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MPEL 2Q 2013 CONFERENCE CALL NOTES

Yes, VIP hold was high at both Altira and City of Dreams but that was already in our numbers and should’ve been in the Street estimates as well. MPEL beat us everywhere on the volume side.

 

 

“Highlighting the ideal strategic positioning of our flagship property, City of Dreams, this premium-mass focused property once again captured meaningful market share in the mass market table games segment which, in turn, has been the major driver of our impressive group-wide performance in 2Q 2013...We continue to move forward with the fifth hotel tower at City of Dreams and anticipate to commence construction by the end of 2013. 


“Altira Macau also delivered robust sequential EBITDA growth in the second quarter of 2013, with increased rolling chip volumes and expanding table yields highlighting the success of our continual group-wide table yield optimization strategy...Our development pipeline continues to progress, with Studio City on-budget and on-track to open in mid-2015, while the timing of our Philippines Project remains unchanged and is expected to open around the middle of next year.

 

-Lawrence Ho, CEO of MPEL

 

CONF CALL

  • COD's market-leading table yields are 20% higher than next best competitor's
  • House of Dancing Water show:  2MM patrons to date
  • Has gained RC share
  • RC/table productivity was up 30%
  • Mass - Ex SCC, market mass growth was 23%
  • MSC - Mid 2015 opening
  • Philippines: opening date mid-2014; $335MM equity raised incl exercise of over allotment option
  • CoD 5th tower:  will begin construction before end of 2013; prob will open end of 2016/2017
  • At end of June 2013, company is in net-cash position - can return capital to shareholders if the Board deems appropriate
  • 2Q Hold-adjusted EBITDA: $290MM
  • EBITDA contribution from non-VIP:  3/4 luck-adjusted EBITDA at COD, 2/3 luck-adjusted EBITDA on group wide basis.
  • 3Q non-operating guidance:  D&A $95-100MM; Corporate expense $20-22MM, Net interest expense $38-40MM ($10MM interest related to MSC, $11MM financed-leased interest related to Philippines)

Q & A

  • Margins:  good cost control; higher VIP hold and favorable VIP mix
  • Since 4Q 2012 (China leadership change), MPEL has been improving.  Weak macro data hasn't impacted operations. Lots of people who want to come to Macau.
  • MSC:  on schedule, on budget; govt very supportive of foreign labor quota
  • Dividends:  probably at the end of 2013
  • Have been lobbying in Japan/Taiwan
  • 2015 Subconcession renewal - not concerned; believes the six operators will stay put
  • CoD:  continue to focus on premium mass; improvements in hotels, F&B, casino; 
  • 2Q costs:  April 1 wage raise:  $4MM impact sequentially; a couple of MM related to utility cost; $1MM of Taboo costs
  • COD hotels:  has lengthened customers' days of stay;  optimization of hotel rooms based on quality of customers
  • COD hotel tower:  will take 3 years because it is the final piece of COD and it is 1.5MM sq ft; it is a complex structure that will be designed by a world-renown architect.

BBEP 2Q Review: Understated Maintenance Capex = Majority of DCF

BreitBurn Energy Partners (BBEP) remains a top short idea for us.  DCF is generated primarily via understated maintenance capex, as evidenced by the fact that the Company posted no organic production growth over the last twelve months, while total capex exceeded maintenance capex by ~$130MM.  This is BBEP’s most material distortion of its economic reality, and the reason why the equity is so overpriced.  We also take issue with the BBEP’s capital efficiency, leverage, calculation of non-GAAP measures, valuation, and corporate governance.

 

Understated Maintenance Capex

 

We believe that BBEP’s “maintenance capex” is significantly understated, and is responsible for nearly all of the Company’s “DCF,” despite management’s qualitative, unsubstantiated comments on the conference call yesterday (8/6/13) that suggest otherwise:

 

Analyst: “With respect to maintenance capex, what assurances can you give us that your maintenance capex is sufficient to maintain production, and can you provide us with some granularity or transparency about how you go about calculating that number?”

