[VIDEO] McCullough: Punish Putin In Pocketbook



Hedgeye CEO Keith McCullough says a stronger dollar and lower oil price are weapons President Obama could use against Russian President Vladimir Putin, leading to the US dealing from a position of strength.


"You look at Putin and he's pushing us around. The No. 1 weapon that we have as a country that neither [former President George W.] Bush or Obama has used is called a weapon of mass currency appreciation, the dollar," McCullough told Newsmax TV in an exclusive interview. 

"Putin doesn't exist, [former Venezuelan President Hugo] Chavez... wouldn't have existed, neither do these Middle Eastern overlords that capitalize on oil, if a weak dollar doesn't exist."

LINN Energy Updates (LINE, LNCO, BRY)

A busy two days for LINN Energy (LINE, LNCO).  Below are some details and comments around the recent headlines.


On the 9/11/13 press release:


Quoted in full: “[LINN, LinnCo, and Berry] announced today that LINN Energy and LinnCo recently received comments related to the Amended Registration Statement on Form S-4 filed on August 9, 2013 in connection with the proposed merger transaction, and are working diligently to file an Amended Form S-4. Furthermore, LINN Energy, LinnCo and Berry Petroleum have agreed to set the record dates for their respective unitholder, shareholder and stockholder meetings as of September 30, 2013.”

  • We consider yesterday’s reaction to this press release (LINE +13%, LNCO +12%) an over-reaction.  The market took a press release with little information to be quite positive. 
  • The fact that LINN “received comments” from the SEC is not surprising or informative.  We also know nothing as to the extent or content of those comments. 
  • The fact that LINN will file another amended S-4 is not necessarily a good thing.  Many believed that the 8/9/13 S-4/A was the last one.
  • Setting the record date to 9/30/13 only means that this is the last day to be “on record” as a shareholder of BRY, LINE, or LNCO to participate in a vote.  Even if LINN files the amended S-4 in the next few days, the SEC could take 3 – 4 weeks to make it effective, with a vote taking place 3 – 4 weeks later.  We believe it will be difficult to get a vote done before the October 31st “End Date.”  However, we do believe that both LINN and BRY are strongly committed to getting a deal done, and will extend the “End Date,” if the merger cannot be completed by October 31st.  In our view, it is a matter of where the share prices are when it's time to do the deal, not whether or not BRY is still interested.  As far as we know, BRY is still interested.
  • The real risk to a LINN position (long or short) in the near-term is the outcome of the ongoing SEC informal inquiry.  We have no insight or opinion on what the SEC will or will not do.  We call this "open the envelope" risk.  The outcome of the SEC inquiry will drive the share prices of LINE/LNCO, which will drive the viability of the merger.  If we assume that BRY needs $47/share to get a “yes” vote from shareholders, LNCO needs to get to $37.60 (+17%) for the 1.25x exchange ratio to hold.  LINN could also improve the deal terms considerably (up to a ~1.95x ratio) before erasing all DCF accretion.  On a FCF/share basis, the deal is dilutive even at 1.25x.
  • As we explained in our note on 7/18/13, “Tying Two Rocks Together - The LINN/BRY Merger,” we don’t believe that the BRY merger is a long-term positive for LINN, though getting the deal done would likely drive the share price higher in the near-term as investors would regain confidence in this growth strategy.  We believe that the outcome of the merger - which relies upon the outcome of the SEC inquiry -  is uncertain and difficult to handicap.

On the 9/12/13 asset acquisition:


Deal is positive for LINN.  LINN announced a $525MM acquisition in the Permian Basin this morning.  It is expected to close in 4Q13.  It will be financed with a committed term loan (LIBOR + 2.5%).  We estimate that this deal will be ~$0.13/unit (4.3%) accretive to DCF in year one, however our estimates rely upon pretty loose guidance/information from the Company.


We estimate that LINN acquired the asset for 6 – 7x NTM open EBITDA.  LINN bulls will likely be glad to see the Company getting back to its bread-and-butter, acquisitions.  The press release curiously leaves out some important information, such as current production, % PUDs, and future capital needs. The deal will close in 4Q13, so we will get one more quarter of LINN’s organic numbers.  No information provided wrt hedging the new volumes.  And we note that LINN no longer uses the term “distributable cash flow,” but “cash available for distribution.”  Interesting, but no telling what that means…

  • Production is expected to be 4,800 boe/d over the NTM, 63% oil, and from the Clearfork formation.  The Clearfork is a shallow interval in the Permian and is generally targeted with conventional, vertical wells, though some operators are testing its Hz potential, like FANG.  In our view, it is odd to give NTM production guidance but not current production guidance.  LINN paid $109k/boe/d on NTM production, but the actual acquisition multiple could be higher if LINN plans on investing capital to grow into that number.
  • Proved reserves = 30 MMboe (~70% oil).  Importantly, a PD/PUD split was not disclosed.  If we assume 35% of acquired reserves are PUDs and a future development cost (FDC) of $20/boe, that gives us $210MM of undiscounted, FDC.  The acquisition multiples in the case would be $27/PD boe and $24.50/proved boe (including undiscounted FDC). 
  • 6,250 net acres.  124 producing wells (50 acres/well).  Additional drilling opportunities = 300 proved “low-risk, infill drilling locations.”
  • It’s difficult to know what LINN really paid here, as the press release leaves out important details such as current production, % of PUDs, and the amount of capital that LINN is to invest over the NTM to hit the 4,800 boe/d guidance.  We estimate that the asset will generate ~$89MM of open EBITDA over the NTM using LINN’s guidance and our own assumptions, putting the headline number at 5.9x EBITDA.  But if LINN is to spend any capital to generate that EBITDA (it likely is), the multiple could be closer to 6.5x – 7.0x.  Regardless, LINN trades at ~10.0x open EBITDA, and this is an accretive deal.

