Takeaway: Twitter shares have been bludgeoned 27% over the past five days. Our Internet & Media analyst Hesham Shaaban has been the bear on TWTR.
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.
We'll have more color on ARP and ATLS after tomorrow's CC (which we expect to be uber-promotional!).
Takeaway: The sector is loaded with a premium valuation (P/E of 19.4x).
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.”
* * * * * *
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.
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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
Takeaway: If you look an inch beneath the S&P 500’s headline (sector and style factors), you can see growth slowing, fast.
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