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LINN & BRY Strike a New Deal

LINN ups the ratio and BRY is still committed to the deal, despite LINN's ongoing SEC inquiry.  In our view, the deal changes little fundamentally, but will likely serve to improve sentiment and confidence in LINE / LNCO in the near-term, particularly around its C-Corp E&P roll-up strategy.  Short LINE / LNCO remains a Hedgeye Best Idea.

 

LINN / BRY Revises Merger Terms......

  • Stock-for-stock deal ratio increased 35% from 1.25x LNCO shares to 1.68x LNCO shares (incremental ~24MM LINE units / LNCO shares)
  • No cash component
  • End date moved from 10/31/13 to 1/31/14
  • Unit / Shareholders expected to vote on transaction in mid-December
  • Conference call tomorrow, 11/5 at 11am EST, to discuss merger and 3Q13 results

Understated Maintenance CapEx = “Accretion”……LINN will offer BRY 1.68x LNCO shares per BRY share, a 35% increase in the ratio from the prior 1.25x.  That’s an additional 24MM LINE units (now 94MM new units) to pay a distribution to (currently $2.90/unit/year).  LINN states in the press release that, “The transaction is expected to be accretive to LINN’s cash available for distribution,”  however, we believe that LINN is materially understating BRY’s maintenance CapEx (last guided to ~$240MM per year), which is the source of all of the alleged “accretion.” 

 

BRY’s turn to focusing its capital exclusively on oil production has come at a high cost.  In 2012, BRY’s organic proved developed (PD) F&D cost was $41.38/boe (17.9MM boes added at a cost of $741MM), up from $24.56/boe in 2011.  LINN’s guidance for BRY maintenance CapEx of $240MM per year implies an F&D cost ~$15.00/boe if we assume exit rate 2013 production of 42,500 boe/d; in our view, $15.00/boe is inconsistent with BRY’s actual capital intensity, as we show in the tables below.  Assuming an F&D cost of $30 - $40/boe, BRY CapEx to keep production and reserves flat in 2014 would be $465MM - $621MM, resulting in LINE distribution per unit dilution of 9 – 25%.

 

LINN & BRY Strike a New Deal - linn1

 

LINN & BRY Strike a New Deal - linn2

 

Change in LINE-to-LNCO Tax Liability Payment……LINN amended the LINE / LNCO “Contribution Agreement” such that LINE will no longer pay LNCO a $6MM distribution in 2013, 2014, and 2015 to compensate LNCO for assumed tax liabilities: “Pursuant to the Contribution Agreement Amendment, LINN no longer has an obligation to pay LinnCo a special distribution for tax liabilities fixed at $6 million per year for 2013, 2014 and 2015 and instead, LINN and LinnCo agree to work in good faith at the end of 2013, 2014 and 2015 to determine whether and in what amounts LINN should make tax liability distributions to LinnCo to reasonably compensate LinnCo for the actual increase in tax liability to LinnCo, if any, resulting from the allocation of amortization, depletion, depreciation and other cost recovery deductions using the “remedial allocation method” pursuant to Treasury Regulations Section 1.704-3(d), with respect to the assets acquired in the Contribution” (11/4/13 Form 8-K).  LINN expects LNCO’s cash tax liability to be “approximately $0.00, $0.01 and $0.07 per share for 2013, 2014 and 2015.”

 

Kevin Kaiser

Managing Director


[video] Keith's Macro Notebook 11/4: #EUROBULLS, GOLD, UST10YR


McCullough Buying Gold?

Takeaway: Shame on Bernanke.

I bought Gold for the first time in a year on Friday.

 

The immediate-term TRADE correlation between the US Dollar and Gold is -0.78, so I shorted the Dollar for the first time in over a year too.

 

Shame on Ben Bernanke. Shame on the Fed's no tapering policy. It should slow growth back to 2% from 2.5% first, then we can decide what happens from there (on the margin that matters).

 

Click to enlarge.

McCullough Buying Gold? - drake


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European Banking Monitor: More Good News Than Bad

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - Europe resumes its winning ways. We are seeing broad-based improvement across Spanish, Italian, French and even Greek banks. The only notable widening came from Sberbank of Russia, where swaps widened by 19 bps to 212 bps.

 

European Banking Monitor: More Good News Than Bad - w. bank cds

 

Sovereign CDS – Sovereign swaps had a good week last week. The US posted a sharp improvement of 7 bps, falling to 30 bps. France and most of the rest of the Europe also moved lower. The only negative movers were Japan (+2 bps) and Germany (+1 bp). 

 

European Banking Monitor: More Good News Than Bad - w. sov1

 

European Banking Monitor: More Good News Than Bad - w. sov2

 

European Banking Monitor: More Good News Than Bad - w. sov3

 

Euribor-OIS Spread – The Euribor-OIS spread was unchanged last week at 11 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: More Good News Than Bad - w. euribor

 


MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD

Takeaway: Europe and its banks improved again (even in Greece). Spreads widened modestly and commodity prices fell further.

Risk Monitor / Key Takeaways:

Things appear to be going the right way again, on the margin. Yield spreads widened modestly for the first time in some time (+3 bps W/W). Commodity prices continued to fall, dropping another 2.4% last week. Sovereign credit default swaps dropped notably with the US leading the charge and Europe close behind. Europe's banks also looked quite good, again. The only notable area to watch remains the Chinese interbank rate which climbed again last week, tacking on another 22 bps. 

