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BWP: Closing Best Idea Short & Stepping to the Side

We added Short Boardwalk Pipeline Partners (BWP) to our Best Ideas list on 12/2/2013 at $26.34/unit.  After cutting its distribution by 80% in February 2014, BWP’s unit price collapsed (down ~50%), and we feel that our short thesis is largely played out.  With this note we are removing Short BWP from our Best Ideas list.

 

In our view, BWP neither is fixed nor cheap – thus we simply move to the sidelines instead of turning outright bullish. 

 

At 18.2x 2014e EV/EBIT and 10.3x 2014e EV/EBITDA, it is certainly screens as inexpensive relative to other pipeline MLPs, but not absolutely.  BWP’s re-contracting risk is significant for several years, particularly in 2018 and 2019.  2014 could be peak earnings for the core businesses, though the out years are naturally difficult to predict.  We also remain concerned with the Company’s high leverage, which looks to be stuck around 5.0x EBITDA; BWP may need to issue equity in 2015 to strengthen the balance sheet.

 

But from a risk/reward perspective, the setup is no longer asymmetrical to the downside.  What’s already happened (and is priced-in to some degree): narrowed basis differentials crushed BWP’s transportation business; narrowed calendar spreads crushed BWP’s storage and PAL businesses; its G&P ventures (Marcellus and Eagle Ford) have disappointed; it cut the distribution 80%; it guided 2014 below the Street;  consensus has soured on Bluegrass’s prospects; and it got kicked out of the Alerian Index.  We’re concerned that the next catalyst/announcement from BWP could be one to break the losing streak –  repurpose an under-utilized asset?  LNG export investment or deal?  A Loews tender offer?  

 

Staying short here is not compelling, in our view; our time and effort will be better spent looking for the next BWP.

 

Research Recap:

Short BWP - New Best Idea (12/02/2013)

Best Idea Short BWP December 2013 (12/10/2013)

Reducing BWP Fair Value to $10/Unit (2/10/2014)

 

Kevin Kaiser

Managing Director

 


European Banking Monitor: Risk Falls on Russia/Ukraine

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 - It was another week of broad-based tightening for EU financial swaps, consistent with the falling risk associated with the Russia/Ukraine situation. Sberbank of Russia also posted another large w/w improvement (-23 bps to 318 bps).

 

European Banking Monitor: Risk Falls on Russia/Ukraine - 1. banks

 

Sovereign CDS – Sovereign swaps mostly tightened over last week. Portuguese sovereign swaps tightened by -8.0% (-17 bps to 191 ) while Italian sovereign swaps widened by 0.5% (1 bps to 135).

 

European Banking Monitor: Risk Falls on Russia/Ukraine - 1 sov a

 

European Banking Monitor: Risk Falls on Russia/Ukraine - 1. sov b

 

European Banking Monitor: Risk Falls on Russia/Ukraine - 1. sov c

 

Euribor-OIS Spread – 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. The Euribor-OIS spread widened by 2 bps to 15 bps.

 

European Banking Monitor: Risk Falls on Russia/Ukraine - 1. euribor

 

Matthew Hedrick

Associate



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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


MONDAY MORNING RISK MONITOR: ALL QUIET ON THE RISK FRONT

Takeaway: What is the risk monitor and why do we use it?

We use our weekly risk monitor primarily as an intermediate/longer term risk management tool. We look for early sings of inflections in bigger picture indicators so that we don't find ourselves flat-footed at times of major inflections. We try and keep the sensitivity "setting" low enough to avoid numerous false positive signals, but high enough that we don't actually miss the important signals. Anyone who's been involved in markets and risk management knows what a tricky balancing act this can be. 

