Guy Ausmus

Long/short equity, special situations, growth at reasonable price
Guy Ausmus
Long/short equity, special situations, growth at reasonable price
Contributor since: 2015
Talked to two of my IT friends today - one with a major U.S. Bank, the othe running an IT security audit function for a "name" consulting firm. Both said: "NO slowdown in their activity. NO slowdown in black hat attempts to hack. NO reduction in resources pointed at IT security." LNKD is a markedly different business model drone PANW or FEYE. This is an apples to oranges comparison.
Desperation. No LNG will land here for a long while. Pawning the family silver is more akin to this.
I screen stocks (well, one of my screens) using a Div/FCF ratio, and a FCF/debt ratio. Beyond that (and this is a key point for ATT) I ask myself if the stock's story is a realistic one. ATT has me worried to be honest. They operate in a saturated market, and it is tough to see how they grow absent increasing their share, IMHO. And share increase is unlikely given our government's concerns about market concentration.
So, while I own T (it's one of my biggest positions) I play the same game that many do - sell calls or sell it at the top of the range, sell puts at the bottom of the trading range. Beyond the increase in yield, it keeps my eye on the stock.
Nice work. A balanced look at what any income investor wants to assess: the safety of his/her div. Think I'll use your methods on the rest of my div. portfolio. Thanks.
Great article - never thought through the credit implications as you have. The LNG market is a big boys game - requiring the credit (almost) of a sovereign. That credit standing is required of buyers and sellers. You'd think that we'd figure that out in the US, given the sad story of the solar companies you mention and subprime mortgage lending...
Sigh. I don't argue your math. I do have concern (and so does Mr. Market) about the underlying business of (most of) these MLPS. A world awash in fossil energy sources has almost no locational basis, almost no underlying volatility. The Saudis are making it their business to put high cost energy production out of business. Transportation and distribution of energy (the business of most MLPS) is thus stunted.
Good add to this battleground stock. Your analysis touches on the essential issue facing all midstream businesses now. No transport differential, no flow. No flow, stunted profits.
Ah, plenty of haters when a negative article comes out about Cheniere. And you can argue the world's LNG capacity/demand balance until the cows come home. Here's what all of us can hang our hat on in the near term. Revenue is a function of throughput, and realized fees for throughput. Yes, Cheniere has signed some long term capacity contracts, but they are not as sold out as mapodga suggests.
There's a very good Cheniere deep drill on Seeking Alpha that speaks to this: "Cheniere Energy: A riddle wrapped in a mystery inside an enigma". This article is required reading for any LNG (the company) holder, long or short. (and I'm short, by the way). As of July 15, about 2/3 of the capacity was termed up, and 1/3 was spot. The deal with ENGIE S.A. (as described on the Cheniere website) is "...The SPA covers the delivery of up to 12 cargoes per year, or up to approximately 222 million MMBtus in total, from 2018 to 2023". "Up to" means ENGIE has an option to decline the shipments, so if they find a better deal...
In short, the capacity isn't all that termed up.
Second, one MUST look at the transatlantic arbitrage of LNG (the commodity). If the arbitrage between Europe and the U.S. isn't greater than the cost of liquefaction + transport, the gas isn't gonna flow, and customers won't sign up for more.
Platt's has a great chart showing the arbitrage trend, which I won't hyperlink for copyright reasons, but the chart shows clearly that the arbitrage has narrowed from $5-$6 USD per MMBtu to $1.50-$2.00. Search for the phrase "Transatlantic gas price arbitrage 2015" and you will find it. LNG has sold the 2/3 of capacity sold to date in the $2.50 to $3.00/MMBtu range. How many customers will sign up for the balance of capacity (~$2.75/MMBtu asking price) at the market derived arbitrage numbers ($1.50/MMBtu)? And we haven't included transport and boiloff losses. I dunno. None, maybe?
I know this is a battleground stock. Ichan is smart, Chanos is smart, etc etc. All I'm saying is: look at the publically available discernable data, and plug it into the cashflow model in the referenced article. Things get ugly for LNG (the company) unless the world LNG (the commodity) market tightens up really fast.
I think the answer to this valuation can be found in Ron Hiram's last analysis of ETP "A Closer Look At Energy Transfer Partners' Distributable Cash Flow As Of Q2 2015". Ron Hiram, by the way, is the Zen master of understanding these companies, IMHO.
Basically, ETP can't cover distributions and CAPEX from existing cash flow, and they are issuing equity and taking on debt to plug the shortfall.
