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Marking LINN Energy's Granite Wash to Market

Takeaway: The LPI/EnerVest Granite Wash deal suggests a value on LINN's Granite Wash play ~90% below LINN's internal NAV case... #MARKtoMARKET

LINN Energy (LINE, LINCO) holds 95,000 net acres prospective for the Granite Wash play on the border of the TX Panhandle and SW Oklahoma (according to the Company's website).  The majority of the acreage is in Hemphill County, TX, Wheeler County, TX, and Roger Mills County, OK.


Marking LINN Energy's Granite Wash to Market - linn1

Source: LINN Energy Presentation


In LINN's 4/1/13 presentation, "LINN Energy Response to Another Round of Short Seller Comments," the Company shows its "NAV Schedule (Internal Case)" on slide 9:


Marking LINN Energy's Granite Wash to Market - linn2

Source: LINN Energy Presentation


LINN states that it has 6.2 Tcfe of unproven volume in the Granite Wash, or 44% of its total unproven volume.  The value that LINN has put on this total unproven value is $6.5B - $11.2B.  If we take 44% of that (that's the best we can do), LINN values its Granite Wash unproven volume at $2.9B - $4.9B.  LINN also has 0.4 Tcfe of PUD reserves in the Granite Wash, or 20% of its total PUD reserves.  The value that LINN has put on its total PUD reserves is $1.9B.  If we take 20% of that, LINN values its Granite Wash PUD reserves at $380MM.  In total, LINN assigns $3.3B - $5.3B of value to its non-producing Granite Wash play.


We showed in our 4/5/13 presentation Response to LINN Energy's 4/1/13 Presentation & Additional Research that recent Granite Wash transactions like the Apache/Cordillera, Noble/Unit, and LINN/Plains deals suggested a value only a fraction of what LINN was representing to investors, and those deals were struck around $6,000 - $7,000/acre (after backing out the production).


Yesterday we got our latest mark on Granite Wash acreage as Laredo Petroleum (LPI) sold its Anadarko Basin properties to EnerVest (private) for $438MM.  The properties produced 58 MMcfe/d (94% liquids-rich gas) in 1Q13.  Included in the deal were ~37,000 acres in the Granite Wash and ~67,000 acres in the Eastern Anadarko and Central TX Panhandle.  LPI's Granite Wash play borders Hemphill County, TX and Roger Mills County, OK, as pictured below:


Marking LINN Energy's Granite Wash to Market - linn3 

Source: Laredo Petroleum Presentation


If we assign a value on the production at $5,000 per flowing Mcfe (standard for gassy volumes), and 0 value to the non-Granite Wash acreage, that leaves us with a market value on Granite Wash acreage of $3,999/acre.


Putting that metric on LINN's 95,000 net acres gives us a non-producing value of $380MM.


So LINN's internal NAV of its Granite Wash play is ~$3.3B - $5.3B, and the market says its worth $380MM.  That's quite the bid/ask...


Kevin Kaiser

Senior Analyst


TODAY’S S&P 500 SET-UP – May 22, 2013

As we look at today's setup for the S&P 500, the range is 31 points or 1.09% downside to 1651 and 0.77% upside to 1682.             










  • YIELD CURVE: 1.69 from 1.69
  • VIX closed at 13.37 1 day percent change of 2.69%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, May 17 (prior -7.3%)
  • 10am: Existing Home Sales, April, est. 4.99m (prior 4.92m)
  • 10am: Existing Home Sales M/m, April, est. 1.4% (prior -0.6%)
  • 10am: Fed’s Bernanke testifies to congressional panel of economic outlook
  • 10:30am: DOE Energy Inventories
  • 11am: Fed to purchase $1.25b-$1.75b notes in 2036-2043 sector
  • 12:30pm: ECB’s Praet speaks on monetary policy in Washington
  • 1pm: Fed’s Fisher speaks on economy in Nacogdoches, Texas
  • 2pm: Minutes from April 30-May 1 FOMC meeting


    • Financial Industry Regulatory Authority holds final day of conf. on regulatory developments, FINRA’s priorities
    • 9am: Secretary of the Army John McHugh; Army Chief of Staff Gen. Raymond Odierno testify at Senate Appropriations panel hearing on FY2014 budget estimates for U.S. Army
    • 9:30am: House Oversight and Government Reform Cmte hearing on IRS w/ Treasury Deputy Sec. Neal Wolin; former IRS Commissioner Douglas Shulman
    • 10am: Treasury Sec. Jack Lew speaks to House Financial Svcs about FSOC’s annual report
    • 10am: Senate Energy and Natural Resources Cmte forum on LNG officials from cos. incl. Sempra, Cheniere
    • 10am: Congressional-Executive Commission on China hearing on “Food and Drug Safety, Public Health, and the Environment in China”
    • 10am: House Judiciary Cmte hearing on constitutional rights during war on terrorism
    • 10am: House Foreign Affairs Cmte considers Nuclear Iran Prevention Act
    • 2pm: House Financial Services’ oversight panel holds hearing, “Who Is Too Big to Fail: Are Large Financial Institutions Immune from Federal Prosecutions.” w/ Mythili Raman, acting assistant attorney general of DOJ’s criminal division
    • 2pm: House Judiciary Cmte hearing on Senate immigration bill and the 1986 immigration overhaul


