper there or if you would like to recommend that we take a look at other opportunities within the region.





Darius Dale

Senior Analyst

Expert Call Today: An Overview of the U.S. Beer Industry

Today at 1:00pm EST we will be hosting an expert conference call entitled "An Overview of the U.S. Beer Industry" featuring industry expert Bump Williams. 


Bump Williams is the CEO and Founder of Bump Williams Consulting Company which provides clients with consumer insights, price and promotion analytics, wholesaler market assessments, retail strategies, new product assessment, M&A and market level analytics for distributors in the Beer, Wine, and Spirits industries. Williams has over 30 years of experience working in the CPG industry with Retailers, Distributors, Brewers, Importers and Wall Street across a multitude of beverage categories. His expertise will help us and our clients develop a clear thesis of what lies ahead in the beer industry.



  • Discuss the competitive dynamics in the sector including market share, and pricing trends
  • Gain a greater understanding of the implications of the proposed merger between Anheuser-Busch InBev and Grupo Modelo

Please dial in 5-10 minutes prior to the 1:00pm EST start time using the number provided below, if you have any further questions email . There will be no slides associated with the call. 

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 518486#

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Currency Wars Heat Up

While the Japanese Yen continues to get smoked courtesy of the political class, Europe is dealing with its own set of problems. The Euro (EUR/USD) in particular is encountering heavy immediate-term TRADE resistance around $1.36/7 and intermediate-term TREND support at $1.31. French President Francois Hollande has been making noise in recent days about how “a monetary zone must have an exchange rate policy or else it ends up being subjected to a rate that does not fit with the true state of the economy.” Essentially, Hollande is keen on currency manipulation and not letting the markets dictate the true price of the Euro. 


Currency Wars Heat Up - EUR


In preparation for HOT's 4Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.














  • "We control property and corporate costs."
  • "We see mixed signals in North America and China. But the case can be made that the current deceleration is a temporary pause in growth."
  • "Corporate transient travel, for example, continues to be robust with occupancies up versus last year. That said, some group bookings are on hold as customers wait to see how their business will perform next year. A more positive sign in lodging, as with autos and housing, is that pent-up demand for new hotel construction might soon contribute to growth. We're beginning to see more interest among owners to initiate projects than at any time since before the crisis."
  • [China] "Starting with credit tightening, we have yet to see an existing hotel project stopped for lack of financing. And year-to- date, we've signed more new deals and opened more hotels than last year; the bulk of our development has moved from Tier 1 to Tier 2 and Tier 3 cities....So, overall, despite tighter credit we see an active development community that's bullish on hotels and has confidence in Starwood."
  • "The euro situation remains volatile and far from over. Now that we're in the travel off-season there, it may be a while before we see where that market is headed."
  • "Going forward, we can now expect our earnings to be 65% fee generated. That compares with less than 20% prior to our host transaction in 2006."
  • "After New York, Dubai has more Starwood Hotels than any other city in the world; and not to mention seven more hotels in nearby Abu Dhabi and Sharjah. And despite our hotel count, our occupancies there are running over 83% this year."
  • [NA REVPAR]  "Corporate America is cautious ahead of the elections and fiscal cliff discussions, so it's unlikely that we'll see any up tick in the fourth quarter. On the positive front, Canada is improving sequentially and will have REVPAR growth in Q4."
  • "Systemwide occupancies in North America are now above the prior peak set in 2006. Rate is still 5% below prior peaks. In Q3, rate accounted for 80% of the REVPAR gain. The business in the U.S. is well positioned to benefit from meaningful rate improvement should demand trends pickup."
  • "We remain of the view that corporate rate negotiations should result at least in the high single-digit increase for 2013. We will describe the group business as steady, but not robust. The large group segment is an area of weakness. We expect that North America REVPAR growth in Q4 will be in the upper half of our 4% to 6% guidance range."
  • "Despite the issues in Europe, our company-operated hotels are almost at peak REVPAR levels in constant dollars. We are experiencing a fair amount of volatility from week to week in Europe, but no meaningful change in trend... Europe REVPAR growth will be at the low end of our guidance range."
  • "With a leadership change now slated for November 8, we do not expect any improvement in China for the rest of the year. In fact, the trend may get worse before it gets better. As our business in China has grown to over 100 hotels, with more and more in Tier 2 and Tier 3 cities, we are very much a local company with two-thirds of our business coming from Chinese travelers. Our team on the ground is convinced that China will get back to business after the transition but probably not till early next year. We expect Asia REVPAR growth to be in the middle of our guidance range or lower...  we are optimistic at this point that growth in Asia will pick up as we enter the new year."
  • "In Africa and the Middle East, Saudi and the Gulf states continue to do well. Across the rest of the Middle East our business reflects what you read in the papers. Things are not improving in Egypt. Except for Algeria, the rest of North Africa remains unstable. Sub-Saharan Africa is doing well with Nigeria and South Africa leading the way. Easy comparisons helped report our results in this region in Q3, comparisons and are more normal as we enter Q4 and we expect REVPAR growth in the middle of our range."
  • "We expect Argentina to remain a significant drag for our Latin American business and the most significant crisis linked to a currency devaluation cannot be ruled out."
  • "Canada is recovering, but New York and Phoenix are weaker than we expected."
  • [Bal Harbour]  "We expect to deliver another $10 million in EBITDA in Q4, bringing the full year total to $135 million.  By year end, we expect to have closed over 70% of the residential units available for sale. Demand for units remain strong and we continue to raise prices. We are on track to achieve our goal of $1 billion from condo sales revenue at sellout."
  • "Asset sales completed to date impacted EBITDA by $2.5 million in Q3 and will reduce Q4 EBITDA by another $8 million....As a result of the hotel sales completed to date, our 2013 EBITDA will be negatively impacted by approximately $20 million versus 2012, a total of $30 million on an annualized basis."
  • "We intend to maintain a leverage ratio as defined by the rating agencies of 2 to 2.5 times, so that we can retain an investment-grade rating through the hotel cycle."
  • [2013 REVPAR guidance]  "Our general sense is that at current trends, we're in the lower half of the range. We do think there could be an uptick post the leadership transition in China and in the U.S., which would put us in the upper half of the range."
  • [Potential portfolio sale] "There still isn't yet the kind of volume and depth in the market to create the appetite for that. That could very well change as we get into 2013. We'll certainly keep an eye on it."
  • [Capital spend outlook]  "I think you should assume that next year, we'll be at or slightly above where this year was because of some of those things being pushed into next year. And then after that, we should start to see it moderating."


