Quick Take on ARP Deal = Dilutive

This morning Atlas Resource Partners (ARP) announced that it will acquire a 25% non-operated interest in the Rangely Field in NW Colorado from Whiting Oil & Gas (WLL) for $420MM in cash.  Rangely is an old oil field undergoing CO2 injection, currently producing ~2,900 boe/d net to ARP (90% oil, 10% NGLs), with production in decline at 3 - 4% per annum.  Chevron is the operator.


Estimated Deal Metrics

P/2015e EBITDA = 7.8x

P/2015e EBIT =11.0x

P/Current Production = $145,000/boe/d

P/PDP Reserves = $16.80/boe

P/PV-10 = ???


By our estimates and calculations, the acquisition is dilutive to both ARP and ATLS.


Importantly, Whiting USA Trust II (WHZ) owns a 4.6% working interest in Rangely, and disclosed that 2013 expected total CapEx net to its interest was $3.3MM in 2013 and will be $2.9MM in 2014 (see WHZ 2012 and 2013 10-Ks).  The vast majority of this CapEx is capitalized CO2 and other maintenance activity.


"The underlying properties include a 4.6% working interest in the Rangely Weber Sand Unit. Capital is expended each year to purchase CO2 for injection in the field, and capital is also expended for the drilling of additional wells to optimize field recovery. According to information provided by the operator, the 2014 estimated capital expenditures are $2.9 million allocated to the underlying properties’ interest and are comprised of development drilling activities, plant and equipment expenditures and CO2 purchases" (WHZ 2013 10-K, pg. 46). 


That means that CapEx net to ARP's 25% working interest equates to $17.9MM and $15.8MM in 2013 and 2014, respectively.  The field produces 1.0MMboe per year net to ARP, putting total CapEx/boe at $16.00 - $18.00.


As ARP disclosed, the field is in decline.  That means that every $ of CapEx AND MORE that ARP incurs here is truly maintenance CapEx.  We don't know what the reported maintenance/growth CapEx split will be yet - we will listen for that info on the ARP CC tomorrow morning - though we suspect that ARP will allocate a significant % of the budget to growth CapEx.  If so, how can that be justified?  G-CapEx on a field that is in decline...?


Assuming the current WTI strip, a 3.5% annual production decline, the midpoints of guided LOE expense and price differentials, a 7.0% production tax, and no additional OpEx (transportation?  G&A?), we estimate that the acquired assets will generate $53.8MM of EBITDA net to ARP in 2015.


We assume M-CapEx of $16.7MM (~$16.50/boe).


Other key assumptions include 50% debt/equity financing, a 9.25% interest rate on the new debt (the same rate that ARP issued senior notes at in 2013), new ARP units issued at $20.00, and a $2.50 LP distribution in 2015 (vs. the 2014 guidance of $2.40 - $2.60), putting ARP in the 50/50 IDR split.


The result is mild dilution for both ARP and ATLS.


A key tenet of the ATLS bull case is that ARP can grow via accretive acquisitions.  We believe the bull case is flawed.  


Quick Take on ARP Deal = Dilutive - arp1


We'll have more color on ARP and ATLS after tomorrow's CC (which we expect to be uber-promotional!).


Kevin Kaiser

Managing Director

Why You Should Tread Carefully In Consumer Staples Right Now | $XLP

Takeaway: The sector is loaded with a premium valuation (P/E of 19.4x).

Why You Should Tread Carefully In Consumer Staples Right Now | $XLP - wallstreet2


Last week, Consumer Staples (XLP) traded in-line with the broader market, rising 0.9%. XLP is up 2.68% year-to-date versus the SPX at 1%.


Our Consumer Staples team continues to believe that the group is facing numerous headwinds, including:


  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing.
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth.
  • The sector is loaded with a premium valuation (P/E of 19.4x) > see chart below.
  • Less sector Yield Chasing as Fed continues its tapering program.
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (recently rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months.

As Hedgeye CEO Keith McCullough tweeted earlier today, “We remain short of consensus US growth expectations.”


