Friday, February 20, 2015

EU Kicks Can on Greek Debt Down the Road -- Again

Eurozone finance ministers demonstrated their continued lack of resolve by kicking the can down the road – again: an agreement has been reached to extend Greece's financial rescue by four months.

This action sends yet another message that Europe (EU) lacks resolve: politically [Ukraine and the Islamist jihad problem] and economically [Greece]. 

The European Central Bank must stop supporting fundamentally flawed and weak economic institutions and let “Grexit” move forward.

Is the ECB afraid letting Greece fall will hasten the unraveling of both the EU and the Euro? Or, could it be the politically-connected are using influence to prevent billions in bond portfolio write-downs?

As Greece and the troubles of other EU economies demonstrate: fiat currencies are a joke. Might it be time to revisit the Gold Standard?  

For those too young to remember: the Gold Standard is a monetary system that fixes the prices of sovereign domestic currencies in terms of a specified amount of gold. Under the gold standard, a government is legally limited as to how much paper money it can print. A bankrupt country lacking hard reserves to back up its paper currency would lose license to print and put into circulation even more worthless currency.

The Gold Standard effectively came to an end last century when Presidents Franklin Roosevelt and Richard Nixon severed the formal links between global currencies and hard commodities (to prevent a run on the U.S. dollar).

What institutional holders of sovereign European debt will not acknowledge publicly is that the EU is in a death spiral. How ironic that the Germanic leader Odoacer overthrew  
Romulus, the last of the Western Emperors in the divided Roman Republic, in 476 C.E. Today, too, the fate of the European experiment (EU) lay in the hands of another German, Chancellor Angelica Mercer.

Wednesday, February 18, 2015

Is Janet Yellen Too Chummy With Wall Street?

Is this bull market too dependent on "easy money" policies - QE?

Could it be that the real reason that Fed Chairwoman Janet Yellen is afraid to pull the trigger on an interest rate hike is that it would spook Wall Street? I don't want to start "yellin" - but if the economy is as strong as Obama and his economic team likes to brag it is - maybe it's time to start raising key rates?

Friday, February 06, 2015

Is Carly Fiorina Accomplished Enough for a White House Run?

Former Hewlett-Packard (HPQ-$$37.95) CEO Carly Fiorina criticized preordained 2016 Democratic presidential contender Hillary Clinton in prepared remarks at the Iowa Freedom Summit in Des Moines last month.

"Like Hillary Clinton, I too have travelled hundreds of thousands of miles around the globe. But unlike her, I have actually accomplished something," said Fiorina. "Mrs. Clinton, flying is an activity not an accomplishment."

Before officially announcing her run for the White House top gig, however, the potential 2016 GOP presidential candidate might want to check her hubris at the door: an examination of her performance during her tenure as chief executive of the tech titan suggests the erstwhile “Most Powerful Woman in Business” has little to brag about - and accomplished very little in that leadership role.

True, Fiorina’s official HP bio paints the picture of a visionary leader:

In July 1999, Carly Fiorina joined HP as chief executive officer, and was named chairman a year later. She resigned from her position on February 8, 2005. While at HP, Fiorina led the reinvention of the company many associate with the birth of Silicon Valley by returning HP to its roots of innovation and invention, reorganizing it to be more agile and competitive, and charting a new strategy to use HP's depth and breadth to help customers and consumers prosper in the digital age. As part of that reinvention, Fiorina led the company's 2002 merger with Compaq Computer, one of the largest high-tech mergers in history. As chairman of HP, she also worked to build on HP's historic commitment to social responsibility, taking global citizenship to another level by leveraging HP's worldwide presence to make a difference in the lives of millions of people.

Albeit, as Mark Twain noted, “Truth is stranger than fiction, but it is because Fiction is obliged to stick to possibilities; Truth isn't.”

And the truth reveals a lackluster legacy: under her tutelage, net income from continuing operations at HP stagnated – slipping from $3.6B in 2000 to $3.4B in 2004 – and shareholder value declined 38 percent (falling from $28.30/share to $17.56/share).

Looking not through Fiorina’s prism of the past, but actual history, the $25B acquisition (which includes acquisition-related charges) of Compaq Computer was a dismal failure too: A name makeover to “Personal Systems Group” (PSG) couldn’t hide the fact that Fiorina bough a low-margin, personal computer manufacturing business which suffered from sequentially lower average selling prices (due to competitive pricing pressure) and declining volumes in both commercial and consumer desktop PCs.