 

BBEP COO Mark Pease: “I think that everybody on the call knows that we define maintenance capital as the amount of investment that it takes to hold production flat, and we look at it regularly, and what we use for the basis for those calculations is our year-end reserve report . . . And we look at multiple years on that reserve report.  So, we don’t cherry pick a year and we don’t try to put the properties or projects that are more capital efficient . . .  We take our exit rate for the latest year in that reserve report and then we look at the reserve report and see how our rate varies out in the future . . . And for instance, if our base decline is 10%, and we look at the time period that production covers and it goes up 5% . . . two-thirds of the money that we spend is needed to cover that 10% base decline.  So that’s the details behind it and it’s all backed up by what we have in the reserve report . . . ”

 

Analyst: “And historically speaking, when you’ve done that exercise, how have your projections about the production from the dollars spent, how have those borne out versus your estimates when you’re making that maintenance capex budget.”

 

BBEP COO Mark Pease: “I think on the whole, they’ve been very good.  And that’s one of the things about having a bigger portfolio of projects, some projects come in better than forecast, some come in under forecast, but as a whole, the program has matched closely.”

 

But, according to BBEP’s actual production results, over the TTM (2Q12 – 2Q13), BBEP’s organic production growth was negative 0.3%, with total capex exceeding maintenance capex by ~$130MM.  The consequence is that, over the TTM, understated maintenance capex generated ~80% of DCF.  Management says one thing; the numbers say something entirely different.  This is BBEP’s most significant issue, and the primary reason why we believe the equity is so overpriced.

 

BBEP 2Q Review: Understated Maintenance Capex = Majority of DCF - bbep edit

  

Timing of Equity Raise in Focus

 

With the amended leverage covenants referencing pro forma TTM adjusted EBITDAX (i.e. BBEP gets the Postle Field adjusted EBITDAX in full for the TTM), BBEP does not have to reduce debt as quickly as we had thought previously.  BBEP stated that it will be at 4.0x total debt/TTM pro forma adjusted EBITDAX at the end of 3Q13, implying that the Postle Field TTM adjusted EBITDAX was ~$40MM per Q.  BBEP’s leverage will continue to tick higher QoQ with calls on cash (capex + distributions) consistently exceeding cash flow by $40 - $50MM per Q (depending on go-forward capex).  The timing of the deleveraging was a popular topic on the conference call, and though management gave little hint as to what it’s thinking, perhaps the “Triggering Event” described in the Ninth Ammendment to the Second Amended and Restated Credit Agreement gives us some idea:

 

“’Triggering Event’ means Parent’s receipt, at any time after Ninth Amendment Closing Date, of net cash proceeds from the issuance of common units (“Equity Proceeds”), as follows: (a) the first Triggering Event means receipt of Equity Proceeds in a cumulative amount of at least $175 million, and (b) the second Triggering Event means receipt of additional Equity Proceeds such that the cumulative amount received after Ninth Amendment Closing Date equals at least $350 million. By way of example, if the Parent receives Equity Proceeds in the amount of $200 million on August 20, 2013, Equity Proceeds in the amount of $100 million on November 20, 2013 and Equity Proceeds in the amount of $50 million on February 20, 2014, the first Triggering Event will have occurred on August 20, 2013 and the second Triggering Event will have occurred on February 20, 2014.”

 

$350MM of equity at $18.50/unit would amount to 19MM new shares, approximately 20% dilution to existing unitholders.    

 

Changes to Derivatives Accounting, Adjusted EBITDAX, and Disclosure

 

We note several changes QoQ in BBEP’s derivatives accounting methodology, calculation of adjusted EBITDAX, average realized sales price, and the associated disclosures in the press release and 10-Q:

 