Why You Should Tread Carefully In Consumer Staples Right Now | $XLP - chart44


*   *   *   *   *   *


Editor's Note: This is an excerpt of a research note that was originally provided to subscribers on May 5, 2014 by Hedgeye Consumer Staples analyst Matt Hedrick. Follow Hedgeye's Consumer Staples sector @HedgeyeStaples.



As you already now, April gross gaming revenues (GGR) increased 11% YoY but as always, the devil is in the details. 



The bad news is that VIP revenues grew only 1%.  Hold percentage recovered in the 2nd half of the month and actually finished right around normal levels and in line with April 2013.  The good news is that Mass performed very well, up 34% YoY. 


Here are some takeaways:



  • Mass revenues grew 34%, slightly below the average growth for the last 12 months – April Mass faced a difficult 2 yr comp
  • Rolling Chip (RC) volume and VIP revenues grew only 1%
  • RC volume grew at the slowest rate in over a year
  • Slots were disappointing, up only 3%
  • Assuming consistent hold in both periods, GGR would’ve grown 12% YoY 






  • GGR grew only 13% YoY – the slowest rate in 2 ½ years
  • The LVS properties held very well on VIP – 50bps above normal - even higher than last April which was also above normal
  • Still, VIP revenues fell 4% and RC dropped an alarming 12%, the company’s worst performance since the dreary days of 2009
  • One would expect high hold to negatively impact volumes but not this much
  • Mass grew 35%, the slowest rate since August 2012 


  • GGR grew 26%, the 3rd highest rate in a year and a half
  • WYNN’s GGR growth led the market.  I thought the property was at full capacity?
  • WYNN held normal on VIP but well above April 2013
  • Higher hold pushed VIP revs above market growth although RC volume was flat
  • Surprisingly, Mass growth of 52% led the market
  • WYNN remains our favorite Macau stock


  • MGM held around normal but well above last year
  • YoY GGR growth was solid, driven by Mass, which grew 47% YoY, the 2nd highest growth rate
  • RC actually declined 4%.  MGM’s RC business could be under more pressure if Wynn Macau decides to get more aggressive on commissions advancement to junkets
  • The weak VIP business pushed market share below recent trend


  • Held well above normal on VIP (70bps higher) and 20bps above last year
  • GGR fell YoY for only the 2nd time in a year and a half
  • RC volume is the problem – down 21% YoY – we’ve been hearing of liquidity issues with some of the junkets
  • Mass grew in line with the market 


  • Mass grew only 16% - the slowest in the market
  • Galaxy was the clear winner in the VIP race with RC volume growing 27%
  • VIP hold was below normal and last April yet VIP revs still managed 21% YoY growth

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Daily Trading Ranges, Refreshed

Takeaway: If you look an inch beneath the S&P 500’s headline (sector and style factors), you can see growth slowing, fast.

Editor's note: This unlocked edition of Daily Trading Ranges was originally provided to subscribers on May 7, 2014 at 7:31 a.m EST. For more information on how you can receive these levels every morning in your inbox click here.


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VIDEO | Keith's Macro Notebook 5/7: JAPAN UST10YR RUSSELL 2000

Retail Callouts (5/7): TGT, NKE, PVH, SHLD, WMT, VFC

Takeaway: Canada won’t be upset if TGT leaves. Nike clearing FuelBands - to its detriment? We don’t think Drexler is TGT-bound. PVH licensing spree.




  • BEBE - Earnings Call: Thursday 5/8, 4:30pm
  • TUMI - Earnings Call: Thursday 5/8, 4:30pm



  • RL - Earnings Call: Friday 5/9, 9:00am




TGT - Vote: Will you miss Target if it leaves Canada?



Retail Callouts (5/7): TGT, NKE, PVH, SHLD, WMT, VFC  - chart2 5 7


Takeaway: This is snap of a poll we found on Canada's Globe and Mail site. Whether or not you believe in the validity of these straw polls, its hard to ignore the opinion of 10,000+ people. A quick note on the sample, we stress-tested the system to see if we could vote multiple times (which would therefore inflate the negative sentiment) - but, no dice. These results seem like they're for real.