  • Irish official says country didn’t give Apple tax deals
  • U.S. sales of existing homes may rise to 3-year high
  • Ford adding capacity for 200,000 new units on Fusion, F-150
  • Microsoft unveils new Xbox; has deals with NFL, Halo TV
  • Co. to hire “several thousand” Chinese workers: CEO
  • Sony board discussing Third Point’s entertainment IPO plan
  • Starbucks pays no tax in Germany, Rheinische Post reports
  • U.K.’s Miliband to tell Google CEO to change tax culture
  • Nintendo, peers winning patent infringement, royalty cases


    • Lowe’s (LOW) 6am, $0.51 - Preview
    • Staples (SPLS) 6am, $0.27
    • Booz Allen Hamilton (BAH) 7am, $0.37
    • Target (TGT) 7:30am, $0.84 - Preview
    • American Eagle Outfitters (AEO) 8am, $0.17
    • Eaton Vance (EV) 8:39am, $0.52
    • Hewlett-Packard (HPQ) 4pm, $0.81
    • PetSmart (PETM) 4:02pm, $0.96
    • Synopsys (SNPS) 4:05pm, $0.63
    • Workday (WDAY) 4:05pm, $(0.18)
    • HEICO (HEI) 4:10pm, $0.40
    • L Brands (LTD) 4:30pm, $0.46
    • Semtech (SMTC) 4:30pm, $0.47
    • Bristow Group (BRS) 5:05pm, $1.02
    • SeaWorld Entertainment (SEAS) Aft-mkt, No est.


  • Gold Gains Amid Stimulus Speculation Before Bernanke Testimony
  • Death in Parched Farm Field Reveals Growing India Water Tragedy
  • WTI Crude Drops a Second Day as U.S. Supplies Gain a Fourth Week
  • Copper Reaches Five-Week High on Supply Concern After Accident
  • Wheat Gains on Weather Concern as Import Demand Seen Picking Up
  • Cocoa Falls on Speculation Prices Climbed Too Far; Sugar Rises
  • Gold Demand at Degussa Is About Double Average in First Quarter
  • Wheat Exports From India May Plummet as Farmers Hoard Harvest
  • Cotton Moving Average Signals Further Slide: Technical Analysis
  • Freeport Reviews Safety as Copper Rallies Amid Mine Suspension
  • Crude Supplies Decline a Second Week in Survey: Energy Markets
  • Rebar Rises First Time in Three Days on Iron Ore Price Increase
  • Ukraine Counters Russian Cargo Grab With Bond-Sale Cash: Freight
  • Gold ETP Outflows in 2013 Top Additions Over Past Two Years






















The Hedgeye Macro Team











Bucked Up!

This note was originally published at 8am on May 08, 2013 for Hedgeye subscribers.

“I feel quite bucked up!”

-George F. Kennan


I’m half way through reading John Lewis Gaddis’ biography of this great American strategist’s life. The aforementioned quote came from Kennan in 1947 (Gaddis, pg 242). He was 43 years old at the time and was just coming off one of the biggest wins of his career – shifting US foreign policy towards Russia in what is well known by historians now as “The Long Telegram.”


Kennan’s character resonates with me because he was quite a moody fellow. He was authentic. He thought for himself and didn’t particularly care about what people thought about him. While he didn’t make as many mistakes as I have at his age, he was still very introspective about his research process. He never stopped questioning himself or his premise.


Whether you are a strategist, athlete, or professional in any other field where performance is measurable in real-time, you get it. Performance is fleeting. As a result, conventional wisdom suggests you should always err on the side of caution when things are going well. I disagree with that. Confidence is contagious. Seize it when you have it. Make as much progress as you can.


Back to the Global Macro Grind


As the SP500 was holding all-time highs into yesterday’s close, I was feeling rather bucked up myself. It is, after all, all about #StrongDollar. When the US Dollar Index was basing in mid-November (at $79-80), that was our signal. We’ve seen higher (all-time) lows in the Dollar and lower-highs in Commodity prices ever since.