 

Along these lines, the bottom line is that there's very little being signaled on the risk front right now. Systemic interbank risk measures are all benign. Commodity price inflation, which had been a rising issue through the first ~10 weeks of the year, is now showing signs of cooling off, at least based on the CRB index price. One of the few areas of ongoing pressure is the 2-10 yield spread, which compressed a further 5 bps last week to 227 bps. In our experience, the trend in place tends to remain the path until you see the risk environment inflect. As we're not seeing any real inflection in risk at the moment, we wouldn't be surprised to see the general upward trend continue for the short/intermediate term trend.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 3 of 13 improved / 2 out of 13 worsened / 8 of 13 unchanged

 • Intermediate-term(WoW): Negative / 4 of 13 improved / 5 out of 13 worsened / 4 of 13 unchanged

 • Long-term(WoW): Positive / 5 of 13 improved / 2 out of 13 worsened / 6 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: ALL QUIET ON THE RISK FRONT - 15

 

1. U.S. Financial CDS -  Swaps widened for 16 out of 27 domestic financial institutions. Overall, however, the moves were generally small with the exception of the bond guarantors, MBI (+31 bps w/w) and AGO (+30 bps w/w). The global US banks were mixed with Citi the worst performer at +3 bps and JPM and GS at -2 bps.

 

Tightened the most WoW: GNW, JPM, WFC

Widened the most WoW: AGO, MBI, TRV

Tightened the most WoW: MBI, GNW, UNM

Widened the most MoM: ACE, TRV, SLM

 

MONDAY MORNING RISK MONITOR: ALL QUIET ON THE RISK FRONT - 1

 

2. European Financial CDS - It was another week of broad-based tightening for EU financial swaps, consistent with the falling risk associated with the Russia/Ukraine situation. Sberbank of Russia also posted another large w/w improvement (-23 bps to 318 bps).

 

MONDAY MORNING RISK MONITOR: ALL QUIET ON THE RISK FRONT - 2

 

3. Asian Financial CDS - There was substantial w/w tightening across Asian Financials last week. Indian bank swaps were tighter by 16-34 bps, while Chinese banks tightened 8-9 bps.

 

MONDAY MORNING RISK MONITOR: ALL QUIET ON THE RISK FRONT - 17

 

4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portuguese sovereign swaps tightened by -8.0% (-17 bps to 191 ) while Italian sovereign swaps widened by 0.5% (1 bps to 135).

 

MONDAY MORNING RISK MONITOR: ALL QUIET ON THE RISK FRONT - 18

 

MONDAY MORNING RISK MONITOR: ALL QUIET ON THE RISK FRONT - 3

 

MONDAY MORNING RISK MONITOR: ALL QUIET ON THE RISK FRONT - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 0.7 bps last week, ending the week at 5.70% versus 5.71% the prior week.

 

MONDAY MORNING RISK MONITOR: ALL QUIET ON THE RISK FRONT - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1,855.

 

MONDAY MORNING RISK MONITOR: ALL QUIET ON THE RISK FRONT - 6

 

7. TED Spread Monitor – The TED spread rose 1 basis point last week, ending the week at 19.5 bps this week versus last week’s print of 18.49 bps.

 

MONDAY MORNING RISK MONITOR: ALL QUIET ON THE RISK FRONT - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.8%, ending the week at 305 versus 303 the prior week. As compared with the prior month, commodity prices have increased 1.2% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: ALL QUIET ON THE RISK FRONT - 8

 

9. Euribor-OIS Spread – 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. The Euribor-OIS spread widened by 2 bps to 15 bps.

 

MONDAY MORNING RISK MONITOR: ALL QUIET ON THE RISK FRONT - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 16 basis points last week, ending the week at 2.66% versus last week’s print of 2.50%. 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: ALL QUIET ON THE RISK FRONT - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened -1 bps, ending the week at 66 bps versus 67 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: ALL QUIET ON THE RISK FRONT - 11

 

12. Chinese Steel – Steel prices in China rose 0.3% last week, or 10 yuan/ton, to 3,275 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: ALL QUIET ON THE RISK FRONT - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 227 bps, -5 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: ALL QUIET ON THE RISK FRONT - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 0.9% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: ALL QUIET ON THE RISK FRONT - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


VIDEO | Keith's Macro Notebook 3/31: JAPAN ITALY COMMODITIES


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