TAP - Q1 Misses, We See Issues for Balance of Year as Well

This morning TAP reported Q1 2013 EPS, missing consensus by $0.04 ($0.30 versus $0.34) and coming in light on revenues as well.  It’s a seasonally unimportant quarter, but it would be refreshing to see some business momentum, anywhere.  We suspect the bulls will say that the weather was crappy (it was) and that the Maple Leafs are in the playoffs (they are, for the time being) but we still think that ’13 consensus is too high even if the company continues to not have to pay any taxes (tax rate in the quarter was 11.5% versus 17.3% in the prior).

What we liked:

  • Very good FCF quarter despite higher levels of capital spending  - FCF per share was $0.27 versus $0.09 in the prior
  • Continued pricing momentum in Canada (constant currency sales per hectoliter +1.0%)
  • Strong cost savings in Canada were able to somewhat offset input costs and impact of deleveraging
  • Strong pricing in the U.S. – sales per hectoliter +3.0%

What we didn’t like:

  • STRs in Canada -1.4%
  • Lower earnings versus consensus even with tax rate favorability
  • Fixed cost deleveraging driving increases in constant currency COGS per hectoliter of 6.0% in Canada
  • 1.0% volume decline in European business

The basic theme in the release is lower volume, better price/mix and higher COGS per hectoliter offset by costs savings.  Unless volume trends improve (unlikely in the U.S. and Canada in the near-term, in our view) or cost trends improve (likely, in our view, though not in the near-term), we struggle to see how the company can deliver consistent operating income growth.  Consequently, it remains on our least preferred list.


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

LINN Energy YouTube'd and a Quick Look at the BRY Quarter

Our negative call on LINN Energy (LINE, LNCO) was featured prominently in Barron's this weekend.  LINN's CEO Mark Ellis appeared on Mad Money last night to (attempt to) refute some of our critiques.  You can find that video here:


Our Take on the Interview


Overall, we thought Ellis' defenses were weak, which is not a surprise to us (there aren't any good ones).  No change in our view here - LNCO/LINE is still one of the best sells/shorts in the energy sector today.  


Jim Cramer: “Are [the bankers advising LINN Energy and Berry Petroleum on the pending merger] saying that [LINE] is worth $18 like Barron’s says?”


Mark Ellis, CEO of LINN Energy: “Absolutely not, Jim.  They’ve done a complete independent analysis; we’ve had three different independent analyses done.  They are all coming in with valuations in the high 30’s to mid 40’s for the Company.  We’ve done our own valuation, it’s in the mid 40’s to as high as $60 per unit depending on how far you go into the 3P reserves.”


Hedgeye:  You are citing the fairness opinions of the bankers that are getting paid to work on the merger?  Really?  We are independent, don’t get paid banking fees from LINN or Berry, and believe that LINE is worth $5 – $18/unit.


Ellis: “Our accounting is in strict adherence to GAAP measures.”


Hedgeye:  We agree.


Ellis: “We’ve been very clear and transparent as it relates to our non-GAAP measures that we use to measure the performance of our business.  And in our most recent 8-K’s we’ve given total transparency in terms of how those measures are calculated.”


Hedgeye:  We disagree.  How LINN excludes the cash cost of put options from “distributable cash flow” by amortizing them through the unrealized loss on commodity derivatives line has neither been adequately explained nor justified (it's complex and most LINE investors don't understand it).  Further, “maintenance capex” is still very much a mystery; we are not able to calculate or estimate this number on our own.  In fact, LINN’s IR team has told us that it’s not possible with publicly available information.  This is hardly transparent.


Cramer: “[Kevin Kaiser] says that ‘LINN can’t keep production flat despite $260MM of capital expenditures, yet the amount of capital spending that is deducted from their definition of distributable cash flow was only $110MM.’  He’s saying that your free cash flow was actually negative $40MM…”


Ellis: “Jim, what you have to understand in our business is that one quarter does not make a company.  One quarter is not the appropriate measure for determining whether or not your maintaining your asset or not [sic].  You have to look at the body of the work over the course of a full year; so I think he’s taking a pretty short view of our business.”