Oil derivative pricing is going the way of the dodo. An increasingly liquid (and oversupplied) LNG market will usher in gas on gas competition. Transatlantic gas arbitrage values are generally lower than the cost of liquefaction + transport. Chiniere doesn't have its capacity sold out, not by a long shot. There's a lot of headwinds here
Ugh. Missed their last earnings expectation. Transatlantic LNG arbitrage usually lower than liquefaction fee at Sable island. Ichan is way underwater on this trade.
Have come to the same conclusion as you - a great shorting candidate...been short LNG twice, waiting for the next entry point.
Nice summary Chris. Here's a some of questions I have with this one. First, the ownership structure - which name owns what, or more appropriately what are the cash flows attributable to each instrument traded? (LNG, CQH, CQP)
Second, what is the nature of the agreements entered? Are they merchant sales of LNG, or are they use of the facilities similar to a gas pipeline transport contract?
Third question: Where is the break even capacity utilization for the company?
Danielle: Thanks for corresponding. Everybody's entitled to an opinion, I guess. Few grind numbers, and that's where it's at if you are going to succeed. Yes, there's room for further declines here. I evaluated CPGX by attaching a trough multiple to slightly higher earnings than the present run rate. Don't want to say much more than I see this as a sub-$15 name. LNG, geez, I just don't know. It all depends on what happens to the substantial uncontracted capacity. Then there's the Godzilla vs. Mothra (Ichan vs. Chanos) issue. The SA article I cite is the best deep drill I've seen. As to MWE, it made the short list, but the div kept me away. I'll check out your suggestion. Another idea (and I bought some of this) is an inverse ETF (MLPS). Not very liquid, but company idiosyncratic risk is gone - just shorts a basket of pipeline mlp's. It has done very well - trade's 7 days old, up 15%.
Lee: Thanks for reading the article and commenting. I'm not really in a position to comment on the Chinese plants, don't know scale, and so on. Both of those chemicals are global commodities, would require a competitive source of gas supply to compete with what I believe to be the lowest cost competitors on the US Gulf Coast. Frankly, I don't see how they could based on LNG consumption. Perhaps they could using the new Gazprom deal I referenced in the article.
AT: Thanks for your comments. If an E&P goes BK that doesn't terminate the tolling (transport?) contracts. Ok, who pays in that instance? I'll grant you, the gas can only leave the lease thru the pipe, so a deal will be cut with the same gathering company. But I wouldn't presume it to be on the same terms. Williams didn't renegotiate with Chesapeake out of the goodness of their heart.
As for the thoughts on the pipe MLP's - well, all interesting stuff, but the charts are terrible, they were well represented on the 52 week lows list yesterday, and they continue to have deteriorating fundamentals. These call into question the ability to pay the fat yields attached to many of the MLP's. As I mentioned in the article, the yields are "shark repellent" to me. I don't want to hold a short and pay 9% per annum for the privilege of doing so. Hence the appeal of CPGX and LNG.
You, and many of the commenters to this article point to a longer term horizon where things will be better. Well, okay. Not holding this trade for the rest of my life. At the rate that CPGX and LNG have been dropping, I envisage reaching fair value in a much shorter time frame. As for q3 - suggest that you keep a close eye on gas well rig counts. They've gone one direction...down. I've looked for a factual basis for optimism here - higher rig counts, higher gas prices, increasing gas production, something. Haven't seen it yet. These fundamental activity drivers have to improve for improvement of the Midstream biz. If you or anyone else can point to these drivers, believe me, I welcome the information.
You know, I've played cards with guys that try to buy the pot after everybody figures out that they don't have a hand. Yeah, we make'em pay.
Both trades are on. Both have positive equity. More than enough to keep a reasonable stop on both names. Now, it's just an issue of managing to the target price. Will I get stopped out? Maybe. But I would be stopped out at a profit. So, am I confident? Yes. Confident that its the right trade directionally right now. Not in some EIA someday time frame. Now. Confident that it would be grabbing a falling knife to hold either name long. Confident that I have enough equity in the trade to manage it appropriately. Confident that the trade will close profitably. Only question will be how much.
Will either short trade to zero? Doubt it. Will both names go up someday? Maybe. But I'll have the money. And that is the whole point of this.
Thanks for your interest. A good article on this detail is on SA - entitled "Cheniere Energy: A riddle wrapped in a mystery inside an enigma". Per the company's own disclosures, only 1/2 of their planned and existing capacity is termed up. A "charitable" cash flow analysis in this article (author's description, not mine) shows equity to be overvalued.
