Alan Brochstein

Time to Bail on Shale?

Nice summary, Marco G. I could have saved a lot of time by just publishing that sentence! Maybe it's a little more complex - what will the shale producers do if prices fall? I don't think that HK's shareholders will be happy with all of the recent equity issuance if they don't keep trying to "make it up on volume". In all fairness, these guys are driving down costs too, which enables them to keep their foot on the accelerator despite a tepid environment.


On Nov 24 08:42 AM Marco G. wrote:

> Thank you Alan, for the great article,
> Have to do more thinking and looking around on this.
> The main idea I have is that low prices have to rebound, but what
> you are saying is that the rebound is capped by the shale production.

Time to Bail on Shale?

Sure, if gas prices rise as they expect, CHK will generate FCF potentially. I was answering your criticism: "I'm not sure where you get the idea that most NG producers are free cash flow negative - I know CHK is not. Nice try, but you've dropped the ball on this one IMO."

I am not sure where you get the idea that most NG producers, including CHK, are FCF generators. The industry is always piling any cash generated into more drilling, etc. Any sort of FCF being generated now is because of the confluence of a cut back in drilling and the recognition of hedging gains.

On Nov 23 09:16 PM BSexposer wrote:

> I'm afraid you haven't reviewed CHK's operational budget for 2010
> and 2011, which clearly shows they will generate plenty of FCF -
> you appear to completely disregard the impact of their drilling carries,
> which are the result of JVs entered into just in the past year [BTW,
> who cares what their FCF was 3 years ago? It only matters what it
> will be going forward]. In any event, buying leaseholds is optional
> - they don't need to add acreage if they don't want to - so these
> are not "capital expenditures" in the traditional sense (i.e., expenditures
> were are required to maintain the value of an asset). No offense,
> but you should do more DD before you pass judgment on an entire sector
> without knowing all of the facts.

Time to Bail on Shale?

It turned out not to be a good call, no doubt. I make a lot and don't bat 1000. If you look, you will also see that I was hoisted on the FNM petard as well. With that said, I have 689 followers now because most of my calls are thought out fairly well and presented in a way that encourages the reader to think about something that may not have been on his or her radar.


On Nov 23 03:00 PM Screwloose wrote:

> Alan
>
> A year ago you said: "Hold Gold? Time to Fold" as it was only going
> one way - down. [From $7-800/oz]
>
> How'd that work out for you....?

Time to Bail on Shale?

On FCF, CHK is still negative by the way I calculate (YTD, Capex of 4.129 bln with D&A of 1.214bln and NI of about 1.5 bln before a massive write-off). Its Capex in 2005-2008 annually was well in excess of NI plus D&A. CapEx sequentially was 2.856 bln, 4.766 bln, 6.744 bln and 9.177 bln. Their most recent filing shows a BVPS of about $20. If we go back to the end of 2006, it was about 25. Of course, their debt is way up. Dividends have equaled about $1. Where is the FCF that you are talking about?


On Nov 23 01:57 PM BSexposer wrote:

> Your analysis is faulty - conventional production will drop precipitously
> b/c of the low NG prices and low rig counts - thus, even though shale
> production will increase in 2010, overall production will decline.
> With the economic recovery continuing - and b/c of how cheap NG currently
> is - NG demand will pick up somewhat. Utilities are also switching
> over to NG as a fuel. Finally, I'm not sure where you get the idea
> that most NG producers are free cash flow negative - I know CHK is
> not. Nice try, but you've dropped the ball on this one IMO.

Time to Bail on Shale?

Given that those are regulated industries, I don't see them as necessarily benefiting. Calpine (CPN), though, may be in a good position. I will give it some more thought...


On Nov 23 09:11 AM WPSPIKER wrote:

> I wanted to know what the thoughts are on not the producers but the
> end users, Companies such as NiSource (NI) Duke energy (DUK) whom
> consume large volumes of gas as electricity generation as well as
> both has/have large increases of energy costs passed onto the end
> users through deregulation and government oked price increases. The
> lower net cost for them (NI & DUK) to buy gas and a higher price
> charged to the end users (individual home owners & small/medium
> sized businesses.) I think everyone can contend that HEDGED plays
> & Future prices are going to decrease with the glut we have in
> gas storage and spot prices will stay low for the foreseeable future
> per you're article. This would lead me to believe that the real play
> is in the sellers of gas to consumers be the gas used to produce
> electricity or actual heating of a home. What would be some other
> good plays on this idea? I like DUK & NI for not only that are
> still lagging slightly but pay a good DIV on top of that.
>
> Thanks you for good info.
>
> Mark M

Time to Bail on Shale?

