Denbury Says, "Upstream MLP? No Thanks"

Funding dividends out of free cash flow ...  what a novel concept!


If any US E&P has an asset base potentially suitable for an upstream MLP, it would be Denbury Resources (DNR), the $7B enhanced oil recovery specialist.  For months DNR has contemplated new strategic initiatives, including forming an MLP.  But on Monday 11/11, DNR officially put the kibosh on that idea, and we couldn’t help but smile as CEO Phil Rykhoek gave the reasons why there is “no clear long-term benefit for Denbury shareholders” (Slide 16) in forming an MLP.


We have been, and remain, highly critical of and negative on upstream MLPs for many of the reasons that Rykhoek cited at the  DNR Analyst Day.  In our view, DNR’s decision to not go the upstream MLP route is a blow to the viability and sustainability of the structure and current E&P MLPs.  While the market is punishing DNR in the short-term for not “playing the game” (down 8.5% this week), we think that Rykhoek will eventually look smart for this decision.  And after listening to that Analyst Day call, we are interested in doing work on DNR … biased long side.

Below we list some quotes from DNR's CEO Phil Rykhoek on Upstream MLPs (our emphasis):


“If you look at the way the MLPs operate, most of them spend more than they make every year.  So how do they handle that?  Well, they continually raise equity, they continually buy things, and that is how they keep it going.


"But on a day-to-day operating philosophy, many of them, if you look at it, spend more than they make.  Now they argue what maintenance capital is versus growth capital, et cetera.  As I will show you on another slide, we would like to operate a bit differently and a bit more conservatively, and so we would expect to fund dividends out of operating cash flow.  So if you have $100, that $100 would be used for CapEx and dividends, and for the most part, we would be self-funded."

"We weren't sure how it would translate into the marketplace if we ran MLP kind of differently, so that is kind of what that comment means.  So long story short, we felt like it was better to not do an upstream MLP. And I think most of our shareholders would agree with that one, in fact, a very high percentage.”




“We expect to fund our dividends with cash flow. So hopefully we don't get into any debate or discussion on what is maintenance capital. We hope to make it very transparent.  Going back to the $100 example, you have $100, you might spend $80 on CapEx and $20 on dividends, but it would all generally be funded with cash flow.”

“If we have extra [cash flow], then we have the option of typical things that you can do at an E&P company. You can increase your CapEx; you can reduce your debt. But the other thing that we want to have in our portfolio is that we can repurchase shares.”




 The biggest positive I think for an MLP is that they usually trade at a higher multiple. Therefore, if you are using the currency to buy things, it's a good currency for acquisitions. If you trade at an 8 multiple versus a 6, if you're going to use equity to buy things, obviously we'd prefer that.  Of course, when you look at our situation, we very seldom use equity to buy things.”




“MLPs have IDRs; that is true. That is a potential value. And, of course, it raises capital. So to the extent you take it public, you raise money. Now there's a trade-off to that one, in the sense that if you look at everything as a whole, if you issue equity, you've also increased dilution. So it's not a free lunch, so to speak. And so we felt like we could manage it basically without having to raise capital.




“We basically felt like the negatives were stronger than the positives.”




“I think it was at the Citi conference where someone asked if we would consider an MLP, and it took a life of its own.  For those of you that I’ve talked to, which is most of you, we have worn this out, I think.  So hopefully we will do this about one more week, and then we won't talk about this again.”



“Question – Audience: Over the long-term, do have a long-term dividend yield target? You show the next couple of years, but as you looked out to the seven years, did you have a target there?


Answer – Phil Rykhoek, CEO: Well, I hope it goes down to about 1%, because I hope the stock price goes up. How's that?



Kevin Kaiser

Managing Director



“Despite the soft revenue environment, Station Casinos reported revenue increases across all major departments and generated double-digit growth in Adjusted EBITDAM. This is our tenth consecutive quarter of gains in Adjusted EBITDAM. Our continued focus on efficiently managing our business has clearly improved our operating results."


-Marc Falcone, Executive Vice President, Chief Financial Officer and Treasurer. 