  • BBEP no longer has realized and unrealized gains/losses on commodity derivatives, but total gains/losses, cash settlements, and premiums paid.  This is an improvement in disclosure, however, the Company still only counts cash settlements in adjusted EBITDAX/DCF; adjusted EBITDAX/DCF is still, in our opinion, overstated by the cost basis of the derivatives that settled in the period, which amounted to 3.7% of DCF in 2Q13 and 2.5% in 1Q13.  There is another ~$28MM in future overstatement coming, as the Company paid $30MM for premiums in 2012.  Further, BBEP also paid ~$40MM cash for WLL’s in-the-money swaps, which will overstated future period adjusted EBITDAX/DCF just as paying a counterparty an option premium does.
  • BBEP no longer adds “net operating cash flow from acquisitions, effective date through closing date” to adjusted EBITDAX, and it “conformed” 2Q12 adjusted EBITDAX to exclude $1.6MM for this adjustment.  For all of 2012, the adjustment generated $19.9MM (12%) of DCF.  BBEP will likely “conform” 3Q12 adjusted EBITDA lower by $13.2MM and 4Q12 adjusted EBITDAX by $5.1MM.
  • “Average realized sales price” now “excludes the effect of commodity derivative settlements,” whereas last quarter it included them.

Disclosure has improved, but the non-GAAP measures of adjusted EBITDAX and DCF remain inflated measures of profitably due to the fact that BBEP excludes the cost basis of derivatives (both premiums paid and acquired hedges), unit based compensation, non-cash interest expense, and cash taxes from their calculation.

 

Why so Cryptic on the Postle Field?

 

BBEP’s management is reluctant to dig into the cash flows from the recently-acquired Postle Field:

 

Analyst: “Can you share what the cash flow just from [the Postle Field] might be versus the capital that would be needed to keep [production] flat?”

 

Phenomenal question.  We wanted to ask that as well.  And here’s management’s response:

 

COO Mark Pease: “I don’t know if we’ve disclosed that.”

 

CFO Jim Jackson: “We just haven’t – we have not given that level of detail on [the Postle Field] to date.”

 

Analyst: “Okay, thank you.”

 

Why not disclose that answer?  Surely they know it, and it’s a crucial information . . .  We want (need) to know how much of this new capital is going into the maintenance capex and growth capex buckets.  The fact that they don’t want to speak to this issue suggests to us that a significant portion of it will be considered growth capex, which is inappropriate, in our view.  This is likely a significant driver of the increase in future DCF coverage.

 

Guidance Cut or Sandbag?

 

Despite closing the Postle Field acquisition 15 days early, BBEP did not adjust 2H13 production guidance.  That’s an incremental 110,000 bbls of oil production for 2H13 that was not in the prior numbers.  Management noted on the call that it was not material enough to adjust guidance, but we think that it is.  It’s an extra 1,200 bbls/d in 3Q13 and 600 bbls/d in 2H13.

 

Profitable Growth?

 

After spending ~$600MM on acquisitions (before Postle) and another ~$200MM of capital expenditures over the TTM, adjusted net income per unit came in at $0.13 in 2Q13, down from $0.15 in 2Q12, and discretionary cash flow (CFFO before change in WC) per unit was $0.56 in 2Q13 vs. $0.72 in 2Q12.  Free cash flow (discretionary CF minus capex) this quarter was negative $5MM (-$0.05/unit) vs. +$28.2MM (+$0.39/unit) in 2Q12.  How ‘bout that for profitable growth?

 

BBEP 2Q Review: Understated Maintenance Capex = Majority of DCF - bbep11

BBEP 2Q Review: Understated Maintenance Capex = Majority of DCF - bbep12

 

Kevin Kaiser

Senior Analyst


STICK WITH WHAT'S WORKING

Client Talking Points

JAPAN

The Nikkei got royally crushed for a -4% move overnight after the Yen rallied versus the US Dollar. Incidentally, the Bank of Japan is meeting tomorrow, and I generally assume that someone, somewhere, always knows something in terms of government front-running. We shall see. No position in DXJ right now. But I am interested in buying this pullback again. We will need to wait and see the BOJ river card before I do that and short more Yen. The Nikkei TREND support is 13,499. Keep an eye on that level.

Brazil

#CommodityDeflation is bad for commodity linked equity markets. Well, Brazil has been the consummate poster child of that and what we call #EmergingOutflows here at Hedgeye. The Bovespa was down -2.1% yesterday and continues to crash. It is down a whopping -22.2% year-to-date. On a related note, the only country that’s worse off year-to-date is yet another mining tape. You guessed it. It's Peru which has gotten whacked -25% year-to-date. 