PSG's earnings from operations as a percent of net revenue amounted to 0.9% in fiscal 2004 - and even this anemic profit resulted mostly due to cuts in operating expenses (such as headcount and lower R&D spending).

In May 2012, HP closed the book on this failed marriage with a $1.2bn write-down in the value of the Compaq trade name.

Her vainglorious promulgations to the contrary, Fiorina did little to “to make a difference in the lives of millions of people.” 

Fiorina did, however, prove the adage that there is no such thing as failure in the corner office. She left in 2005 with a severance package worth an estimated $42 million.

If incompetence and hubris are requisites for presidential aspirations, Fiorina is halfway there. 

Ed. note: this commentary should ot be construed as an endorsement for the likely candidacy of Hillary Rodham Clinton

Tuesday, February 03, 2015

Energy Stocks Surge on Expected Bottoming in Crude Prices

Nordic American Offshore (NAO-$11.11) management has repeatedly stated that the fundamentals of its PSV (platform supply vessel) leasing business are “not directly exposed to the price of oil to a significant extent.”

“The best liar is he who makes the smallest amount of lying go the longest way.” ~ Victorian-era English author Stephen Butler

The company announced a $1.7 million loss in net-income for fourth quarter 2014. Management now attributes the disappointing results to weakening demand for new drill projects in the North Sea – tied to a decline in the price of oil!

Many energy-related stocks of all stripes (including speculative E&P companies with highly-leveraged balance sheets) have climbed more than 10% in just the last two trading sessions: The 10Q Detective's diversified energy portfolio has also benefited handsomely from surging oil prices. That said, it is our view that the worst is not yet over in the oil patch – as drillers slash capex budgets, look for further downward revisions in profit outlooks to be announced on conference calls this month.

Given the continued imbalance between expectations and reality, we sold most of our positions as the markets rallied today. Where it was possible to obtain “reasonable” bid prices (depending on option activity), we did write covered calls on a few remaining positions, such as Seadrill Partners (SDLP-$15.04), to provide some down-side insurance as we wait for ex-dividend dates.

We will look to repurchase previously discussed stocks on any market pullback.

Monday, February 02, 2015

Finding Opportunity in Crude Oil's Bust - Part 3

Natural Resource Partners LP (NRP-$9.39) is principally engaged in the business of owning and managing mineral reserve properties.  NRP primarily owns coal, aggregate and oil and gas reserves across the United States that generate royalty income for the partnership. The partnership does not actively engage in the mining of any of its minerals or natural resources, but rather leases its properties to various operators in exchange for royalty payments.
  • NRP owns and controls 2.3 billion tons of coal reserves across three US coal basins, interests in approximately 1500 oil and gas wells, interest in soda ash operations, and over 11 million mineral acres. While in 2012 roughly 95% of NRP's EBITDA was derived from coal-related businesses, the proportion is expected to fall below 55% in 2015, with the remainder derived from oil and gas, aggregates and industrial minerals.
  • Recent debt-financed acquisitions have strained the balance sheet – the Debt/ EBITDA, as adjusted is expected to be in 4x -- 4.5x in 2015, up from 3.0x as of the end of 2012. 

Nordic American Offshore Ltd. (NAO - $11.87) owns and operates platform supply vessels (PSV), principally in North Sea.

NAO as a company is not directly exposed to the price of oil to a significant extent. The company does not own oil fields or sell oil. It is a Platform Supply Vessel (PSV) company servicing offshore oil installations, including oil rigs as necessary parts of their operations. In its main market, the North Sea, existing production accounts for about 80% or so of the work handled by its vessels. Existing production in the North Sea, according to management, is by and large unaffected by movements in the oil price.
  • ZERO debt and cash break-even level of about $12,000 per day per ship, which is considered low.
  • Of the current six vessel fleet - three are on long term charters with an average duration of two years before options. The income from these three vessels alone can cover all the costs of the six vessel fleet, thereby safeguarding the company's financial position.

QEP Midstream Partners, LP (QEPM- $15.50) has primary assets consisting of ownership interests in four gathering systems and two FERC-regulated pipelines through which it provides natural gas and crude oil gathering and transportation services. Assets are located in, or are within close proximity to, the Green River Basin located in Wyoming and Colorado, the Uinta Basin located in eastern Utah, and the portion of the Williston Basin located in North Dakota.
  • Over 2.6 Bcf/d and 54 MBbls/d throughput capacity
  • Access to three prolific oil and natural gas basins in the Rockies
  • ~ $500 million credit facility, undrawn on Sept. 30th

Seadrill Partners LLC (SDLP-$13.75) offers a speculative play on drilling services. A drop-down from Seadrill, this MLP owns a modern, high specification fleet of contracted vessels with a revenue backlog of $5.7 billion. The contracts have relatively high day rates and an average length of nearly four years, with the earliest finishing in 2015.