There’s measurable entropy in something that’s rising off a 40yr low (USD hit an all-time low in 2011 when Commodities (CRB Index) hit an all-time high). It’s critical to contextualize the asymmetry associated with that entropy. Remember, long-term bottoms are processes, not points. By the time everyone and their brother is bucked up on #StrongDollar, we’ll be getting out of the way.


The good news (if you are Long Dollars, Short Commodities, and Long US Consumption stocks) is that we are still in the early innings of what could be a long telegram of Early Look notes anchoring on this fundamental point. So, please – I beg you to be patient with both our thesis and the American recovery in confidence, birth rates, and household formation. It’s all born out of the same thing.


What’s up since the US Dollar gave us the green light (quant signal) in November 2012?

  1. SP500 is +20% now (vs 1353 on November 15th, 2012)
  2. Weimar Nikkei is +65% (vs 8661 on November 15th, 2012)

Yep, Bernanke spent the 1st half-decade of his reign as USA’s Central Planner In Chief (2007-2012) Burning The Buck. Ever since his epic “print to infinity and beyond” moment (SEP 2012 FOMC meeting), the Japanese dudes have taken the torch.


Everything in currency markets is relative. On the margin, former BOJ Chief (Shirakawa) was actually the most hawkish of the Big 3 Central Currency Commanders going back to 2006. That’s what most guys who got squeezed being short Yens to 40yr highs in 2011-2012 had wrong. To get the timing right in big currency moves, you need to get the relative policy shifts right.


Again, this is just how we roll. So if our GIP (Growth, Inflation, Policy) framework sounds a little foreign to some, that’s cool too. Don’t forget that we did the unthinkable here and thought for ourselves in building our models and macro strategies this way.


Back to 1-month CTRL+SQUEEZE move in everything Global Equities this morning…


Here are 3 big things jumping out of my notebook:


1.   CHINA – just as it looked like Chinese stocks were going to hell in a hand basket again, China joins the party printing a +14.7% Export print for April; it’s not just the US data that has accelerated sequentially m/m – most of the Asian and European data stopped slowing in March too; Shanghai Comp +4 days in a row, back above 2206 TREND support to 2246


2.   COMMODITIES – SP500 +0.5% yesterday w/ the CRB Index deflating -0.4% (-2.4% YTD); #CommodityDeflation remains the outlier call of 2013; it is bullish for inflation adjusted consumption growth (particularly US #GrowthAccelerating). Will Oil start to look like Gold does next? Prices at the pump falling Q2 vs Q1 for the first time in 4 years


3.   SP500 – 1626-1630 is not where you want to be chasing US stocks; you have -1.4% of immediate-term downside to my 1st line of support (1599); that said, higher-lows and higher all-time highs in my model are what you want to be net long of, unless you have a bearish catalyst


As I have been asking my sparring partners Doug Kass and Dennis Gartman since January, what is your bearish catalyst? Will it be a reversal of last week’s raging bull catalyst (US Jobless Claims dropping to 324,000, a 5 year low)? Since we’ve ripped for 4 consecutive up days since that data point, I wouldn’t be surprised if we sold off on it being less great this week (Thursday).


Who knows? And, if it’s legal, what is it they know? All I know is that the more I read about history and repeatable market strategies, the less I know altogether. The only thing I am 100% certain about is that I will be getting something very wrong soon. That’s just the game. In the meantime, I’ll play it confidently. That’s the only way to win.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Shanghai Composite, and the SP500 are now $1421-1481, $99.36-106.11, $81.87-92.98, 98.25-99.98, 1.71-1.82%, 12.36-14.51, 2169-2265, and 1599-1630, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bucked Up! - Chart of the Day


Bucked Up! - Virtual Portfolio


The Macau Metro Monitor, May 22, 2013




Galaxy's CFO Robert Drake said that he expects 2013 casino revenue for the city to increase by “mid-teens,” while VIP revenue will expand by “high single digit."  He added that the company is considering a “golf course” or “some other non-gaming amenity” if it is successful in acquiring a piece of land on Hengqin Island and the development of facilities complementary to what it has across the water at Galaxy Macau on Cotai.



Sarkis Izmirlian, CEO of resort company Baha Mar Ltd., said he selected Global Gaming Asset Management, LLC—led by former longtime LVS president William Weidner—to manage the gambling operations of his project, partly because he believes the team understands China better than anyone else.  The Baha Mar resort, currently the largest tourism development in the West, is being built by China State Construction Engineering Corp. and primarily financed by the Export-Import Bank of China. The selection of Mr. Weidner's team further solidified China's role in the project.


The beachfront Baha Mar project in Nassau will have a 100,000-square-foot casino with more than 150 gambling tables and 1,500 slot machines as well as luxury hotels, dining and shopping, a golf course and a convention center.  It is set to open in December 2014.