SPY

So... is it going to be a 1% or a 2% correction this time? From the all-time closing high of 1709, it could be either. From our perch, the two immediate-term TRADE momentum lines of support that matter most right now are 1693 and 1676. Either could happen; maybe neither do. The reality is that stock market corrections have been few and far between. So our advice is simple: stay the course and stick with what’s been working for eight months now.

Asset Allocation

CASH 34% US EQUITIES 25%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 23%

Top Long Ideas

Company Ticker Sector Duration
WWW

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.

MPEL

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. 

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road

TWEET OF THE DAY

What’s a 0.7%-1% $SPY correction (from the all-time high) when you have the Nikkei moving 2-4% up/down per day?

@KeithMcCullough

QUOTE OF THE DAY

Men are born to succeed, not fail.

- Henry David Thoreau

STAT OF THE DAY

500 years of YouTube video are watched every day on Facebook, and over 700 YouTube videos are shared on Twitter each minute. (ReelSEO.com)


Daily Trading Ranges

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Expert Call TODAY: PWC Head of Aerospace Defense Practice on Contract Accounting/Pensions

Takeaway: Please join us TODAY @11AM to discuss defense accounting with the head of PWC's US Aerospace & Defense practice (EACs, Pensions, etc)

Expert Call TODAY: PWC Head of Aerospace Defense Practice on Contract Accounting/Pensions - def2

 

 

The Hedgeye Industrials Team, led by Jay Van Sciver, will be presenting an expert call titled "Defense Contract Accounting: Pro-cyclical?" with Scott Thompson, U.S. Head of PWC's Aerospace & Defense (A&D) practice.  The call will be held on TODAY at 11:00am EDT.  

 

 

CALL OBJECTIVE
Examine the impact of declines in defense spending on contract accounting and discuss the relevance of new EAC disclosures.

 

 

MaterialsCLICK HERE

 

 

KEYS TOPICS WILL INCLUDE 

  • EACs: Estimates at Completion background, disclosure and SEC interest
  • Pro-Cyclical Aspects of EACs: To what degree are EACs pro-cyclical and what should investors look for in a spending downturn
  • Pensions:  Relevance, background and trends in FAS vs. CAS
  • Segment Changes:  Relevance with respect to impairment charges
  • Other Areas of Flexibility/Interest:  While contract accounting is a major factor, what else matters

 

 

KEY TICKERS

LMT, GD, RTN, NOC, LLL, FLIR, HII, ATK, XLS, CACI, BAH and ACN   

 

 

 

ABOUT SCOTT THOMPSON 

Scott Thompson is the US A&D practice and Assurance leader. He leads a cross-functional team of professionals dedicated to the A&D sector in disciplines of audit, tax and advisory and has responsibility for assurance quality and service to A&D clients.  For more information about Scott please CLICK HERE

 


CONTACT

Attendance on the call is limited. If you are not a current client of our Industrials research please email to obtain the dial-in information for this call and a copy of the presentation.


A Thousand Pebbles

This note was originally published at 8am on July 24, 2013 for Hedgeye subscribers.

“Fragility is the quality of things that are vulnerable to volatility.”

-Nassim Taleb

 

We have quoted Nassim Taleb a number of times at the start of the Early Look and, admittedly, I didn’t check to see if this was a recycled quoted. Nonetheless, it is a very apropos quote for the topic of today’s Early Look and for contemplating risks in markets generally.

 

 The title for today’s note comes from a story, which is referenced in Taleb’s most recent book “Antifragile”, that emanates from rabbinical literature (Midrash Tehillim) and is about a king that is angry at his son.  In fact, the king is so angry at his mischievous son that he explodes one day and tells his son he will crush him with a large stone. 

 

Herein lies the dilemma according to the story: a king who breaks his oath is considered unfit to rule.  The king is now faced with the decision to either crush his son, or to give up his throne.  Luckily before the poor prince was crushed, an advisor (the Hedgeye of the era perhaps?) came up with a solution.  The king should cut the stone into very small pebbles and pelt his son with these pieces.