Exactly the point - LNG still has to sell approximately 1/2 of their developed and planned capacity. China's demand vs. previous forecasts appears to be dropping if their impact on other basic materials is any guide. If I were an LNG (the company) long, I'd be much more relieved/bullish if they had a Chinese market booked.
Thanks for commenting GT. As to timing. - sure, could have been earlier. CPGX & LNG still have meat on the bone, if you look at earnings (or lack of) and trough PE's in this sector. In my opinion, anyway. As I said earlier, it took awhile to get the article published, and both names have had some precipitous declines in the last ten days.
You raise an excellent point MM. I evaluated all names in a similar fashion, regardless of the firm structure. The GP/LP names were all eliminated from my consideration by their high yields. Thanks for commenting - will impound your thought as I update this work and continue to look at fair value metrics.
Thanks for your interest CB. Please understand, I'm not criticizing the GP/LP construct. I'm pointing out that the midstream biz is in a slowdown and has been for some time. No opinion on refining biz.
Market moves faster than the physical projects. Pipes are seeing YOY declines in sales and rev. Projects get kicked off, and cancelled...
The issue is net backs to producers (demonstrably insufficient to induce more drilling), and financially stressed producers. Most pipelines tell a growth story (we are building this and that, and we will have this ever increasing ramp of revenues). Tough to support at these rig counts.
Robgcon: did this work about a week ago, took a bit to get it published. I note that LNG is pretty short (about 11% of float) and CPGX is about 1.6% of float.
"Iron clad rock sold can't break contracts"? For Cheniere's sake, I'd hope so! But - and this is the big "but" - Midstream contracts are getting renegotiated right now. Take a look at the Chesapeake/Williams renegotiation that was just consummated. This is hardly the first or is it likely to be the last instance of midstream transport contract renegotiation.
I'll grant you - these LNG contracts are of such a magnitude that sovereigns (or their first cousins, or S&P 500 companies) are the counterparties to Cheniere. So you have a greater (but not absolute) assurance of performance by Cheniere's counterparties.
Second, as C&C I notes in his analysis, about 1/2 of the capacity (existing, in construction, and proposed) is subscribed, the balance is proffered as bundled merchant LNG capacity. All capturing a $3.00/MMBtu spread. Hmmm. Transatlantic arbitrage may be there, may not. Unarguably, there is no guarantee of recovery at any rate for about 1/2 of the capacity that's on the drawing board.
A wonderful deep drill article. I landed on this name as a short a couple of weeks ago (stay tuned for the SA article to be released next day or so). Basically, I think the entire midstream space is a short, with certain names rising to the top as being the best for shorting. LNG is one, CPGX the other, but you could hit almost all of them. LNG is, if you stop to think about it, the functional equivalent of a natural gas pipeline. It ships gas from the field to some other point on the globe. That's it. No different than Transcanada or any of the others. Entire space is under pressure.
An excellent article on the topic, as per your usual.
I am very concerned about ALL pipeline companies at this time given the depressed state of oil and gas prices. Apart from the accounting intricacies (which you've dealt with admirably), one has to be concerened about the counterparties to the pipelines, ie the oil and gas producers. a) These prices are causing great stress/bankruptcies in the space, and a bankrupt is not going to pay its demand charges to the pipe. b) apart from default risks, present pricing stymies new drilling, and new drilling is the precursor to pipeline expansion projects. Most PL's tout their growth, not so much.
It shows, too. Take a look at the competitors of KMI. In general, they are flat to down. I'm not the only one making the observations above.
Disclosure: Long CPGX, and not liking it much at present.
Great summary. In re: Magnentation...I continue to be amazed by the fact that most steel execs fail to understand that their business is similar to oil refining, you take raw materials (crude oil, or Iron ore/coke) and turn it into product (gasoline or hot rolled sheet). Again and again, steel companies try to lock their input costs, usually near to top of the commodity price cycle. AKS did it in a minor way (Magnentation), MT did it in a major way. And the shareholders suffer. IMHO, one of the great advantages of the minimill model is the covariance of input costs (scrap) and product sale prices.
Dear steel execs: STOP IT!!! Lock the conversion spread, not one end or the other.
Josh makes good points. To that I will add that there identified growth projects that support forward growth @ historic rates, and the post split NI will be a 100% regulated rate company. On the negative side, NI's power company sells about 50% of its output to heavy industry (steel, refining) and the financials on some of the steel customers are AWFUL. Will they be NI's customers in their present form? Methinks unlikely. A great analysis, however!