Once the resort opens, Izmirlian said he expects it will account for 10% to 15% of the Bahamian economy. While the Bahamas has historically relied on the U.S. for 90% of its business, Izmirlian said he hopes Baha Mar can help to broaden its appeal, including to Chinese visitors.


Weidner, whose company is also managing the casino operations of Philippine ports magnate Enrique Razon Jr.'s recently opened Solaire Resort & Casino in Manila, said he plans to engage junket operators to bring Chinese customers to Baha Mar.  He said he also plans to reach out to high-rollers directly.  However, the current absence of direct flights between China and the Bahamas could complicate the process.




Your Opinion

“Look, I want to hear your opinion.”

-George F. Kennan


One of the hardest things to do in this profession is to check your position at the door and listen to the other side of the trade. Some opinions matter; some don’t. The market’s opinion always matters – so don’t just hear Mr. Market; listen to him very closely.


Our all-star energy analyst, Kevin Kaiser, and I had the opportunity to debate one of our best short ideas with the top holder of the stock yesterday. This wasn’t this 70 year old hedge fund manager’s first rodeo. Herniated disc in his back and all, he took the meeting with us during the market open. He had plenty of other things going on, but he really listened to our opinion. #Respect


At one point in the meeting, the debate between Kaiser and the analyst in the room got so intense that the PM decided to call the CEO of the company in question. He got the exec on the phone within a minute, told him what the bear case was (right in front of us), and asked for his opinion. Watching him listen to the CEO’s answers made me smile. Questioning and listening like that is not easy.


Back to the Global Macro Grind


This game isn’t easy. Laden with our individual confirmation biases, we are all hostage to being human while we play it. There is a real-time score on every decision we make. Our opinion is marked to market every day. If you don’t love that; you don’t love the game.


I’m not always sure if I am getting dumber or smarter each day. From a Global Macro Strategy perspective, that’s why I find it useful to study history – and not just market history – but the history of decision making. What was the process? Were they making decisions within an open network of information? What dogmas, agendas, and conflicts of interests impacted those decisions?


I just finished reading George F. Kennan’s brick of a biography. It’s thick because the man lived 101 years and kept strategizing until the very end. He never retired because he never stopped questioning, listening, and thinking. He was one of the most introspective and self-effacing strategists I have ever studied. If you had a seat at the table in a meeting with him, your opinion mattered.


“The thing you were planning for took place the day before yesterday, and everyone who wants you to know why in the hell you didn’t foresee it a long time ago.”George F. Kennan (pg 277)


Which brings me to today…


Mr. Macro Market’s opinion (#StrongDollar, Down Gold, Up Stocks) into Ben Bernanke’s testimony to Congress today is now old news. Why in the hell didn’t people foresee that there would ultimately be an end to these ridiculous expectations of endless QEs?


Why isn’t my opinion on expecting no more incremental easing equally ridiculous?


This is what makes a market. This is also why I spend so much time on both the road (seeing clients) and on Twitter (reviewing credible criticism of my positions). It’s not personal. Everyone’s goal in this game is to be right for the right reasons.


The aforementioned Kennan quotes came out of the US State Department policy planning meetings of 1. At the big turns in US policy history (post WWII in this case), respecting the pattern of decision making is critical.


Is Bernanke at the turn?


If you use the economic data for an opinion, he definitely should be. He’s been effectively easing monetary policy now since the day he took his seat as the head of the Fed in 2006. It’s been a long death march for conservative US Savers that needs to end.


What major macro markets have already front-run him making the turn?

  1. US Dollar Index = Bullish Formation (anything tighter, on the margin, is bullish for a currency that’s been devalued)
  2. Gold = Bearish Formation (up for 12 straight years with the last 6 of them becoming Bernanke’s bff, ending)
  3. US Treasury Yields = Bullish Formation (provided that our long-term TAIL risk line of 1.82% on the 10yr holds)

But will 1.82% on the 10yr hold? Will Bernanke acknowledge economic gravity? I don’t know. But neither my opinion nor yours will matter come 10AM EST. Pencils down – your central planning overlord will issue his un-elected opinion.


I think I know how our CYA State of The Union in this country got to this point. But the more history I read, the less I know about how politically conflicted and compromised it really was all along.


There’s nothing I can do about that history now. Neither can you. The best we can do each and every risk management morning isn’t playing the game we’d all like to play. It’s to play the game that history has put in front of us.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $102.16-105.13, $3.26-3.39, $83.57-84.69, 101.49-104.62, 1.82-2.01%, 12.18-13.79, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Your Opinion - Chart of the Day


Your Opinion - Virtual Portfolio

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.