EVEP – Where do we Stand?

EV Energy Partners (EVEP) remains a short on our Best Ideas list.  We added it on 4/26/13 at $47/unit and have a 26% “unrealized gain” (not the LINN Energy kind) as of yesterday’s close.  Our thesis is largely playing out as expected, and with EVEP $12 lower in short order, it is time to reevaluate.


For background information, see our prior work on EVEP:


4/26/13: Short EVEP: New "Best Idea"

5/2/13: EVEP: Beyond the Yield

5/10/13: EVEP is Still a Short


Conclusion: We are not “covering” the short here, but we would “lighten up.”  Risk/reward is not what it once was, but we remain negative for two key reasons:

  1. Leverage/liquidity situation is dire; we believe that EVEP will raise equity in 2H13, and that is not yet a consensus view.
  2. There is no legitimate valuation support anywhere close to the current price, in our opinion.  EVEP is overvalued relative to the intrinsic value of its own assets, as well as its E&P peers.

As of 3/31/13, EVEP had $944MM of long-term debt, $19MM of cash, $925MM of net debt, and a net derivative asset of $48MM (adjusted EV of $2.37B at $35/unit).  Net debt increased $74MM sequentially in 1Q13, and assuming no A&D activity and no change in the distribution, net debt will increase ~$77MM every quarter for the next three quarters.  If we draw the cash balance down to $0, that gets us to total long-term debt of $1,160MM at YE13.  At that level the credit facility would be at $660MM, near its borrowing base limit of $710MM (EVEP has $500MM of senior notes (8.0%, 2019)).


In 2013, we estimate that EVEP will generate $159MM of open EBITDA and $33MM of hedge gains, for EBITDA of $191MM (note: we do not exclude unit-based compensation from EBITDA as EVEP does – that just doesn’t make sense to us).  Current adjusted net debt/2013 open EBITDA is at 5.5x (($925MM - $48MM)/$159MM); current net debt/2013 EBITDA is at 4.8x ($944MM/$191MM).  Using our YE13 net debt estimate at $1,160MM, leverage ratios will be at 7.1x adjusted net debt/open EBITDA and 6.0x net debt/EBITDA at year end.  It’s also worth noting that net debt exceeds the value of the proved reserves (SEC PV-10 of $874MM at YE12).  The point is that EVEP is dangerously over-levered – which we do not think is really appreciated – and needs to raise capital.


The levers that EVEP can pull are 1) asset sales and 2) equity raises.  We think that we get both this year.


In our view, EVEP can sell down its Utica Ohio wet gas acreage for ~$200MM (45,000 net acres at $4,444/acre) – but it will be in a number of different transactions, and the timing is uncertain.  Acreage prices in the Utica are still fluid, but we feel like we’ve given the benefit of the doubt to EVEP in our assumptions below:


EVEP – Where do we Stand? - evep acreage


We assume that the rest of the Utica acreage (volatile oil window, other OH, and all of PA Utica) does not get monetized (though a JV carry arrangement is possible).


Those proceeds are not enough.  If EVEP manages to realize the full $200MM in proceeds in 2013 (unlikely), net debt will down to $960MM at YE13 – still over-levered by any measure – but it would not be long until EVEP is again bumping up against the borrowing base ceiling as in 2014 and 2015 EVEP needs to raise another $100MM and $60MM of capital, respectively, assuming the distribution is not cut.


If EVEP wants to maintain the current distribution – we think they do as cutting it is a death sentence – we think that it raises equity in 2H13 (perverse, but it is what it is).  EVEP hasn’t done an equity deal since February 2012 when they sold 4MM shares at $67.95/unit (brilliantly done) for proceeds of $268MM.  Suppose that this time around they raise $200MM at $34/unit – that would be 5.8MM new units, diluting exiting unitholders by 14%.  That's what we're playing for.    




As we have written previously, we believe that fair value for EVEP is in the low $20’s.  We use traditional E&P valuation approaches (NAV and multiples of cash flow), not a yield target.  We do not believe that EVEP’s current distribution is sustainable without consistently funding it with capital raises, so we think that method is inappropriate, and overvalues the enterprise.  At the current price – $35/unit – EVEP trades at 2.7x EV/PV-10, 15.0x EV/2013 open EBITDA, and 12.0x EV/2014 open EBITDA.  Compare those metrics with E&Ps that have better assets and better growth prospects and trade at 1.5x PV-10 and 5x EBITDA – and most E&Ps have acreage for sale and midstream businesses just as EVEP does.      