<IMG class=authors_reply src="static.seekingalpha.co..."> Thanks. I think that the quote I used suggested that their organic growth is up 13% for the year despite a lot fewer rigs. Maybe I shouldn't have bolded the total, but the point is that they too are cranking it out. Also, I beg to differ slightly about the impact of acquisitions. If XTO buys reserves but then cranks out production relative to what had been produced by the prior owner (perhaps nothing), it does impact total production.


On Nov 23 08:16 AM algo41 wrote:

> Great article. One negative: for XTO shouldn't organic production
> increases be emphasized, not total increases? Acquisitions have no
> impact on total US production.

Small-Cap Smackdown: Russell 2000 Laggards Could Offer Future Opportunity

I think that your comments apply well to banks, but the rescues haven't permeated much beyond the Financial sector. As to why the DJIA is doing better, I would suggest that the recovery of the bond market has certainly helped larger companies with lots of debt in terms of accessing very inexpensive (in absolute terms) money. DJIA is a funny index - the price of the stock matters. IBM, the most expensive stock per share, is also one of the best performers and has boosted the average, while C, the lowest by far, is the weakest (and has had almost no impact). In any event, DJIA is up a lot less than the S&P 500 on a YTD basis than the S&P 500.

Quality Individual U.S. Companies: The Short List

Caution on TDW - they have a huge capex commitment ahead and have never really generated a lot of FCF. Fortunately, they have limited debt, but they are committed to spending another $540mm to bring on additional vessels between now and 2012. These commitments were made at a time when the economics were very different and will now serve as a drag. HRL, on the other hand, is very timely despite the rally over the past year. I can see it reaching 48 over the next year. JNJ should be fine too.

Own Gold? Time to Fold

It clearly wasn't a good call. I am no gold expert and said so from the get-go in the first article in October: I was approaching this as an outsider with no real vested interest (though I did for a short while bet against gold with an ETF).

All assets have rallied since I wrote this article. This has happened in the context of no signs of inflation. I believed that gold would pull back as people came to understand better that the massive monetary stimulus wouldn't trigger inflation in the near-term or as the economy continued to crater. What I missed was that the improved liquidity would rally all hard assets as well as financial assets. I was spot on in stocks, but this same lack of understanding about the impact of liquidity caused me to become cautious way too early (since May).

When I wrote this article, the CRB index was about 209, so it has rallied about 30%. Gold has rallied a bit more. In the October article, I made the point that other metals seemed to offer better value (having pulled back while gold had held in). Rather than be so negative on gold, I probably should have presented the idea as a relative value trade. Since that first article (10/11/08), gold has rallied by about 25%, but copper has rallied by 40%, palladium by 50% and copper by 60%. So, it's not just gold. I would add that other assets have increased since the December article substantially as well (S&P 500 up 22%). Another problem has been the dollar, which has eroded substantially relative to the Euro.

So, while I feel like I got the inflation part right, I sure blew the call on gold. The economy proved not to be as weak as I had envisioned as well - we didn't really get the deflation that I feared. I know that some people will say that I didn't get the inflation part right, because it will show up later, but I still believe we are years away from that. To me, the biggest risk now is that the house of cards comes tumbling down. I didn't think long-term interest rates would soar this year (they are up, but only reflective of the safety bid diminishing), but that is a big risk now (and not from inflation - just supply and lack of demand).

I don't know if this is what you were looking for in terms of what went wrong with this call. It is not something that I stuck with - I recognized many months ago that I was wrong. I don't really have a strong opinion about gold, but I do believe that global economic growth will be weak and inflation isn't likely to be an issue. Gun to my head, I would avoid gold, but I am not standing on the soap box these days.

Allegiant Travel: Not Your Typical Airline Stock

Good luck... This one has been an enigma. I know that Trader Mark, who frequents S.A. got frustrated with this one due to the way it was acting over the summer. You might read the Barron's cover story from the late summer too, as it laid out the bear case (not too convincingly in my opinion).

Some Chain Restaurants Gaining Traction

Hey, John. I listened to the BJRI call, as that is the restaurant chain about which I am most optimistic. While I continue to view that story very favorably, the stock seems to more than anticipate the future. The near-term remains very challenging for all restaurants in terms of demand. I don't see a lot of opportunity for investment currently in the sector.