As a result of its growing asset base and cash generation, Seadrill Partners is expected to continue increasing distributions to its unitholders. The future balance between fleet expansion, leverage, and quarterly distributions will be important factors for an assessment of Seadrill Partners' financial policy. We note that proposed maintenance covenants would allow debt to EBITDA of up to 5x. [LT exceeds $2.8B, maturities 2019 - 2021]

Downside is the relative lack of diversification across the business, compared with Seadrill Ltd. and other large operators. Geographically, the vessels under current contracts are in three main regions. Operationally, there are four ultra-deepwater floaters, two drillships, and three tender barges: Ergo, more than a few days off day-rate for one or more vessels could have a meaningful effect on performance. 
  • LT contracts with Exxon-Mobil, Chevron, Total SA & BP
  • Seadrill “drop-downs”: Under agreements with its majority owner Seadrill Ltd., SDLP is likely to continue to acquire rigs and fractional interests in rigs that already have contracts for more than five years.
  • No exposure to day rates of UDW rigs until 2017, only semi-tender rig West Vencedor available before then
  • Coverage ratio exceeded 1.03x in 3Q:14
  • Ratio of earnings –to- fixed charges exceeds 4.5x
  • Cold-stacking issues should realign supply-demand issues by 2017

USA Compression Partners, LP (USAC - $17.35) is a pure-play Compression MLP.
Compression is a necessary and critical infrastructure for producing & transporting hydrocarbons - Compression is required to transport natural gas throughout the pipeline system.

Fundamentals remain strong: For the year ended December 31, 2014, USAC’s average fleet utilization was 94.0 percent.
  • Although 85% of USAC’s business (by HP) is natural gas-based, gas price agnostic - activity driven by production volumes and the need to move the gas
  • Gas production increasing primarily in shale plays, which require more compression and flexible compression
  • Midstream build-out still in “early innings” in many shale plays; compression grows alongside gathering and processing (“G&P”) expansions
  • Crude oil economics support unconventional production techniques made possible with compression
  • Long-lived Asset base: Compression units typically last for 40+ years, when properly maintained & 60% of the capital cost of a unit never wears out (average age of fleet is about 4 years old)
  • Liquidity: $1.1 billion in revolver credit and an extension of the maturity to 2020 (~600M available).
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. ~ British Prime Minister Winston Churchill (1874 – 1965)

Finding Opportunity in Crude Oil's Bust - Part 2

Evolution Petroleum Corp. (EPM-$7.51) is an E&P specializing in lower cost secondary recovery efforts.
  • Debt-Free Balance Sheet
  • 2P Reserves of 22.8 MMBOE (6/30/2014)
  • Development plan:  installation of recycle gas processing to recover methane and NGLs, and water-flood with deferred future CO2 injection in portion of Delhi recovery project.  Secondary recovery efforts could add  2.9 MMBOE to known 2P reserves

Enerplus Corporation (ERF-$8.97) / is an E&P with following exposure: 25% - Gas/ 75% - oil. US assets include: Williston Basin / No Dakota: 28,000 – 30,000BOE/day / 2013 2P Reserves: 131 MMBOE; Marcellus (natural gas) – NE PA: ~60% of 2015E natural gas volumes (190 – 230 MMcf/day)
  • Bank Credit Facility - $1 billion / $942M in unused capacity (Credit facility matures October 31, 2017)
  • 2015 est. Production: 105.5 MBOE/day [56% gas – 44% oil]
  • Change of $5.00/bbl WTI crude oil:  $42M = $0.20 (+/-)
  • Change of $0.50/Mcf NYMEX natural gas:  $28 = $0.14 (+/-)