We want to wait for our catalyst – equity raise – before “covering” our position.  We don’t think it’s priced in yet, but maybe it’s starting to be.  While EVEP is still very overpriced in our eyes, we understand that most investors and analysts do not look at EVEP the same way that we do, and we don’t expect them to “come our way.”  We want to keep the position on, but would “lighten up,” as risk/reward is not what it was when we initiated the short at $47, and there are two potential catalysts that could squeeze EVEP higher: an DCF/unit accretive acquisition; and/or EVEP monetizes a small amount of acreage in the Utica for a high price, and investors extrapolate that number across its entire position.    


Kevin Kaiser

Senior Analyst

Stories on Hedgeye's Radar Screen

Takeaway: A quick look at some stories we're reading (and watching) this morning.

Keith McCullough - CEO

Emerging Markets Act to Stem Capital Flight (via Bloomberg)

Turkey protests: Ruling AK party may hold vote on park (via BBC)


Stories on Hedgeye's Radar Screen - reading

Kevin Kaiser - Energy

Report: 33 injured in Louisiana plant explosion (via WAFB)


Daryl Jones – Macro

CIT's Thain: 2008-Style Crisis Can Still Happen (via Bloomberg)


Howard Penney - Restaurants

How to get fired from a fast food joint: Wendy's employee pictured eating ice cream direct from the Frosty machine (via Daily Mail)

Chipotle to open second ShopHouse unit in Los Angeles (via Nation’s Restaurant News)

Jonathan Casteleyn – Financials

After its first monthly outflows ever in May Pimco's Total Return ETF $BOND has lost another $119 MM MTD in June (via PIMCO)


Brian McGough - Retail

Retail sales, jobs data show underlying economic strength (via Reuters)





Staples Valuation Remains Stretched

Valuation alone is never a catalyst in our investment process; however below we updated charts on forward P/Es of the consumer staples sector and its main sub sectors. Needless to say, while valuations have come in over recent weeks, they remain stretched. That said, our quantitative real-time set-up for consumer staples (etf: XLP) is bullish, trading above its intermediate term TREND line. We’ll let the charts do the talking:


Staples Valuation Remains Stretched - ww. 1


Staples Valuation Remains Stretched - ww. 2


Staples Valuation Remains Stretched - ww. 3


Staples Valuation Remains Stretched - ww. 4


Staples Valuation Remains Stretched - ww. 5


Staples Valuation Remains Stretched - ww. 6


Staples Valuation Remains Stretched - ww. 7


Staples Valuation Remains Stretched - ww. 8


Matthew Hedrick

Senior Analyst


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.


Regional gaming still disappointing


  • Despite an improving economy, May regional gaming revenues are disappointing – coming in below our projection of flat
  • June may look even worse – we are projecting down 5%
  • Q2 estimates look aggressive for regional companies – ASCA, PNK, PENN, BYD
  • Market saturation and bad demographics should continue to pressure this industry


Weimar Nikkei: We Called It

Takeaway: To be crystal clear on our conclusion on how we think this ends for the Japanese people: in tears.

(Editor's Note: This note was originally published on May 30, 2013. We have been pounding the table on Japan for quite some time here at Hedgeye. In other words, we called all this market mayhem well ahead of consensus. As CEO Keith McCullough is fond of saying, it is a "certified Gong Show" in Japan. For more information how you can sign up for our services, please click here.)

The big picture

“Economics is haunted by more fallacies than any other study known to man.”

-Henry Hazlitt



That’s the opening sentence to one of the best introductory books on markets that you’ll ever read: Economics in One Lesson. Hazlitt wrote the book in 1962, then republished it again in 1979. The quote is timeless. It’s also cyclical.


Our everything Japan Jedi, Darius Dale, and I spent the day seeing clients in Boston yesterday and we had some colorful debates about what both the New York Times and The Economist are all of a sudden championing as “Abenomics.”


To be crystal clear on our conclusion on how we think this ends for the Japanese people: in tears. Never mind a country that starts doing it with a quadrillion in debt, there has never been a country in the history of humanity that has devalued their way to long-term economic prosperity. Championing Japan’s economics today is the equivalent of cheering on the Weimar Republic circa 1924.

Macro grind

The exciting thing about getting long the Weimar Republic’s stock market in the early 1920s is that you would have crushed it on the long side. The devastating thing was the other side of the trade – The People, their liberties, and purchasing power got crushed too.


Try some anti-gravity (economic or physical) exercises at home, and let me know how it ends. As a general rule, what goes up comes down, fast. The Yale Economics Department didn’t teach me that, btw. Incredibly, Keynesians believe they can “smooth” gravity.


