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LINN Pleads the Fifth: S-4 Ammendment #5 Recap

This morning (10/22) LINN Energy filed the 5th Ammendment to its Form S-4 Registration Statement for the LINE / LNCO / BRY merger.  For the second time, LINN changes verbiage and disclosure, but not distributions.  The market is taking these changes to be quite positive (LINE +2% at the time of writing), though it's not clear to us why... 

 

The key change in this version is that LINN will no longer use the non-GAAP measure "Adjusted EBITDA."  In fact, it has removed substantial disclosure and reconciliations related to “Adjusted EBITDA,” “Credit Facility EBITDA,” and “EBITDA” in the latest S-4/A.  This comes after removing "Distributable Cash Flow (DCF)" in the S-4/A #4.  The market's positive reaction to this latest change could suggest that investors believe that LINN has done enough to satisfy the SEC, as the SEC was concerned with LINN's use of non-GAAP measures, and LINN has solved the problem by no longer using them...  We have no view as to what the SEC will or will not do, though the optimism seems excessive, in our view.

 

With Adjusted EBITDA and DCF out of the picture, the key non-GAAP measure that remains is what was formerly known as "maintenance capital expenditures," but is now "discretionary reductions for a portion of oil and natural gas development costs."  Importantly, "This change in terminology, however, does not reflect any change in LINN’s methodology for determining the amount of these costs" (pg. 233); in other words, nothing has changed except for what LINN is calling it; same as the prior S-4/A.

 

LINN did include new data for the amount of reserves estimated to be converted to the PDP status via discretionary reductions CapEx (pg. 236 and cut out below):

 

LINN Pleads the Fifth: S-4 Ammendment #5 Recap - linn1

 

The F&D (finding and developing) cost for this capital is remarkably low compared to LINN's consolidated metrics.  For instance, discretionary reductions F&D was $1.37/Mcfe in 2012, 36% below the PUD Conversion Cost and 64% below LINN's organic (ex. acquisition) proved developed F&D cost.  LINN's numbers imply that it's non-"discretionary reductions" capital had a staggeringly-high F&D cost of $13.85/Mcfe in 2012 ($886MM to move 64 Bcfe into the PD category).

 

LINN Pleads the Fifth: S-4 Ammendment #5 Recap - linn2 

 

How anyone can take these numbers seriously, we don't know.  LINN's total PD F&D cost over the last three years is $3.41/Mcfe ($20.46/boe).  Based on that number, at current production levels, LINN needs to spend at least $250MM/quarter to keep reserve and production flat, not the ~$110MM/quarter it's currently calling "discretionary reductions."  Of course, LINN's distribution would be cut by ~100% should it deduct that amount of capital from the cash available for distribution - hence its reluctance to change.

 

Other Notable Changes in the 10/22 S-4/A (#5):

  • Page 50: Change in wording for the “discretionary reductions” risk factor.  Dropped terms "natural decline," "cash production," and swapped "producing assets" our for "producing reserves."
  • Page 171 on the “remedial method”: “Additionally, the pro forma financial information does not represent the actual results of allocating depreciation, depletion and amortization and other cost recovery deductions generated from the “remedial allocation method” pursuant to Treasury Regulation Section 1.704-3(d). The total tax liability generated from the remedial allocation will be recognized over the remaining life of the underlying assets, which could extend beyond 50 years. See footnote (d) to LinnCo’s notes to the unaudited pro forma condensed combined financial statements for additional information.”
  • Page 210: David Hall vs. Berry Petroleum Company – “parties are currently engaged in settlement discussions” was removed.
  • Page 233-4: Significant changes in wording / disclosure re: distribution calculation; and no longer using “Adjusted EBITDA.”
  • Page 235: LINN clarifies funding, “LINN intends to fund interest expense, a portion of its oil and natural gas development costs and distributions to unitholders from net cash provided by operating activities. LINN funds premiums paid for derivatives, acquisitions and other capital expenditures primarily with proceeds from debt or equity offerings, borrowings under its Amended Credit Facility or other external sources of funding. Although it is LINN’s practice to acquire or modify derivative instruments with external sources of funding, any cash settlements on derivatives are reported as operating cash flows and may be used to fund distributions.”
  • Page 235 footnote 1: LINN acknowledges that even through premiums paid hit the GAAP cash flow statement as CFFO, it considers them investments, so it will add them back to operating cash flow to arrive at cash available for distribution.

Kevin Kaiser

Senior Analyst



EMERGING MARKETS LOVE DOWN DOLLAR

Takeaway: Emerging markets love dollar debauchery.

Click image to enlarge. 

