Just How Understated are E&P MLPs' Maintenance CapEx Figures?

CLICK FOR FULL REPORT: Just How Understated are E&P MLPs' Maintenance CapEx Figures?


Companies in this Analysis:

Atlas Resource Partners (ARP)

BreitBurn Energy Partners (BBEP)

EV Energy Partners (EVEP)

Legacy Reserves (LGCY)


QR Energy (QRE)

Vanguard Natural Resources (VNR)


Summary Points

  • In our view, understated maintenance CapEx (and overstated DCF) is endemic among the upstream MLPs.
  • VNR strikes us as especially aggressive, because they only replaced 17% of produced reserves with the drill bit in 2013, but did not include any capital spent on acquired PDs in maintenance CapEx.  We calculate that VNR’s maintenance CapEx should have been ~5x higher than what it was in 2013, which would've reduced VNR’s reported DCF to below $0.
  • Understated maintenance CapEx is not a free lunch.  While it boosts the distribution in the near-term, it’s a long-term headwind, as the MLP needs to raise additional debt and equity merely to sustain that distribution.
  • This is one important non-GAAP accounting issue with respect to the E&P MLPs, but not the only one.  Other issues that we often see include aggressive hedge accounting (like adding back the cost basis of commodity derivatives to DCF); adding back unit-based compensation to DCF; adding back non-cash interest expense to DCF; adding back acquisition-related G&A to DCF; and more.
  • We remain negative on the upstream MLPs.  Aggressive non-GAAP accounting, particularly with respect to maintenance CapEx, is a serious concern.  Valuations are difficult to justify on any metric other than reported DCF.

Kevin Kaiser

Managing Director


Even the ‘80s Couldn’t Save RadioShack | $RSH

Takeaway: RadioShack doesn’t need to close its stores. It needs to close RadioShack.

RadioShack to Close 1,100 Stores as Sales Slump

  • "The retailer has been retooling stores in response to competition from online rivals such as Inc. To help speed the comeback, RadioShack said today it will shut as many as 1,100 underperforming stores, leaving about 4,000 U.S. locations."

 Even the ‘80s Couldn’t Save RadioShack | $RSH - radioshack


Despite a clever and much-discussed Super Bowl '80s flashback advertising blitz (see video: "The '80s called; they want their store back.") the reality here is that RadioShack probably does not need to close stores.


It needs to close RadioShack altogether.


The store banner is hardly an asset, nor is the fact that it is the destination for replacement transistors, extension cords, cheap electronic toys, and mobile phones (and even that is underperforming). The greatest asset, in our opinion, is actually the 5,000+ US store locations.


Think about it.


If you wanted to build a small format retail concept in any other category -- apparel, sporting goods, or heck, even e-tail showrooms -- it would take at least a decade to build up that kind of scale.


If current management (who is quite good -- especially for Radio Shack) can pull off this turnaround, then we'll give 'em all the credit in the world. But we think a better answer lies in a different strategic direction. 


 Even the ‘80s Couldn’t Save RadioShack | $RSH - chuckie

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VIDEO | Keith's Macro Notebook 3/5: ITALY RUSSIA SENTIMENT

Early Look

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Mr. Market Getting All Frothy

Takeaway: It's getting frothy out there.

A return to all-time highs for US stocks is putting sentiment right back to where it was on 12/31.




Both front month VIX (volatility) and the bear side of the II Bull/Bear survey have dropped right back to where they were on January 1. No, that’s not a good thing.


Mr. Market Getting All Frothy - VIX


The Bull/Bear Spread has ripped right back towards its all-time highs at +3950 basis points wide to the bull side. Only 15% admit they’re bearish. That is a generational low.


Remember. Risk happens fast.

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Client Talking Points


As the U.S. "Burns the Buck" (see Obama’s spending ramp plan), #StrongEuro continues to perpetuate European purchasing power. Italy’s Service PMI has crossed the important 50 line to 52.9 in February (versus 49.4 January). Being long Italy’s stock market (up +8.3% year-to-date) sure beats banging your head against the wall on whether the Dow should be “up” or not yet YTD.


Mr. Putin may have ramped hedgie S&P 500 short positions for a day (there was a SPX net short position in Index + Emini of -41,486 futures/options contracts into the event), but both the Ruble and the Russian Stock market are still implying that being long anything Russian sucks. Russian Trading System down -0.4% after its 1-day bounce. It's still down over -18% YTD 


Both front month VIX and the bear side of the II Bull/Bear survey just dropped right back to where they were on Jan1. No, that’s not a good thing. The Bull/Bear Spread has ripped right back towards its all-time highs at +3950 basis points wide to the bull side with only 15.1% admitting they’re bearish. That is a generational low.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.


Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike.  The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet.  The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%.  And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


Back to the all-time highs for US stocks is putting sentiment right back to where it was on DEC 31 #frothy @KeithMcCullough


“If you’re limiting yourself to what you experienced, you are going to be in trouble. . . . I studied the Great Depression. I studied the Weimar Republic. I studied important events that didn’t happen to me.” -Ray Dalio 


The EU is ready to provide $15 billion of financial support to Ukraine over the next couple of years via a series of loans and grants, European Commission President Jose Manuel Barroso said on Wednesday.