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:   BETTER: Volumes were healthy across both properties and EBITDA was above the Street even before adjusting for low hold. The new financing also removes some very restrictive covenants and allow MPEL to pay a dividend once they are have some of their constructive out of the way in 2014.



  • BETTER:  Despite low hold, COD EBITDA handily bear consensus estimates. Mass and VIP volume growth exceeded that of the market.
  • PREVIOUSLY: "City of Dreams continues to maintain its market-leading mass market yields when compared to all other major mass-focused properties in Macau, while at the same time, it has delivered strong improvements in rolling chip table yields over the prior period."


  • SAME:  Altira delivered GGR growth with 40 less tables YoY  
  • PREVIOUSLY: "Altira Macau has also delivered substantially improved per table operating metrics compared to the previous quarter, which we are confident can be further built from here."


  • SAME:  Studio City remains on track to open around the middle of 2015.  Has done 95% of the piling work is complete. ...ready to move on to the basement. have 500 workers on site with the main contractor.  
  • PREVIOUSLY: "Studio City is moving ahead on its expected timetable, with the majority of the piling and foundation work now complete. We have also recently engaged on a fixed price lump sum contract basis, our main contractor, providing us greater clarity and certainty around Studio City's design and construction costs. We remain on track to open this property around mid-2015."


  • SAME:  Still waiting for the land to be re-gazetted.  They are optimistic that the project can begin by the end of 2013.
  • PREVIOUSLY: "City of Dreams, Phase 3, the additional tower – we're going through the formal government approvals because we have upgraded the building and included more amenities. So assuming it gets approved, we are hoping that we could get started on that project, probably the middle or the later half of next year."


  • SAME:  Manila project remains on track to open by mid-2014.
  • PREVIOUSLY: "With our current expected investment upon opening of both Phase 1 and 2 of the project expected to be around US$600 million, we believe this venture offers the company an opportunity to deliver strong returns on invested capital while also providing us with a platform for future expansion throughout Asia. We currently expect those Phases to open together by the first half of 2014."


  • SAME: For MSC, won't know for a few more months on whether their partner will choose to fund part of the $225MM sponsor guarantee or whether MPEL will increase their ownership stake and fund 100% of the guarantee.   In Manila, they expect to spend $450-475MM capex in 2013 which could be funded through a local loan but all options are on the table, including raising equity. Have plenty of cash to fund Phase III of CoD
  • PREVIOUSLY: "In addition to the Studio City numbers that we've already discussed, we anticipate spending approximately $600 million in Manila upon opening. And as we said, we anticipate having $325 million of that funded through a local loan. So, you can back into our equity component there. And you're correct on Phase 3 of City of Dreams, that will be funded by cash and internally generated cash flow."


  • SAME:  Chinese economy is picking up and optimistic about the new administration.  MPEL expects at least 10-15% YoY market growth in 2013. 
  • PREVIOUSLY: "So heading into next year and hoping that some of the global headwinds like the European – people get used to the European debt crisis and there's less headwinds, and eventually, I think the Chinese leadership, they've had a very tight grip on the various sectors such as the real estate sector which has impacted asset prices. But once those things are behind and with the new leadership in place, I'm quite optimistic about next year."



  • SAME: "Our table use at the City of Dreams continue to outperform all other major properties in Macau while at the same time our table yields in the rolling chip sector are both Altira and City of the Dreams continue to improve. Our table optimization initiative is ongoing, as we proactively look for ways to maximize the performance"
  • PREVIOUSLY: "In terms of the yield on the VIP side... we are a little bit discount to the leading property at the moment. So I guess we have put plans in the optimizing process during the last three quarters in both Altira and CoD. This is a ongoing process, and we hope that we could be able to stabilize Altira at the moment, but we are still continuing to put the effort in CoD. So you will see some improvement in the next few quarters."


  • WORSE:  Q4 marings came in at 22.5%, in-line with 3Q margins, due to unfavorable hold.  However, mix remained steady as well with non-VIP segments comprising 75% of luck adjusted at CoD and two-thirds of EBITDA on a group-wide basis
  • PREVIOUSLY: "In terms of the mass and VIP mix, I think it's a ongoing process and you'll see some margin-based improvement if we are doing this new performance in the next few quarters."


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