It's particularly interesting that those who say they will miss Target in Canada totals 11%. Given that 11% of Canadian citizens had shopped at a Target in the US in the 12mnths prior to Canada's opening it leads us to believe that a good chunk of the 11% who say they will miss TGT Canada were already established US shoppers. To us this means that 1) Target Canada has yet to establish meaningful brand equity outside of its carry over customers from the US, and 2) customers missing Target in Canada is mostly a function of convenience. 


NKE - Gen 1 FuelBand on The Clymb


Retail Callouts (5/7): TGT, NKE, PVH, SHLD, WMT, VFC  - chart1 5 7


Takeaway: Now this one is strange. This is the first time that FuelBands are showing up on The Clymb, a well-respected site for outdoor enthusiasts. But they're not the latest generation FuelBands -- these are the White Ice and Black Ice models -- which were sold a year ago. Looks to us like Apple is mandating that Nike clears all its old inventory of FuelBands before those two launch their new partnership (Nike on software, Apple on hardware). What we find most perplexing is that FuelBands, or any other Wearable Technology device that tracks fitness levels, are not like shoes or Hoodies where you can own a dozen items. This is a category where you own just one -- and you need to use it consistently in order to get the full benefits. You can't switch off to other devices like you switch sneakers. What will these people think in another few months when there's a new piece of Apple hardware co-branded by Nike? Will Nike have cannibalized its own sales by clearing old FuelBands?


PVH - PVH Corp. Announces License Agreement with Leisure Brands (Pty) Ltd. for IZOD Brand



  • "PVH Corp. announced that it had entered into a license agreement with Leisure Brands Ltd. under which Leisure Brands will distribute, sell and promote men’s sportswear, golf apparel and related accessories under the IZOD and IZOD Golfbrands throughout South Africa. The partnership will leverage Leisure Brands’ established positioning within the South African golf apparel market, as well as its operational expertise in the region. The initial term of the license agreement runs through December 2016."
  • "Under the agreement, Leisure Brands has the rights to sell, distribute and promote IZOD products including men’s denim pants and shorts in 5-pocket construction, men’s headwear, men’s belts, men’s socks and umbrellas, as well as the rights to manufacture, sell, distribute and promote men’s sportswear, golf apparel and specified golf accessories. The license permits Leisure Brands to sell such products in specialty stores, department stores and company-operated IZOD freestanding stores."


Takeaway: This is yet another seemingly insignificant licensing move by PVH. In isolation, perhaps it is. But the reality is that we're all going to wake up one day in the not-too-distant future and PVH will be generating growth of a few percent just from the latent growth associated with these licensing deals. Is it a reason for us to get excited about the stock? No…not unless people are underestimating growth for the company in aggregate. We don't think that's yet the case.


Jcrew - Mickey Drexler Discusses J. Crew Mercantile



  • "...Drexler on Tuesday discussed for the first time where the company is at with the J. Crew Mercantile name, telling WWD, 'Mercantile is a name we own. There’s not much beyond that. It’s a name that was available and we liked. The way we run the company, we are always thinking creatively, innovating, and managing our assets. We have secured names and trademarks with either loose ideas or intentions, or with our imaginations. Sometimes things come of it, or they don’t.'"
  • "Drexler, however, stressed that nothing has been decided and that there is the possibility that J. Crew Group never uses the Mercantile name."


Takeaway: We were asked twice yesterday if Drexler would go to Target's C-Suite. We'd be floored to see him make the move. The reality is that his sweet spot is innovating and brand building for small-mid sized companies. He did it at Gap. Doing it at J Crew.


BLKIA - Belk teams up with the Dallas Cowboys Cheerleaders



  • "Belk has entered into a three-year partnership agreement with the Dallas Cowboys Cheerleaders (DCC). The agreement includes endorsements, appearances and numerous co-branded marketing initiatives."
  • "Belk will provide the official wardrobe for the director of the Dallas Cowboys Cheerleaders…"
  • "'The synergy DCC and Belk share was apparent from the beginning. The company's commitment to the communities in which it operates, fashion, style, and Southern values mirrors what the Dallas Cowboys Cheerleaders represent,' said Finglass."


Takeaway: With football players, Brands compete for the right to sell replica product to the masses. But somehow we don't think that quite applies to Dallas Cowboys Cheerleaders gear.