Large Caps Could Lead the Market Much Higher

No, perhaps you are getting confused with the Index of Leading Indicators. GDP is the sum of production and has nothing to do with asset values.


On Oct 19 06:06 PM Bjarne Jensen wrote:

> Do I recall correctly that increases/decreases in the stock market
> is a component of GDP? Does the market run up explain positive GDP?
> Does anyone know the answer?

PetMed Express: The Type of Business We Like to Own

JW, what do you think about the competitive environment? This one caught my attention a couple of months ago, and I liked what I saw initially. Then, coincidentally, Amazon sent me an email regarding their pet offerings. Certainly not as extensive a selection, but the prices were so much lower and on things that I would buy.

My Take on China Versus the US

You raise a lot of excellent points. You might turn to Thomas Friedman's "The World is Flat" for some additional insight. It's also interesting to consider that the Chinese people are relatively homogenous compared to our melting pot. Before one embraces a socialist society that is adopting capitalist tendencies, though, I would consider that the country beheads its citizens as a matter of policy. We may do it clandestinely here (no clue), but it is certainly not done at the federal level. Then there's the whole pollution thing.

So, while I recognize the several factors that suggest the ascension of China, I do understand that it too has its flaws.

Large Caps Could Lead the Market Much Higher

I don't totally agree with your point. Yes, PE's have run up from extremely low levels, but it this surprising? Usually PE's do rise when earnings are depressed. Plus, they are linked to interest rates, and corporate bonds have come down in yield this year. I believe, though, that an honest assessment of earnings is that they have been much better than we would have expected. Kudos to companies for taking so much cost out so quickly. Surely, some of this is just slashing headcount, an action that may be expedient in the short-run but likely to poise longer term challenges to economic recover. But part is related to operating smarter. I spend most of my professional time studying smaller companies, and improvements in business processes are certainly helping the cost structure.

To argue your point more specifically, though, Captain JJack, let's look at just the top 10 companies:

XOM = score a big one for you -- 6.41 at year-end to 3.87
MSFT = ditto -- 2.23 to 1.67
WMT = nada - 3.71 to 3.58, but UP from 3.53 at the end of March
JPM = 2.55 to 2.14, but up from 1.63 at the end of March (and from 1.41 bottom)
GOOG = UP 21.74 to 21.93
GE = 1.45 to 0.98
AAPL = UP BIG 5.16 to 5.89
PG = 4.20 to 3.72
JNJ = 4.66 to 4.57, but up since March's 4.49
IBM = UP 9.07 to 9.79

So, while some estimates for this year are clearly a lot worse, several are up and some are unchanged. Perhaps more importantly, the direction of the estimates is now up. So, I believe that there was too much pessimism in March regarding future earnings and that PE ratios were absurdly low.

This tells nothing of the future, but it does help explain the rally. It's not just PE expansion, and PE ratios haven't moved to "absurdly high" levels as many claim.


On Oct 18 09:11 AM CaptainJJack wrote:

> We have had a HUGE run-up of P/E multiples since March. In fact,
> I could argue that the ONLY thing that has really changed since March
> are the P/E multiples.
>
> Anybody who has been in this market over the last year knows how
> notoriously bad the forward earnings numbers are -- just take a look
> at forward estimates at the start of this year for THIS year.
>
> While there is a lot of manufacturing leverage now that companies
> have cut so much payroll, the current fixed infrastructure is currently
> being supported by large government (both US and Abroad) stimulus.
>
>
> The key question is: What happens when the stimulus is withdrawn?
>
>
> The key metric is the top line, not the bottom line: Those forward
> earnings are only as good as the sales projections.
>
> As an aside, there has been a significant tax cut which, if I remember
> the numbers right, amounted to 2/3 of the tax stimulus proposed by
> some Republicans ( there never was a unified Republican stimulus
> alternative, but the number $400 billion was often used as the tax
> cut required --- and the only stimulus needed).
>
> We should have seen the top line numbers rising by now if the tax
> cuts were as powerful as they were being promoted, and I for one,
> do not see it.
>
> As far as I can see, the $250 Billion tax cuts have had almost zero
> effect, and this is similar to the tax rebates of last year--coming
> into effect in at the end of the 2nd quarter, after the recession
> was 2 quarters old, and just before the economy tanked.