Gastar Exploration Inc. (GST.PRA - $19.00) is a SPECULATIVE E&P play with big money coming in (such as Carl Icahn). GST.PRA is a 8.625% Series A Cumulative Preferred Security callable at $25 per share.
  • 1P Reserves: Appalachia - 55.5 MMBoe / Mid-Continent - 22.5 MMBoe
  • Liquids 46% of proved reserves
  • Active hedging program - currently hedged 86% of PDP oil production and 76% of PDP gas production for 2015(
  • First Mover Adv – Hunton Formation (OK) / ~155 MMBoe of 3P resource in Hunton and Stack Play(
  • Liquidity: Borrowing capacity: $191.6M / LT Debt: $314.7M Senior Secured Notes due 2018

MV Oil Trust (MVO-$14.82) is a royalty trust formed in 2006. The trust has oil & NG interests in approximately 1,000 producing oil and gas wells, located in the Mid-Continent region (KS & eastern CO).
  • The net profits interest will terminate on the later to occur of (1) June 30, 2026, or (2) the time when 14.4 MMBoe have been produced from the underlying properties and sold (which amount is the equivalent of 11.5 MMBoe in respect of the trust's right to receive 80% of the net proceeds from the underlying properties pursuant to the net profits interest)// As of December 31, 2013, cumulatively, since inception, the trust has received payment for approximately 5.5 MMBoe of the trust's 11.5 MMBoe interest.

Sunday, February 01, 2015

Finding Opportunity in Crude Oil's Bust - Part 1

Though the Energy Information Administration (EIA) expects global oil inventories to continue to build in 2015, the downward pressure on oil prices could ease mid-year. The EIA projects that Brent prices will reach a 2015 monthly average low of $49/bbl in January and February, and then increase through the remainder of the year to average $67/bbl (during the fourth quarter).

As sliding crude prices pressure profit outlooks, those investors looking to “bottom fish” should principally focus on companies that are being proactive in this difficult environment  in facing declining free cash flows (such as balancing cost cutting and capex without sacrificing long-term reserve replacement needs and production schedules).

In addition, ideal buy candidates should have locked-in hedges (cash flow preservation) and manageable debt leverage (including net-on-balance liquidity – untapped revolving credit lines – and no balloon-debt maturities due before 2017 -2018).  
Attractive dividend yields are not necessarily anathema, too – assuming distribution coverage ratios are realistic.

Opportunity often comes disguised in the form of misfortune, or temporary defeat. ~ Motivational speaker Napoleon Hill (1883 – 1970)

With valuations at multi-year lows, the 10Q Detective has added the following stocks to a diversified portfolio of energy holdings – upstream to downstream:

CSI Compressco (CCLP-$14.52) provides vertically integrated compression-based production enhancement services, including both conventional wellhead compression services and unconventional GasJack-casing compression services; and, in certain markets, well monitoring and sand separation services. Total fleet horsepower is 1,072,304 as of September 30, 2014.
  • Production enhancement services improve production rates and recoverable reserves of natural gas and oil wells
  • Distribution coverage ratio was 1.21x (1H:201)

Capital Product Partners L.P. (CPLP-$8.02) is an international, diversified shipping company and leader in the seaborne transportation of a wide range of cargoes, including crude oil, refined oil products, such as gasoline, diesel, fuel oil, jet fuel and edible oils, as well as dry cargo and containerized goods. 
  • CPLP maintains a strong balance sheet and capital structure with net debt/capitalization of 26.7% (as of September 30, 2014) 

Eagle Rock Energy Partners, L.P. (EROC-$2.30) is a SPECULATIVE, growth-oriented upstream Master Limited Partnership (MLP) with assets located primarily in Oklahoma, South Alabama, Texas, Mississippi and Arkansas.
Eagle Rock's E&P assets are highly concentrated in the Mid-Continent and are small on a reserve and production basis relative to E&P MLP peers:
  • Proved Reserves 346.3 Bcfe  /% Proved & Developed/ 67.3% % Oil 48.8%
  • 13-year reserve life
  • 3Q 2014 production of 75.1 MMcfe/d (82% operated by the Partnership)
  • Strong Balance Sheet: ~$285 million of liquidity (~$190 million of RGP units as of 9/30/14 and ~$94.3 million revolver availability)
  • Net leverage ratio of 2.3x as of September 30, 2014
  • Owns 4.9M shares of Regency Energy Partners LP (NYSE:RGP) - $25.11 (as of 1/29/15)

Transitioning to a pure-play E&P MLP, Eagle Rock will also be exposed to the structural risks inherent in the MLP business model characterized by an `acquire and exploit' growth strategy and uncertainty regarding the availability, pricing, and quality of acquisition targets as well as execution and integration risks while growing cash distributions paid out to unit holders.