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Iran Nuclear Deal Emerging as a Potential Election Risk For Energy Markets

Takeaway: Trump pledges to undo the Iran nuclear deal. Reimposing US sanctions will put Iran's 750K b/d of new crude exports to world markets at risk.

Editor's Note: Below is a brief excerpt from an institutional research note written this morning by Hedgeye Potomac Senior Energy Policy Analyst Joe McMonigle. Joe is in Cleveland at the Republican National Convention. 

 

Iran Nuclear Deal Emerging as a Potential Election Risk For Energy Markets - z o9

 

As Republicans gather this week in Cleveland, there will be considerable talk about energy issues – support for hydraulic fracturing, coal, natural gas, LNG and overall US energy independence. While Donald Trump has not provided many specifics on his energy plans, there is a solid consensus that his administration would be favorable to fossil fuel energy sectors with very little downside risk for investors.

 

However, there is an emerging election risk to energy markets and that is Trump’s pledge to nullify the Iran nuclear deal.

 

It would be especially disruptive to oil markets as Iranian crude exports have regained significant market share in recent months.

 

The International Energy Agency (IEA) said last week that Iran’s crude production rose to 3.66 million barrels a day in June and 750,000 barrels a day since January when international nuclear sanctions were lifted.

 

Re-imposing US sanctions could put much of this new Iranian crude exports on the market at risk.

 

For more information on our institutional research email sales@hedgeye.com.


CALL INVITE: BREXIT IMPLICATIONS – A 360° ANALYSIS

Hedgeye Potomac, in conjunction with the international law firm of Squire Patton Boggs, will be hosting a series of calls on Brexit and will first examine the legal and procedural implications.  

 

With Prime Minister Theresa May now formally installed at 10 Downing Street, we will discuss with Squire’s Brexit Task Force the events following the UK’s exit vote from the EU and what the outcome of the vote spells for the UK and the rest of the world.

 

The call will take place on July 22nd at 11:00AM EST with prepared remarks followed by Q&A.

 

KEY TOPICS ON THE CALL WILL INCLUDE

  • The timing and procedure of the withdrawal, and future negotiations between the UK and the EU
  • The consequences for UK, EU and US companies arising from the end of the application of EU Freedoms, Mutual Recognition, Passports and other privileges
  • Consequences under the domestic laws of the UK and the remaining 27 Member States
  • What happens to International Agreements entered into by the EU
  • What you need to know when entering into new contracts after June 23, 2016 and what you should do with respect to existing contracts
  • Labor, Employment and Immigration
  • What alternatives are available to the UK, including WTO, EFTA, EEA, Swiss-Style, Free Trade Agreements

 

ABOUT SQUIRE PATTON BOGGS

 

Squire Patton Boggs is a full service global law firm that provides insight at the point where law, business and government meet. Squire Patton Boggs consists of over 1,500 lawyers in 45 offices across 21 countries.

 

Squire Patton Boggs’ Brexit Task Force is a multi-disciplinary team of lawyers and policy advisers who are uniquely placed to support clients from across the globe on the effects Brexit will have on business.

 

The Public Policy teams, particularly in Brussels and Washington, D.C., consist of top tier lawyers with considerable public policy experience - which helps them provide seamless and coordinated discussions with the relevant authorities.

 

CALL DETAILS:

Toll Free:

Toll:

UK: 0

Confirmation Number: 13641782


The Key Discussion Points Ahead Of Our Institutional Call on Wabtec | $WAB

The Key Discussion Points Ahead Of Our Institutional Call on Wabtec | $WAB - wab email

 

Editor's Note: Wabtec (WAB) is currently on our Industrials analyst Jay Van Sciver's Best Ideas List as a short. He is hosting a call today to update his thesis and preview their upcoming quarterly report. Send an email to sales@hedgeye.com for access or for additional information about our institutional research.

KEY DISCUSSION POINTS:

 

  • A Look At Freight Decremental Sustainability: WAB's report and guidance will test the sustainability of 1Q 2016's Freight segment decremental margin, which the 10-Q indicates was driven by lower Material costs. These favorable decremental margin expectations are now imbedded in 2H 2016 consensus estimates, and we expect the recent snap back in steel prices to have a significant 2H16 impact. While Materials costs went unmentioned in both the press release and earnings call, the company has apparently subsequently claimed mix as a factor; we do not find that claim credible. 
  • Consideration of Faiveley Deal Structure, Remedies: Investors should receive an update on the Faiveley acquisition, a deal we think management wanted to close by mid-year amid Freight segment pressure. Management has previously left no ambiguity that they expected to close the deal, but the information from regulators indicate to us that divestitures or other remedies will be required to close. Given the dearth of appropriate buyers for divested assets and not-so-minimal business overlap between WAB and LEY FP, comments should be interesting. The Faiveley merger remains a long thesis element for several large WAB holders.
  • Our Take On Management: We have observed thesis drift among WAB longs. While initially embracing freight aftermarket and regulation-driven demand, the focus shifted to international Transit growth and Faiveley. Now, discussions typically end with how this management team will execute through the downturn. If management is not able to deliver, further thesis drift may lack a new port.