VFC - Thinking Young, Wrangler Sees Red



  • "VF Corp...on Thursday will introduce Wrangler Jeans Co. Red, a new assortment of jeans and sport shirts targeted at the younger man...Wrangler Red will retail for $21.97."
  • "Wrangler Red will be tested in mass-market retailers such as Wal-Mart Stores Inc. and Target Corp. beginning this fall with a plan to roll out nationally in 2015."


WMT - Wal-Mart Boosts Tech



  • "Wal-Mart said that the technology and innovation arm of its global e-commerce team, @WalmartLabs, is bolstering its team of technologists. This week, the Silicon Valley-based lab welcomed 60 technologists from Adchemy to its existing team of 2,100 to specialize in areas like marketing, data analytics and semantic search."
  • "Ten-year-old Adchemy, which specializes in product search and e-commerce technology, will help Wal-Mart develop e-commerce functionalities in-house…"
  • "The retailer founded the technology portion of its team, @WalmartLabs, three years ago. This marks the 12th acquisition since the lab’s inception. Web search categorization company Kosmix; mobile receipts technology Grabble; Facebook social reminders app Social Calendar; predictive data analytics company Inkiru, and recipe discovery and meal planning service Yumprint are among the companies that now sit under the @WalmartLabs umbrella."
  • "The lab is in growth mode. Hires from acquisitions aside, 1,000 people have joined the @WalmartLabs team in the past year."
  • Takeaway: We were asked twice yesterday if Drexler would go to Target's C-Suite. We'd be floored to see him make the move. The reality is that his sweet spot is innovating and brand building for small-mid sized companies. He did it at Gap. Doing it at J Crew. The decisions that need to be made at Target don't need to be made by a merchant. They reality is that Target needs someone from a mega-cap company that can radically shake up and re-architect an org chart.


SKX - Skechers, Marcolin Extend Deal



  • "...Marcolin Group has extended its licensing agreement for the design, manufacture and international distribution of Skechers USA Inc. eyewear for five years, until June 30 2019, with an option for further extension through 2024. Skechers...had originally inked a license in 2010 with Viva International, which Marcolin Group acquired last December."
  • "Skechers Eyewear includes men’s, women’s, boys’ and girls’ frames, which are available through e-commerce retailers such as and, as well as at opticians’ offices, department stores, select independent retailers and Skechers stores worldwide."


BBG - Billabong Appoints Global General Manager, RVCA 



  • "Billabong announced the appointment of Bill Bettencourt to the role of global general manager, RVCA. Reporting to Neil CEO Neil Fiske, Bill Bettencourt is returning to the Action Sports industry after a four year stint with Sperry Top Sider…"
  • "Previous to Sperry Top-Sider, Bill spent five years at Vans last holding the position of Vice President, Product and Marketing. In this capacity he had global responsibility for design, development, product merchandising and marketing for Vans footwear/apparel, Vans Snowboard Boots and ProTec equipment. Bill’s experience also includes eight years at Reebok International, where he led global marketing."
  • "With the appointment of Bill Bettencourt, the Executive Leadership Team reporting to CEO, Neil Fiske is now complete."


SHLD - Edward Lampert Says Sears Must Trim Apparel



  • "Speaking at a press conference following the retailer’s annual meeting at its headquarters here Tuesday, the chairman, chief executive officer and largest shareholder of the company said, 'There is too much space at Sears dedicated to apparel. We need to be more effective with all our constituents or more effective with one or two. We are evaluating who our core customers are going to be. We can’t be all things to all people, but we want to serve the entire family.'”
  • Instead of bulk orders to cover an entire year’s worth of selling, the retailer is looking toward more frequent, smaller fashion buys. 'It’s cheaper to make a decision 50 weeks out,' he said. 'But that’s offset by the inability to learn — you make a mistake and it costs you a year.…We’ve been deliberate, and aggressive, in bringing talent comfortable in that faster environment,' said Lampert."
  • “'We probably have more space than we need. In some cases we lease part of the space; in some cases we sell. We have great real estate.…Will we be operating more or less stores five years from now? It’s hard to say. If it’s more stores, it will be different types of stores with hybrids of our brands and others,' Lampert said."

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