Hedgeye:  This is a weak argument that is not supported by the data.  First off, LINN is a pretty standard E&P company – spud-to-sales times are ~30 - 60 days.  There are no significant upfront costs to be followed by a large increase in production months or years later.  Second, let’s do what Mr. Ellis suggests and look at the Company's performance over a longer duration.  LINN says that maintenance capex should be considered on an annual basis, but let’s look at the last two quarters plus the guidance for 2Q13; this is an instructive exercise because the Company did not close any material acquisitions over these three quarters, so we have three straight quarters of organic numbers.  Production averaged  800 MMcfe/d in 4Q12, 796 MMcfe/d in 1Q13, and management has guided 2Q13 production to 780 – 820 MMcfe/d.  After adjusting the 2Q13 guidance for the Panther divestiture (expected to close on 5/31/13), the midpoint of the 2Q13 guidance is 806 MMcfe/d (by our estimates).  So for three consecutive quarters LINN will have essentially no production growth, and total capex will exceed maintenance capex by $491MM.  "Distributable cash flow” over these three quarters equals $497MM.  In our view, if maintenance capex was anywhere near what it is really costing LINN to maintain production, there would be no distributable cash flow (see table below).


LINN Energy YouTube'd and a Quick Look at the BRY Quarter - line pic


Ellis: "I think many of the facts were misleading."


Hedgeye: Freudian slip?



Quick Look at the BRY 1Q13 Results


Berry Petroleum (BRY), the E&P that LINN is attempting to acquire in a $4.3B all-stock transaction (expected to close around the end of 2Q13), reported 1Q13 results last night.  Production increased 0.44% q/q, CFFO was $134MM, and CapEx was $179MM, for a free cash flow deficit of $45MM.  CapEx surprised to the upside versus consensus expectations ($152MM), management's guidance ($500 - $600MM for the FY13), and last quarter ($158MM).


Production in 1Q13 was 39,676 boe/d and guidance for the FY13 (unchanged from February 2013) is 38,000 - 40,000 boe/d on $500 - $600MM of CapEx. It is reasonable to assume that production either holds flat or declines sequentially over the course of the 2013 (or increases with CapEx +$600MM).


Strangely, LINN is guiding 2H12 BRY "maintenance CapEx" to $121MM, or $242MM annualized.  So BRY on its own in 2013 will see production flat-to-down on $500-600MM in spending, but once LINN acquires it, maintenance CapEx is only ~$242MM on an annualized basis.  Interesting math...


This is how LINN can acquire (all-stock deal) a company that does not generate any free cash flow, admit no material synergies (note: BRY paid only $1MM of cash taxes in 1Q13), and claim that it will be accretive to "distributable cash flow" per unit.


Kevin Kaiser

Senior Analyst 



Bookings picked up in the last few weeks.  Pricing improvement in Europe is slow.  The company believes everything is going as planned in 2013. 



"We are excited to announce another quarter of strong results, especially in light of this being our first quarter as a publicly traded company.  These strong results bring us to nineteen consecutive quarters of year over year Adjusted EBITDA growth."


- Kevin Sheehan, Norwegian Cruise Line's President and CEO



  • Start to 2013 Wave Season was robust with strong onboard spend 
  • Caribbean/Hawaii performed well in 1Q.  
  • European ships increased from 1 to 2 ships in 1Q.  
  • IPO proceeds:  raised $477.6 MM 
  • Onboard particularly strong in bar and short-excursion categories
  • Pride dry-dock expected to be done by September 
    • Invested in scrubber technology to comply with EICA requirements; should be operational by year-end
  • 2Q deployment schedule:  26% Caribbean, 23% in Mediteraran, 7% in Baltic, 7% in Hawaii,  12% Bermuda, 12% Alaska, 12% other