 

What Levers Are Next? This management will not ride the downturn quietly, in our view. Wabtec still has substantial balance sheet capacity, and we would expect disappointing headlines to be offset with positive ones. Results last quarter should have seen pressure, but management was able to pull a Materials cost rabbit out of the hat. We will consider some options and the associated risks.

 

The Key Discussion Points Ahead Of Our Institutional Call on Wabtec | $WAB - wab call

 

**Email sales@hedgeye.com for access.


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Earnings Season Update: The Soft Bigotry of Low Expectations

Takeaway: So far, 43 of 500 companies have reported an aggregate year-over-year EPS decline of -7.1%.

Earnings Season Update: The Soft Bigotry of Low Expectations - earnings q2

 

Everyone beats Wall Street's beaten down earnings expectations. But what really matters is the year-over-year change.

 

"So far, 43 of 500 companies have officially printed their GAAP and non-GAAP stories for an aggregate year-over-year EPS decline of -7.1%," Hedgeye CEO Keith McCullough wrote earlier today. "Financials EPS are currently -8.3% y/y and allegedly they all “beat”; I’d still sell them on bounces from here."


Daily Market Data Dump: Tuesday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, rates and bond spreads, key currency crosses, and commodities. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Tuesday - equity markets 7 19

 

Daily Market Data Dump: Tuesday - sector performance 7 19

 

Daily Market Data Dump: Tuesday - volume 7 19

 

Daily Market Data Dump: Tuesday - rates and spreads 7 19

 

Daily Market Data Dump: Tuesday - currencies 7 19

 

Daily Market Data Dump: Tuesday - commodities 7 19


NFLX | Closing Long (2Q16)

Takeaway: We got too cute trading around our thesis. 2Q16 was so bad that we suspect our thesis may play out much sooner than we originally expected.

KEY POINTS

  1. 2Q16 = JUST AWFUL: Both the print and our long call into it.  We bought NFLX as trade on expected upside to int’l net sub adds for both the 2Q print/3Q guide.  NFLX reported int’l net adds of 1.54M (-36% y/y decline) vs. consensus of 2.1M and issued 3Q guidance of 2M vs. our expectation of 3.5M.  US was much worse, with net adds at historical lows of 160K and 300K in the 2Q print/3Q guide, respectively.  Mgmt suggested its gross adds were inline with its expectations, but heighted churn preempting the price increases from the ungrandfathering of its plans led to the shortfall vs. its expectations.  Regardless of the reason, its int’l net subs adds are a big concern given that NFLX hadn’t annualized past many of its 2015 country launches, and it just launched to ROW in 1Q16.  The fact that net adds are down on a y/y basis despite these tailwinds casts new doubt on the longer-term int’l story.
  2. DEMAND = ELASTIC? We clearly underestimated the magnitude of churn in our two trackers this quarter; largely because we didn’t think a $1-$2 increase in the monthly rate would be a big deal for most of its subs.  The sub adds miss vs. guidance was the worst in NFLX’s reported history (both US and int’l on a % basis); suggesting mgmt was really caught off guard as well.  It’s too early to tell if churn will become a prolonged issue since over half of NFLX domestic subs are in grandfathered plans, and NFLX will be staggering the price increases.  But the 2Q16 churn issue casts new doubt over one of NFLX’s assumed levers to cover its longer-term content costs; demand may be more elastic than many of us had assumed.  Granted, we could be overreacting to the print, but given the backlash to such a relatively small monthly rate increase, we have to question NFLX’s pricing power. 
  3. THESIS REFRESH: The first two bullets suggest that NFLX may have a shorter runway on both int’l growth and its ability to take price down the road.  In the context of our thesis, it appears even less likely that NFLX’s model will survive in its current form, and more importantly, that the street will actually figure that out over the 2016-2017 period following its ROW launch.  NFLX's mounting contractual obligations aren't a secret; if int'l user growth sputters out further despite its ROW launch, the specifics of its content costs will likely receive more attention (first note below) as the street realizes that int'l can't compensate for waning US demand (second note).  We're actually shocked that the stock isn’t down more pre-market and that we haven't seen any downgrades on one of NFLX’s worst prints in recent memory.  That basically suggests that the street still has hope and/or is in denial about NFLX’s longer-term prospects, which also means that we may get another shot on the short side this year.

 

See the notes below for supporting detail around our thesis.  Let us know if you have any questions, or would like to discuss further.

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet

 

 

NFLX | Breaking Down Content Costs
05/26/16 08:14 AM EDT
[click here

 

NFLX | Good vs. Bad (US User Survey)
06/09/16 10:41 AM EDT
[click here

 

 


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