 

Taleb’s point in this analogy is to explain how fragility stems from non-linear effects.  That is, if you double the dose, you get more than twice the effect.   By way of a practical illustration, if you have five shots of Jack Daniels, you have a buzz.  But if you have ten shots of Jack Daniels, your wife (or husband) makes the couch up for you to sleep on that night.

 

Back to the global macro grind . . .

 

As it relates to non-linear impacts on the global markets as of late, interest rates have certainly had the most critical impact.  In the Chart of the Day, we highlight a slide from our most recent Q3 Theme Presentation that looks at quarter-over-quarter moves in interest rates.  As the slide shows, the move in interest rates in the last quarter was the largest percentage increase in fifty years.  (Yes, the last time this happened Sandy Koufax was pitching for the L.A. Dodgers.)

 

We were on the road in Europe talking to clients last week and not surprisingly interest rates were a key topic of discussion.  Many of the more astute investors actually narrowed in on this precise point of interest rate volatility.  Our view is that volatility of rate increases will be more benign moving forward, which, as we’ve been stating, should be positive for the U.S. dollar, domestic economic activity and U.S. stocks.

 

To the extent that volatility picks up, the effects of interest rate increases will be non-linear.  In reality, a move from 1.63% on the 10-year treasury to 2.63%, or an increase of 100 basis points, shouldn’t have a meaningful impact on asset classes or the economy.  The markets become fragile, though, when this 63% back up in rates occurs in a very compressed time period, as it did in May – June.   In pushing the interest rate ball under water, the global central banks have created a set up in which interest rates are very fragile (to use Taleb’s definition).

 

In addition to the risk of rates increasing at a rate that is highly volatile, the other key focus area of investors in Europe on our visit related to the impact of #RatesRising to housing.  This is certainly a legitimate question as the wealth impact from home price increases is a key reason we are bullish on U.S. consumption.  Specifically, as a consumer’s balance sheet improves via an increasing home price, so too does their confidence, ability to borrow and subsequently spend.

 

Based on our long run analysis of housing, the recent accelerated move in rates has not altered the fact that the affordability of purchasing a home remains at historic lows.  On the basis of median mortgage payment as a % of median income, the housing market is at 22% and well below the twenty-five year median of 28%.  On the basis of median mortgage payment to median rent, the housing market is at 99%, which is also well below the long run average of 131%.

 

This is not to say, of course, that housing won’t be impacted by a volatile move in rates, but the housing market is still so depressed based on historical levels it should have the ability to manage through #RatesRising.  June data from the NAR seems to support this as existing home sales were up 15.2% year-over-year and the national median home price in June was up 13.5%.  So yes, housing can do well if rates continue to rise.

 

Switching to infomercial mode for second, I want to highlight that we will be expanding our U.S. financials research coverage and are launching on U.S. asset management stocks on Monday July 29th at 11am.  Jonathan Castelyn has joined Josh Steiner’s team in a senior role and will be initiating on these names.   As always, we will be actionable and Jonathan will have 2 short ideas and 2 long ideas.  Please email sales@hedgeye.com  for access.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr 2.47-2.71%

SPX 1684-1702

VIX 11.59-13.54

USD 82.01-82.89

Brent 107.21-109.14

Gold 1249-1346

 

Keep your head up and head on the ice,

 

Daryl G. Jones

Director of Research

 

A Thousand Pebbles - Treasury L vs NL

 

A Thousand Pebbles - Virtual Portfolio


August 7, 2013

August 7, 2013 - dtr

 

BULLISH TRENDS

August 7, 2013 - 10yr

August 7, 2013 - spx

August 7, 2013 - nik

August 7, 2013 - ftse

August 7, 2013 - dxy

August 7, 2013 - euro

August 7, 2013 - oil

 

BEARISH TRENDS

August 7, 2013 - VIX

August 7, 2013 - yen

August 7, 2013 - natgas
August 7, 2013 - gold

August 7, 2013 - copper


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