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TRADE OF THE DAY: DAL

Today we shorted Delta Air Lines (DAL) at $14.38 a share at 3:18 PM EDT in our Real-Time Alerts. Airline bulls are all looking for the same catalyst that A) may not happen (US Air deal) and B) won't change Hedgeye Industrials Sector Head Van Sciver's Industry call that this time it's not different. Shorting Delta at immediate-term TRADE overbought with oil down.

 

TRADE OF THE DAY: DAL - TOTD


IDEA ALERT: BUYING MPEL

Takeaway: Long MPEL for a trade on today's weakness

Keith added MPEL to our list of Real Time Positions at $19.40.  The TRADE risk range is $19.21-$21.31 with TREND support at $16.85.

 

 

An MPEL selloff on today's beat on earnings wasn't surprising.  Investors were already already expecting a beat and the London Times story on a junket crackdown didn't help.  However, a 6% sell-off looks overdone and we expect the sell side to be defending the stock and downplaying the Times article tomorrow.  We actually think the article has some teeth but we won't find out until after Chinese New Year (2/10/13) if that is the case.  In the meantime, we expect the stock to recover fairly quickly.

 

IDEA ALERT: BUYING MPEL - mpel2


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Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Expert Call; An Insider's Look into Pricing and the Restaurant Industry

Expert Call; An Insider's Look into Pricing and the Restaurant Industry - restaurant call pricing

 

We will be hosting an expert call titled "An Insider's Look into Pricing and the Restaurant Industry". The call, featuring Leslie Kerr of Intellaprice, will offer expert analysis on current industry trends as well as an opportunity to explore pricing power as we move through Q1 2013.  

 

OBJECTIVE:

  • The aim of this call is for us and our clients to develop a better understanding of companies' view of pricing as a strategy to absorb inflation in operating expenses over the next couple of years. 

 

The call will be held Wednesday, February 20th at 1:00pm EST. Please dial in 5-10 minutes prior to the 1:00pm EST start time using the number provided below. A link to the presentation will be distributed before the call, if you have any further questions email .

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 946362#

 

KEY TOPICS WILL INCLUDE:

  • How brands define pricing power
  • Methods companies typically use to measure traffic sensitivity to pricing
  • Macroeconomic factors that are worth monitoring to ascertain pricing power of the industry or a given company
  • Personnel within a restaurant company that are typically charged with making pricing decisions
  • The pitfalls of using test markets to measure pricing power
  • Any standard calculations that our expert or companies use in measuring pricing power

 

ABOUT LESLIE KERR

  • President & founder of Intellaprice, a pricing advisory firm for the restaurant industry
  • Built the pricing function for Dunkin' Donuts, formerly Allied Domecq Retailing US
  • While at Allied Domecq, she also held roles in strategy, finance, and brand management for Baskin-Robbins
  • Previously held roles in operations at PepsiCo Restaurant Services Group and in finance for Disney Consumer Products
  • Worked with Customer Relationship Management at Berkeley Enterprise Partners
  • Gained pricing and research experience at Coopers and Lybrand's Compensation Consulting practice
  • Earned her bachelor's degree in marketing and entrepreneurial management from the University of Pennsylvania's Wharton School
  • Earned her MBA at Duke University's Fuqua School of Business

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 


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.

 

Conclusion:

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


GET OUT OF BRAZIL IF YOU HAVEN’T ALREADY

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

SUMMARY CONCLUSIONS:

 

  • 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).

 

KEY IDIOSYNCRATIC DEVELOPMENTS:

 

  • 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.

GET OUT OF BRAZIL IF YOU HAVEN’T ALREADY - 1

 

GET OUT OF BRAZIL IF YOU HAVEN’T ALREADY - 2

 

Darius Dale

Senior Analyst


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