  • Disappointed in LV Locals revenue
    • Higher healthcare costs, federal govt issues impacted revenue environment
  • Graton Resort & Casino:  30% Asian target population in San Francisco; 13 restaurants, 9 casual dining choices
    • Pleased with inital opening of property and consumer response; smoothest of new Stations Casino openings
    • Fees: will now receive 24% of pre-tax income (year 1-4) and 27% of pre-tax income (year 5-7)
  • 10th consectuive growth of EBITDA growth
  • Overall, core LV market remain strong; housing market has shown improvements; construction on Strip is promising
  • Nevada: Ultimate Poker continues to be the leader.  Will release new features in next few months
  • Full-launch NJ i-gaming:  Nov 26
  • North Fork Rancheria: referendum will be on Nov 2014 ballot; Oct 22 compact was published in federal register; timing has become less certain
  • Adjusted EBITDAM leverage of 5.9x will improve as Graton opens
  • 3Q Capex:  $15.6MM; $66.8MM YTD;  $20-25MM addtional capex for balance of 2013

Q & A

  • Graton:  property opened for 1 week; will provide more financial details next quarter
    • Customers:  getting decent response from Asian community
  • Simliar trends within portfolio but more softness at lower-end properties 
  • Continue to delever the company
  • LV Locals:  will not comment on Oct trends; July/August was strong, September was weak; similar comments made by other operators
    • Promotional environment:  STN remains disciplined.  Periodic episodes of promotional activity by different operators.
  • $62MM Loan (rate 11 5/8%)
  • 2014 LV Locals:  group bookings are solid, visibility is limited 
  • i-gaming NV:  CZR launched 45 days ago; impact has been within range or slightly better than what they expected; CZR grew the market a little bit; industry still remain challenged with use of credit cards; still market leader
  • i-gaming NJ: $300MM to $1.2 BN - estimate of market size; will be dependent on ACH and wire payment options - will create limitations on market size; there will be an option to provide free play for players
  • North Fork:  waiting for validation of 500k signatures; no clarity until they get those
  • Will launch with full scale of games offerings in NJ
  • i-gaming NJ:  Exclusive contract agreement with Trump

[video] McGough: Why I Like $JCP, But Not $KSS

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Brilliant: $JCP Burns $LULU

Takeaway: JCP is on offense, trying to find the right formula.

Hedgeye Retail Sector Head Brian McGough applauds JC Penney's campaign to burn Lululemon's fat-shaming.


From The Gloss 


"JC Penney Burned Lululemon's Snobby Fat-Shaming, And It's Brilliant"

  • "Lululemon‘s recent image problems are excellent news for other athletic brands, and JC Penney wants everyone to know that if Lululemon doesn’t want you in its pants, JC Penney is ready to hook you up."
  • “When it comes to yoga pants, we fit any shape and size,” JC Penney tweeted at right about the time Lululemon was making headlines for blaming the failure of its yoga pants on the size of its customers’ thighs.

Brilliant: $JCP Burns $LULU - jcplulu


Takeaway: Call this clever marketing campaign by JC Penney what it is: Brilliant. The company continues to show a level of irreverence in its marketing that sets it apart from other national retailers. We’re not saying that the marketing approach fully works. But simply that JCP is on offense trying to find the right formula. We like offense. 


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Takeaway: We are removing Hologic Inc (HOLX) from our Investing Ideas list today.

We are removing Hologic Inc (HOLX) from our Investing Ideas list today.  




Hedgeye Healthcare Sector Head Tom Tobin says, "We overstayed our welcome on HOLX, but with the toolkit we have, we're likely to be back, just at a lower price from here."


Some Good Trends, But Mostly Just Confusing

  • We anticipated a tailwind from patient volumes in the quarter, share gains, and a stable headwind from interval testing sequentially from fiscal Q313. Share gains are clearly coming at a higher cost (lower pricing) than we anticipated.  Additionally, we have thought HPV testing would increase under the Cervical Cancer Screening Guidelines, which is either not happening, or being offset by price concessions to lab providers like DGX.  
  • In Breast Health, the positive commentary on 3D matches our analysis of new facilities with the technology, but again, pricing pressure in the legacy business is offsetting all of the gains. 
  • With problems in the base business worse than we expected, the opportunity from the ACA has become more important, and given problems with the roll-out, not a bet we're willing to take here.

Guidance & Valuation Interesting Lower

Walking through the FY14 guidance and accounting for share repurchases and de-leveraging, and a share price above $19 looks expensive at above 9X EV/EBITDA.  The new CEO may indeed be setting a reasonable and low bar to beat over the coming quarters, but we'd prefer not to stick around to find out.



[video] Keith's Macro Notebook 11/12: USD, ASIA, MBSBubble