Big overhang for NCLH shares at the same time their pricing in the Caribbean remains iffy


Wednesday, March 5

  • STAY – 7:30 a.m. Citi Global Property CEO Conference
  • LHO – 9:30 a.m. Citi Global Property CEO Conference
  • RHP – 10:10 a.m. Citi Global Property CEO Conference
  • FCH – 11:30 a.m. Citi Global Property CEO Conference
  • HT – 12:10 p.m. Citi Global Property CEO Conference
  • MAR – Mitsubishi Seattle Consumer Conference
  • BYD – 4Q13 earnings, AMC, 5 pm call

Thursday, March 6

  • Todd in Boston       

Friday, March 7

  • Employment Report for February 

Monday-Thursday, March 10-13

  • 2014 Cruise Shipping Miami Conference

Monday, March 11

  • CZR 4Q 2013 conference call

Tuesday, March 12

  • MTN FY2Q 2014 conference call

Friday, March 14

  • Hyatt Investor Day


NCLH:  15m secondary,  Genting HK to sell entire RM7 bln stake in NCLH The Edge Malaysia

Genting HK Ltd has proposed to sell entire 31.35% stake (worth US$2.18bn) in NCLH.  Chairman and CEO Tan Sri Lim Kok Thay said the disposal was in line with group's strategy to unlock the value of its NCLH investment.  It plans to seek shareholder approval.  Lim said "whether the disposal is made in the open market at market price or through secondary public offering(s), the minimum selling price per remaining NCLH share shall not be less than US$19."  Star NCLC, Genting HK's wholly-owned unit sold 7.5m NCLH shares via a block trade yesterday. After the sale, Star NCLC will continue to own 56,819,334 NCLH shares or 27.7% of total outstanding shares.  Genting HK will use the proceeds for general working capital and/or to fund new investments.


Meanwhile, NCLH issued a 15m share secondary by selling shareholders, Star NCLC and Apollo Global Mgmt last night. 


Takeaway:  Genting HK may need capital to finance its Resorts World Vegas project. Any way you cut it, these stock sales are negative for NCLH.  Our cruise pricing survey suggests that Caribbean discounting continues.


IGT – announced a 40% floor share of games running on the newly installed IGT Advantage Systems at Dania Casino and Jai-Alai.  Dania Casino has 549 slot machines.  


Takeaway:  Another system install for IGT. Taking share back from BYI?


PENN – Judge Eliza Ovrom granted the city of Sioux City's request to intervene in the Argosy Sioux City riverboat casino's lawsuit against the Iowa Racing and Gaming Commission.  This ruling occurred after Argosy owner Penn National Gaming Co. last Friday voluntarily withdrew its motion opposing the city's intervention.  Judge Ovrom also canceled a hearing on the issue that had been scheduled for Friday in Des Moines.


Takeaway:  This legal dispute will culminate with final arguments on September 6, followed by rebuttal filings shortly thereafter and a hearing in November or December.  It is looking increasingly likely analysts will have to pull SC out of their 2015 estimates.


HOT – CEO, Frits Paasschen, speaking at the Citi Global Property CEO Conference indicated the most misunderstood aspect of the company is the attractive growth and cash flow characteristics of its asset light operating model. HOT’s EBITDA is >60% fee based today vs. ~25% six years ago. The long term goal remains 80% through continued asset sales and unit growth.


Takeaway:  While we wouldn't quite characterize it as misunderstood, we appreciate the asset light strategy. What we don't appreciate is HOT's under leveraged balance sheet.  With the transactions market continuing to improve, more asset sales are likely.  HOT ramped up it's return of capital to shareholders but there is a long way to go.  HOT remains our favorite lodging name.


HST – CEO, Ed Walter, speaking at the Citi Global Property CEO Conference said “equity issuance this year should be minimal in the absence of significant acquisition opportunities, as HST is approaching its leverage target of 3x.”


Takeaway:  This is welcome news as we’d like to see the positive earnings leverage to the lodging cycle flow to the bottom line without further equity dilution which occurred in prior up lodging cycles.


Black Sea season affected Cruise Industry News

Is the Black Sea cruise season in jeopardy? It might seem so as the three most popular ports, Odessa, Sevastopol and Yalta, are all in the Ukraine, and one happens to be the naval base that Russia’s Vladimir Putin is reportedly so concerned about.  Cruise lines have not yet announced any changes, but among the major operators, Costa and MSC, as well as Azamara and Crystal, have programs in the Black Sea this coming season.


Takeaway:  This could dampen the resurgence in Eastern Europe. So far, pricing remains steady.  


Downtown BR hotels get boost from Mardi Gras bookings Business Report

While New Orleans hotels have been full with Carnival revelers over the five-day Mardi Gras holiday, those visitors are not translating into spillover crowds in Baton Rouge hotels.  Nevertheless, officials at the city's growing number of downtown hotels say they have enjoyed some of their busiest weekends yet, thanks to local Mardi Gras festivities.   DDD Executive Director Davis Rhorer, "All the hotels were sold out last weekend. More importantly, several have had high occupancy rates in the 80% to 90% range over the past several months. That is very good news for downtown and quite high in the market." Citywide hotel occupancy rates in Baton Rouge typically average between 65% and 70% for any given month, which is slightly better than the national average but not as good as some local hotels would like it to be


Takeaway:  Good news for the Baton Rouge market.  PNK has the largest exposure to BR.


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive. 


Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%