The Weimar Nikkei was down another -5.2% last night. It’s down -13% from its Policy To Inflate high of May 22. That’ll leave a month-end mark. So will the implied volatility this kind of a move perpetuates throughout our interconnected global macro ecosystem.


What is a Policy To Inflate?

  1. A Policy To Inflate is an explicit (and implicit) strategy to debauch and devalue the currency of your people
  2. Bernanke is the “innovation/communication” dude who taught the Japanese to roll this out (without calling it what it is)

How do you devalue?

  1. As Bernanke’s boy, Paul Krugman, suggested to the Japanese in 1997, you need to “PRINT LOTS OF MONEY”
  2. And, ideally, have your conflicted/compromised politicians spend their brains out on borrowed moneys, at the same time

Then you have to overlay the almighty “communication tools” (i.e. central planners whispering inside info to “consultants” who then tell fund managers and/or bark about how much more you can print if/when you feel like the stock market needs more juice).  


This communication tool thing has the potential to be a lot more powerful today than it was for the Germans in the 1920s, primarily because the distribution pipe for our conflicted/compromised media is exponentially larger.


Remember, any lie can live for as long as people are dumb enough to believe it. I don’t think the media is as dumb as they are cornered. If they don’t broadcast this Fed, BOJ, and ECB propaganda, they lose access to the only meaningful content they have left.


BREAKING NEWS: central planner A says B to reporter C in the WSJ and/or English Major D @CNBC – markets react!


People who are paid to believe lies inspire us. So we are going to publish the Hedgeye Risk Management Top 10 things a hard core Bernankian is going to tell you in a meeting about the benefits of 0% interest rates and burning your currency.


At the top of the list will be things like “exports”, “competitiveness”, etc. These aren’t new arguments. But what’s fascinating about them is that they are the same fear-mongering and regressive arguments that central planners have been making since the 1920s.


Losers make excuses when their plans aren’t working. For Abenomics to work, we need to see sustained real (inflation-adjusted for local currency) economic growth.


In the short-term, they might get the illusion of that – it’s called inflation. In the long-run, what do they care about what they really get? On that score they’d agree with Keynes too; in the long-run they (and the Weimar Nikkei) will be dead.

  • CASH: 30

Our levels

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, VIX, Nikkei225, and the SP500 are $1361-1424, $101.06-103.98, $83.31-84.61, 100.41-103.69, 2.01-2.18%, 12.35-15.11, 13506-14920, and 1641-1674, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Weimar Nikkei: We Called It - Chart of the Day large

Tears in Tokyo

Client Talking Points


That was quick. Japanese Prime Minister Shinzo Abe went from flying like Superman on the cover of The Economist to the Weimar Nikkei crashing to earth (-20.4% since May 22!). Evidently, people are realizing that the whole Bernanke strategy doesn’t actually work where it is promised to work – in the Japanese economy. YEN breakout > 95.95 TREND line (vs USD) #critical 


It's just a certified train wreck in the A-shares (down -2.7%) and the Hang Seng (down -3.4%). Developing. We held our China Risk conference call yesterday which was very well attended. If you want the slide deck, ping us.


I've been pounding the table on this: Get the US Dollar right and you get a lot of other things right. When we covered the USD/YEN short on Monday and sold ½ our longs in US Equities, this was the interconnected risk I was worried about. Down Dollar is bad for SPY. Period. The TREND correlation between USD/SPY = +0.84. So we’ll be looking for a USD oversold signal to start buying US stocks again.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Financials sector head Josh Steiner is the Street’s head bull on residential mortgage originator/servicer Nationstar, projecting $9 in earnings for the company in 2014.  This is well above the company’s own guidance range, which tops out at around $7.50. NSM had a successful start to the year as it won servicing bids on substantial mortgage portfolios.  They also reported significant increases in their profit margins on those portfolios, and double-digit increases in their own originations.  Housing prices are ramping significantly higher, as Steiner predicted, as demand continues to exceed supply in both new and existing homes.  Steiner says this quality mortgage company could ride the crest of a sustained wave of sector improvement.


Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.  


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road


ASIA: complete collapse of another Keynesian experiment in Japan; Weimar Nikkei -6.4% and rest of Asia gets smoked



“To be crystal clear on our conclusion on how we think this ends for the Japanese people: in tears” (Hedgeye Early Look, May 30, 2012)


38% ... The percentage of Japan's population that is 55 years old or older.

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