EMERGING MARKETS LOVE DOWN DOLLAR - DXY vs EEM


CONFERENCE CALL WITH CFO OF BRINKER INTERNATIONAL

Takeaway: Join us for a conference call with Guy Constant, CFO, of Brinker International.

Friday, October 25th at 11:00am EDT  

For details please email 

 

We will be hosting a call with the CFO of Brinker International, Guy Constant, to discuss 2Q14 results, the outlook for the balance of the year, and the emerging role of technology in the casual dining industry.

 


TOPICS TO BE DISCUSSED:

  • Bringing technology to the casual dining industry.
  • Closer look at 2Q14 results and a detailed outlook for the balance of the year.
  • Incremental topics TBD post the 2Q14 earnings call.

 

 

GUY CONSTANT

Guy Constant is Executive Vice President, Chief Financial Officer and President of Global Business Development for Brinker International.  In this role, he is responsible for overseeing Planning and Analysis, Mergers and Acquisitions, Investor Relations, Treasury, Tax and Accounting, Domestic Franchise Business Development, and Corporate, Chili’s and International Finance in addition to overall Development.  Guy added his global responsibilities in January 2013 and is responsible for overseeing global operations.

 

 

CONTACT 

Please email or call to learn more about the event. Attendance is limited. Please note if you are not a current client of our Restaurants research there will be a fee associated with this call.

 

 

 

Howard Penney

Managing Director

 


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EMPLOYMENT DATA: MARGINALLY NEGATIVE

September’s jobs report was disappointing, as employers added 148,000 jobs in the month, well below the 180,000 that economists expected.  Following suit, the narrower data sets released were, on balance, negative for the restaurant industry.  Employment growth across all cohorts decelerated on a sequential basis, suggesting that sales at QSR, fast casual, and casual dining companies could remain weak in the early stages of 4Q.

 

Below, we discuss employment by age and restaurant industry employment.  These serve as proxies for demand and operator confidence, respectively, in our models.

 

 

Employment by Age (demand)

Employment growth by age skewed negatively across the board in September as the 20-24 YOA cohort saw growth decelerate to +128 bps from +338 bps in August, the 25-34 YOA cohort saw growth decelerate to +152 bps from +185 bps in August, the 35-44 YOA cohort saw growth decelerate to +37 bps from +59 bps in August, the 45-54 YOA cohort saw growth slowing accelerate to -124 bps from -113 bps in August, and the 55-64 YOA cohort saw growth decelerate to 172 bps from 257 bps in August.

 

Employment by age is an important metric for the restaurant industry.  Given the discretionary nature of casual dining expenditure, and the highly-competitive nature of the industry, we infer that sustained employment growth in core demographics is necessary for continued comp growth in the absence of new unit growth or income per capita growth.  The sequential acceleration in growth slowing in the 45-54 YOA cohort and the deceleration in the 55-64 YOA cohort reflect negatively upon casual dining companies, indicating that we could continue to see weakness persist within the sector.

 

Within the QSR segment, we continue to find that the majority of management teams we track consistently highlight the importance of employment growth to the success of their business.  The sequential deceleration in the 20-24, 25-34, and 35-44 YOA cohorts, suggest that demand for quick-service and fast casual restaurants could wane.  

 

EMPLOYMENT DATA: MARGINALLY NEGATIVE - age

 

 

Restaurant Industry Employment (Confidence)

The Leisure & Hospitality employment data, which leads the narrower food service by one month, suggests that employment growth in the food service industry decelerated sequentially in September.  Furthermore, the Leisure & Hospitality data also registered a month-over-month decline of -13k (second chart below), a stark contrast from August’s +21k month-over-month gain. 

 

The more narrow restaurant-focused data sets paint a less clear picture.  Limited-service employment growth decelerated sequentially in August, while full-service employment growth accelerated sequentially in August.

 

 

Sequential Moves

Leisure & Hospitality: YoY employment growth at +2.60% in September, down -32 bps versus August

Limited-Service: YoY employment growth at +4.86% in August, down -6 bps versus July

Full-Service: YoY employment growth at +2.85% in August, up +4 bps versus July

 

EMPLOYMENT DATA: MARGINALLY NEGATIVE - yy employment

 

EMPLOYMENT DATA: MARGINALLY NEGATIVE - ye

 

EMPLOYMENT DATA: MARGINALLY NEGATIVE - Knapp Comps

 

 

 

Howard Penney

Managing Director

 


SEPTEMBER EMPLOYMENT: MARKING THE LOW?

Takeaway: Net monthly NFP gains continue to decline while growth remains steady. Payroll data should strengthen from here as seasonality reverses.

While this morning’s nonfarm payroll data was a continuation of a steady multi-month growth trend, the market remains focused on the magnitude of the absolute number and the read through to prospective Fed policy adjustment.  Given the unremarkable, +148K MoM change and the sequential softening in the rolling 3M/6M averages, a Taper delay is increasingly likely.  