 

* 2-10 Spread – Last week the 2-10 spread widened 3 bps to 224 bps.

 

* CRB Commodity Price Index – The CRB index fell -2.4%, ending the week at 275 versus 282 the prior week. As compared with the prior month, commodity prices are down -3.7% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

* Sovereign CDS – Sovereign swaps had a good week last week. The US posted a sharp improvement of 7 bps, falling to 30 bps. France and most of the rest of the Europe also moved lower. The only negative movers were Japan (+2 bps) and Germany (+1 bp). 

 

* European Financial CDS - Europe resumes its winning ways. We are seeing broad-based improvement across Spanish, Italian, French and even Greek banks. The only notable widening came from Sberbank of Russia, where swaps widened by 19 bps to 212 bps.

 

* Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 22 basis points last week, ending the week at 4.59% versus last week’s print of 4.37%. 

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 13 improved / 1 out of 13 worsened / 7 of 13 unchanged

 • Intermediate-term(WoW): Positive / 10 of 13 improved / 1 out of 13 worsened / 2 of 13 unchanged

 • Long-term(WoW): Positive / 2 of 13 improved / 1 out of 13 worsened / 10 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD - 15

 

1. U.S. Financial CDS - US Financials were mixed with large cap banks predominantly wider, though only by 1-2 bps, on average. US mortgage insurers, MTG & RDN were tighter, improving by 20 and 15 bps, respectively. US Insurers were broadly tighter last week.

 

Tightened the most WoW: ALL, MBI, AGO

Widened the most WoW: COF, AXP, C

Tightened the most WoW: MS, CB, AIG

Widened the most/ tightened the least MoM: TRV, GNW, GNW

 

MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD - 1

 

2. European Financial CDS - Europe resumes its winning ways. We are seeing broad-based improvement across Spanish, Italian, French and even Greek banks. The only notable widening came from Sberbank of Russia, where swaps widened by 19 bps to 212 bps.

 

MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD - 2

 

3. Asian Financial CDS - Asia was mixed last week, but on balance tighter. The largest movers were Japan's Nomura and Matsui Securities, tightening by 11 and 14 bps, respectively. On the month, the largest movers remain India's banks, tighter by an average 32 bps.

 

MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD - 17

 

4. Sovereign CDS – Sovereign swaps had a good week last week. The US posted a sharp improvement of 7 bps, falling to 30 bps. France and most of the rest of the Europe also moved lower. The only negative movers were Japan (+2 bps) and Germany (+1 bp). 

 

MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD - 18

 

MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD - 3

 

MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 3.3 bps last week, ending the week at 5.95% versus 5.92% the prior week.

 

MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.0 points last week, ending at 1821.

 

MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD - 6

 

7. TED Spread Monitor – The TED spread fell 0.4 basis points last week, ending the week at 20 bps this week versus last week’s print of 20.4 bps.

 

MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD - 7

 

8. CRB Commodity Price Index – The CRB index fell -2.4%, ending the week at 275 versus 282 the prior week. As compared with the prior month, commodity prices have decreased -3.7% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged last week at 11 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 22 basis points last week, ending the week at 4.59% versus last week’s print of 4.367%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened by 1 bp, ending the week at 84 bps versus 85 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD - 11

 

12. Chinese Steel – Steel prices in China rose 0.9% last week, or 30 yuan/ton, to 3510 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 224 bps, 3 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.7% upside to TRADE resistance and 0.6% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: MORE GOOD NEWS THAN BAD - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


MPEL 2Q YOUTUBE

In preparation for MPEL's F3Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

 

 

 

CITY OF DREAMS PREMIUM MASS/NON-GAMING

  • We're very much focused on one segment, the premium mass, whereby most of our competitors they have (been focusing) between portfolios (of segments)...Non-gaming improvement, really, really help us to improve our length of stay for those customers.

STUDIO CITY

  • Studio City, our unique cinematically themed integrated resort remains on budget and on track to open in mid-2015.

CITY OF DREAMS MANILA

  • The development of our Philippines project is also moving forward as anticipated with the opening date remaining unchanged at around the middle of 2014.

CITY OF DREAMS 5TH TOWER

  • We anticipate starting construction on a fifth tower at City of Dreams before the end of 2013. This iconic development will provide another powerful lever to drive our premium mass business and expand our high-end patronage at City of Dreams, in turn enhancing property-wide return on invested capital.

NON-OPERATING GUIDANCE

  • Total depreciation and amortization expense is expected to be approximately $95MM to $100MM. Corporate expense is expected to come in at $20MM to $22MM, and consolidated net interest expense is expected to be approximately $38MM to $40MM, which includes finance lease interest of $11MM relating to the Philippines development and approximately $10MM of interest expense associated with Studio City. This takes into account approximately $8MM of capitalized interest related primarily to Studio City.

CAPITAL ALLOCATION

  • I think the board is committed to look at a regular dividend policy because unlike some of our competitors, I think our board and the management team would prefer if we had stuck to one dividend policy. So we don't want to kind of make the decision like hastily. So anyways, it's going to be some time at the end of this year, early next year that we're going to sit down to discuss.

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