  • Triumph effect was only 'on the margin'
  • Europe booking through the season is good.  Pricing back to where they are hoping for.
  • Last couple of weeks, booking levels exceeded what mgmt was looking for
  • Caribbean is booking well
  • Booking period has been extended
  • Booking volume ex Breakaway YoY is pretty much where they're hoping to be
  • Solid position in 4Q; 3Q is also looking well
  • Do not want to provide 2H guidance color at this time
  • Bookings 2014: higher volume and higher prices YoY
  • 2013 % booked vs 2012: up mid-to-high single digits 
  • Triumph affected call volume in North America
  • $0.01 of additional costs will swing into 2Q due to timing
  • 2013 three drydocks: Pride, Pearl, and Sky
  • The guidance range is due to uncertainty with Breakaway
  • Alaska operating the way as expected
  • European booking volume has accelerated in the last couple of weeks
  • Confident that onboard spending will be strong on Breakaway
  • Pricing:  extremely strong pricing on Pride of America; Europe pricing starting to come back slowly 



  • An increase in Net Yield, partially offset by lower Capacity Days primarily due to the planned Dry-dock of Pride of America, resulted in a 1.3% improvement in Net Revenue
  • Net Yield increased 3.3%... on stronger overall pricing and increased onboard spend, particularly in the bar and shore excursion areas
  • Adjusted Net Cruise Cost ex Fuel decreased 1.5%... mainly due to the timing of certain expenses. 
  • The first quarter included a portion of the Pride of America Dry-dock which extended into the second quarter. Incremental Dry-docks in subsequent quarters include Norwegian Pearl and Norwegian Sky.
  • Interest expense, net for the period was $127.7 million and included $90.5 million in charges related to the prepayment of certain credit facilities and the redemption of certain of the Company's senior notes in connection with proceeds from both the Company's IPO and Notes Offering. 
  • On April 25, 2013, the Company took delivery of the newest ship in its fleet, the 4,000 passenger Norwegian Breakaway
  • Norwegian Breakaway's sister ship, Norwegian Getaway, continues construction for an on-time delivery in January 2014
  • As of March 31, 2013, anticipated capital expenditures for business enhancements were $57.2 million for the remainder of 2013, and $77 million for each of the years 2014 and 2015.  As of March 31, 2013, anticipated capital expenditures for ship construction were $681.1 million for the remainder of 2013, $755.6 million for 2014 and $788.5 million for 2015, of which export credit financing is in place of $572.8 million for 2013, $657.1 million for 2014 and $621.1 million for 2015, based on the euro/U.S. dollar exchange rate as of March 31, 2013.






Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

Broken: Gold Levels, Refreshed

Takeaway: Gold failed to recapture my 1st line of resistance (1492) and remains in a Bearish Formation (bearish TRADE, TREND, and TAIL) as a result.

I’m getting a lot of client questions about Gold today. I focused on it in my Early Look note this morning, but there was nothing new there – and that’s the point. Gold is broken. And that’s not new either.


Across our core risk management durations, here are the Gold lines that matter to me most:


  1. Long-term TAIL risk line = 1681
  2. Intermediate-term TREND resistance = 1579
  3. Immediate-term TRADE resistance = 1492


In other words, after bouncing to another lower-high in the last few weeks, Gold failed to recapture my 1st line of resistance (1492) and remains in a Bearish Formation (bearish TRADE, TREND, and TAIL) as a result.




Keith R. McCullough
Chief Executive Officer


Broken: Gold Levels, Refreshed - gold


JAPAN: Celebrate Good Times

Japan's Nikkei 225 Index moved +3.6% to the upside overnight putting its year-to-date performance at an astounding +37.4%, second only to Venezuela, which is enjoying +44% gains for the same time period. Weaker Yen, monetary policy at the Bank of Japan keeps everything in check. How high can we go?  At this rate, much higher if Japan is OK with its currency being burned.


JAPAN: Celebrate Good Times - NIKKEI225


This note was originally published May 06, 2013 at 15:36 in Gaming

While five days of data is not enough from which to draw many conclusions, the May holiday is off to a strong start.  Average table revenues for 5 days spanning April 30-May 4th were HK$1.2 billion, up 24% year-over-year (HK$975 million) and up 36% from last week’s HK$886 million.  In-line with our earlier projections, we expect May gross gaming revenue growth to accelerate to 16-20% or HK$29.5-30.5 billion.


In terms of market share, Galaxy and Wynn were big gainers.  Galaxy’s share shot up to 21.1% from 17.8% share in April while Wynn’s share rebounded to 12% from the April low of 9.2%.  MPEL gave back its massive share gains in April and dropped back to its 6M average share of 14.0%. 





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