Kevin Kaiser

Senior Analyst

Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories on our radar screen.

Keith McCullough – CEO

A Plea for Caution From Russia (KM note: It’s time for Obama to shut Putin up with currencies of mass appreciation aka #StrongDollar > via New York Times)

Jobless claims drop below 300,000 (via Marketwatch)

Li Says China Rebound Not Yet on Solid Foundation (via Bloomberg)

China Statistics Chief Says No Tolerance for Fake Data (via Bloomberg)

Colombia arrests woman 'with cocaine' in pregnancy bump (via BBC)


Morning Reads on Our Radar Screen - poo9


Todd Jordan – Hotels & Gaming

Hilton Worldwide Files for $1.25B I.P.O. (via DealB%k)


Howard Penney – Restaurants

Review: Mighty Wings from McDonald’s (via GrubGrade)

Dunkin' Donuts to Enter UK Market (via WSJ)

Inheriting the Family Apron (via New York Times)


Josh Steiner – Financials

U.S. Bank mortgage chief sees tough conditions ahead for industry (via StarTribune)

Umpqua Agrees to Buy Sterling Financial for $2 Billion (via Bloomberg)


Jonathan Casteleyn – Financials

Blackstone’s Hilton Files for $1.25 Billion IPO in U.S. (via Bloomberg)


Kevin Kaiser – Energy

The Best 9/11 Survival Story You've Probably Never Read (via Esquire)

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ENR – Cheap for a Reason

Energizer fits the profile of a stock, at the very least, that we do not want to own. We expect the stock to underperform as competitive pressures continue to impact both the personal care and home product segments of the company’s business. Sluggish top-line performance, particularly in Personal Care, is weighing on expectations as cost savings are being pulled forward to maintain earnings growth.


Overview: Energizer is one of the largest manufacturers and marketers of primary batteries, portable lighting and personal care products in the wet shave, skin care, feminine care, and infant care categories. The company’s exposure to these respective product categories is detailed in the chart below.


ENR – Cheap for a Reason - enr rev by category



Fundamental Outlook: Energizer is widely known for its battery and lighting products but the company derives 54% of its revenue and 51% of its operating profit from the personal care category which has seen a deceleration in trends over recent months. The company has grown revenues and income at 8% and 26%, respectively, on a blended trailing-twelve month basis.


Personal Care: In the most recent quarter, Hydro Disposables offset sharp declines in U.S. men’s razors and shave prep sales as negative impact of promotional environment has created a more difficult competitive environment.


Household Products: Distribution losses at two U.S. retailers will impact numbers starting in 4Q, exacerbating the impact of declining category sales of roughly 2% and other company-specific restructuring-related factors.



Conclusion: Going forward, earnings targets may be met as cost savings are made but we believe the stock’s multiple is unlikely to appreciate meaningfully until investors see evidence of an acceleration in sales growth. The stock is currently trading at 13.7x forward earnings, which is close to the high-end of its range over the past four years. The bull case seems to be that earnings should grow as cost savings are implemented and, as a result, the multiple should expand. This thesis strikes us as similar to the bull case on KMB. In that instance, sluggish revenue growth has dissuaded investors despite cost savings driving earnings to meet expectations. As investors increasingly look for growth over yield, we expect ENR’s performance to underperform its peer group. We favor EL on the long side, at current levels, and would continue to be short KMB.


ENR – Cheap for a Reason - KMB ENR eps


ENR – Cheap for a Reason - enr levels



Rory Green

Senior Analyst





Companhia de Fomento Predial e Desenvolvimento Kong Sing Ltda won permission to build developer Chan Chor Tung’s 12-storey block of flats at the foot of Mong Ha Hill.  The premium for the 896-square-metre site is MOP23 million (US$2.9 million) with annual rent is MOP2,215.


Oil Likes Putin

Client Talking Points


Yes - oil prices like Putin. Brent Oil broke its immediate-term momentum line of $115.11 last week. But it held our TREND support line and bounced right where it should have. Higher oil prices remain the biggest risk to global consumption growth. There’s only one real way for President Obama to fight Vladimir Putin on this – weapons of mass US currency appreciation. #StrongDollar


It's right back into crash mode for Gold and Silver this morning (Gold is down -20% year-to-date) after Gold saw its highest net long position since January. Remember, these are commodities – people chase price. The TREND resistance is firmly intact up at $1485/oz; TRADE resistance now $1389.


This is the first morning in weeks where Treasuries, Bunds, Gilts, and JGBs all have a bid (at the same time). They havve been getting absolutely killed, so this bounce was inevitable. But it is something to watch as US, German, British, and Japanese stocks all signal immediate-term TRADE overbought within my risk range model.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


If there is a sector more universally loved... with more groupthink than MLPs, let me know. I don't think there is. @HedgeyeENERGY


“I would rather be vaguely right than precisely wrong.”

- Keynes


The number of new applications for U.S. jobless benefits fell below 300,000 for the first time since 2006.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.