 

The absolute NFP numbers have been trending lower since 1Q13 while, on a rate of change basis, the YoY growth in total payrolls has been stable-to-higher over that same period – a dynamic largely stemming from the existent seasonal distortion in the data. 

 

September reflected this same dynamic as total nonfarm payrolls were 45K lower than in August (revised) and the 3M  rolling average fell  -8K sequentially while YoY growth in payrolls ticked marginally higher.  

 

Elsewhere in the report, the unemployment rate declined to 7.2% on a static participation rate, part-time employment declined -594K MoM, State & local government employment showed positive growth for a 3rd consecutive month, and the U-6 Unemployment Rate and level of LongTerm Unemployed both continued to decline.   

 

On balance, September was another month of middling employment growth with small, ongoing under-the-hood improvements.  All-in, the preponderance of data is unlikely to get the Fed to move in the near term.   

 

We expect seasonality to drive strengthening headline improvement in the employment data over the next 6 months with peak positive impact (again) occurring in March.  Incidentally, prevailing expectations are shifting towards March as the likeliest timeline for Tapering – at which point Yellen should be fully confirmed at the helm of the Fed, Fiscal Policy uncertainty should (hopefully) be rearview, and the domestic marco data will, optically, be at peak strength.    

 

Below is a summary review of the September Employment data along with a visual re-highlight (see: Initial Claims: "Tis the Season) of how seasonality has manifest in the macro data, expectations, and market prices over the last 4 years.

 

NFP:  Net Non-Farm payrolls gained sequentially coming in at +148K – holding flat on a YoY growth basis at +1.66% while the 2Y average decelerated 3bps to 1.64%.

NFP Revision:  The net two month revision was +9K with July revised lower from +104K to +89K and August revised higher from +169K to +193K.  

Household Survey:  The net employment gain as measured by the Household Survey was positive at +133K vs. -115K  in August

Employment by Age:  Employment growth held positive but decelerated across all age cohorts except for 45-54 year olds, where payrolls remain mired in negative growth.

Unemployment Rate:  The Unemployment Rate dropped to 7.2% from 7.3%  as the total labor force increased +73K alongside a -61K decrease in Total Unemployed and +133K increase in Total Employed. 

Labor Force Participation:  A positive +209K change in the working age population alongside a +73K net change in the labor force pushed the Labor Force Participation Rate down to 63.19% from 63.22%.

Part-time/Temp Employment:  Part-time employment declined by -594K (2M chg = -828K) while Temp employment gained +20K, registering its 12th consecutive month of net gains.  

Industry Employment:  Leisure/Hospitality and Finance were the lone losers with employment declining -13K and -2K, respectively in September..  Manufacturing gained jobs for a second straight month while Trade/Transportation and Construction posted their largest gains in 10 and 21 months, respectively.

State & Local Government Employment:  Net positive change of +28K in September and a third consecutive month of positive YoY growth.

Ave Weekly Hours for Private Employees:  Hours held flat at 34.5 MoM and YoY.

 

SEPTEMBER EMPLOYMENT:  MARKING THE LOW? - Employment Summary Table

 

SEPTEMBER EMPLOYMENT:  MARKING THE LOW? - Quits vs Consumer Comfort

 

SEPTEMBER EMPLOYMENT:  MARKING THE LOW? - Unemployment Rate

 

SEPTEMBER EMPLOYMENT:  MARKING THE LOW? - Employment by Age

 

SEPTEMBER EMPLOYMENT:  MARKING THE LOW? - U6

 

SEPTEMBER EMPLOYMENT:  MARKING THE LOW? - State   Local Gov t

 

Seasonality Reminder:  The September Trough

Positive Seasonal impacts build from September through March then reverse to a headwind that builds over the April to September timeframe.   The seasonality impacts have been pervasive across the reported domestic macro data, sentiment, and market prices.  From here, seasonality should manifest via strengthening improvement in the employment data through 1Q14.  

 

SEPTEMBER EMPLOYMENT:  MARKING THE LOW? - NFP Seasonality

 

SEPTEMBER EMPLOYMENT:  MARKING THE LOW? - JS 3

 

SEPTEMBER EMPLOYMENT:  MARKING THE LOW? - US Economic Surprise Index Seasonality

 

SEPTEMBER EMPLOYMENT:  MARKING THE LOW? - SPX NTM Revenue Revision Spread Seasonality

 

SEPTEMBER EMPLOYMENT:  MARKING THE LOW? - SPX Deja Vu Annual Trend 

 

Christian B. Drake

Senior Analyst 



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