Osiso's  Instablog

It was reported today that PDVSA, Venezuela's state run oil company has taken over 11 rigs from HP

This should have a small material effect on HP’s top line.  With $3.1m collected in the first quarter from Venezuela HP lost more than 5 times that by Venezuela devaluing its currency. 

With $3.3B in PPE the 11 rigs account for $71.6M (2009 10-K pg.74) which is about 2% of PPE.

Note:

HP has over 200 land rigs in the U.S. 

A/R due was $26.6M per last 10K, soon after the eleven rigs went idle..  

I wonder if these rigs are insured and if so would seizure by an NOC be covered?

I have developed a quant screen for the Energy sector that has had decent returns for the past year.  Last year's top stock it chose was Dril-Quip (DRQ), and I've modified it a bit and it has rather solid results year to date.  

I’m sharing this screen with the seekingalpha community for three reasons:

• Get others to follow me
• Get feedback on the stocks since the quant screen just gives the best/worst based on a multivariate score,  I have to study each equity in detail and the more people who want to write up on each small cap stock, the better.
• Generate a following who would be interested in this research and can help improve it

A few (not all) of the variables in the multivariate quant screen developed in FactSet are:

• Book-to-market
• CFO-to-price
• NOA to lagged Assets
• Total accruals LTM
• FCF to price
• Trailing OP EP
• 6 month compounded return (momentum play)
• and a few custom made ones from various academic papers that require customized accounting screens.

A simple regression analysis on one of the variables I was checking is shown above for illustrative purposes.

I backtested the screen vs. the DJ oil ETF for 10 years and 18 years.  This screen has outperformed the market by 200% (10 years) and about 300% for the 18 year screen.  I could not backtest more than 18 years due to the dataset I had in FactSet.  In the two graphs below, the blue area is the quant screen, and the yellow line is the benchmark (DJ energy ETF).

Using the same screen from January 4, 2010 these are the top five picks and bottom five picks. 

     

Top Five Stocks

Symbol	Company	YTD Return
AHGP	Alliance Holdings	15.9%
ARLP	Alliance Resource Partners	2.1%
DOM	Dominion Resources Black Warrior	2.5%
ATW	Atwood Oceanics	1.0%
GLP	Global Partners, LP	6.6%

 

Bottom  Five Stocks

Symbol	Company	YTD Return
SNEN	Sinoenergy Corp.	-8.7%
ALJ	Alon USA Energy	+1.9%
CFW	Cano Petroleum Inc.	-1.0%
SD	SandRidge Energy	-20.5%
TRMA	Trico Marine	-32.6%

On an equal weight basis, the top five investment alpha is 1.56% YTD and if you shorted the bottom five the alpha is 17.77% (using the iShares Dow Jones US Energy Sector ETF as your benchmark).

 
The graph below is the returns based on an equal weight of the portfolio.

Although this quant screen has been backtested and has had a decent return YTD, it is primarily used for long term investing.  I will post the updated quant screen results for March 2010 in another posting soon.

By the way, FactSet is awesome.

Disclosure: I own none of these yet

Union Pacific generates 6% of its revenue from its automotive segment, yet it seems to be largely ignored.  In the last two conference calls, many of the questions from analysts were focused on the energy segment, specifically coal.  This is most likely due to the fact that 25% of UNP’s revenue is from this segment, as well as it being a good indicator of industrial output. 

  

Figure 1: Segment Breakdown

The Powder River Basin (PRB) Region in Wyoming has the biggest concentration of sub-bituminous coal in the United States and UNP generates considerable business from here.  For Q4 UNP had $765 million in revenue from this segment and the type of coal generated here is used mostly for electricity output (vs. Bituminous coal used for steel coking).  So it’s understandable why one should focus on this segment (along with chemicals and industrial) but Automotive is generally ignored.

During the conference call analysts asked multiple questions about Energy with not much positive outlook coming from management.  Management stated that the automotive segment will grow in 2010 in the prepared remarks, but there was not much Q&A on the topic. I was curious where this growth will come from and did a bit of digging.  I was able to see where the 1% volume came from and feel comfortable with my analysis to put it out here.
 

Figure 2: Revenue/Volume	Figure 3: Automotive Segment
source: UNP Q4 presentation

Historically, Automotive has accounted for about 10% of UNP’s revenue, but during the latest recession it has trended down to 6%, with 79% of it coming from Finished Vehicles (automotive assembly plants).  As of 2009 there are five assembly plants remaining (six were stated by UNP in the Q3 conference call) which are Fremont Nummi,  GM Arlington, GM Fairfax, GM Shrevport, and Chrysler (Mr.) Belvidere.  

As can be seen in the table below, there are some cars that are attractive and others that well…probably will be gone soon (Saturn, Hummer, and Corolla).

Plant	OEM	Products
Fremont Nummi	Toyota + GM	Pontiac Vibe, Toyota Matrix, Toyota Corolla
GM Arlington	GM	Chevy Suburban, Tahoe,
Belvidere	Chrysler	Jeep Patriot, Caliber, Compass
Fairfax	GM	Chevy Malibu, Saturn Aura
Shrevport	GM	Hummer

Table 1: Assembly Plants that UNP serves

In Q4 the 1% revenue increase came from Nummi, Toyota + GM joint venture, this plant made 25,082 more vehicles YoY and if you took this out (since Nummi will close in March 2010), revenue dropped by 11%.  So it’s fair to assume that there will be a drop coming in Q2, but two things bother me, one it this news does not seem to be priced into UNP.  With BNSF’s purchase, UNP and all the railroads popped and this was after Nummi’s closure was announced.  Recently, GM announced that Hummer will not be sold to a Chinese firm; rather it will be closing shop.  This has not been taken into account in my opinion, I mean 39% of UNP’s clients (on volume) are closing shop, for a segment that consists of (only) 6% of revenue this is material.  What will happen to the operating ratio in Q2 and beyond?

  


















Figure 4: Assembly Plant throughput as a % of UNP volume

Figure 5:  Plant production, last three years

Table 2:  Production forecast based on latest reports

When you look at the January sales, things are dire, but thanks to the Malibu and Saturn, sales are up for Fairfax Assembly.   Overall if you use 2009’s sales and forecast based on 2010’s run rate (SAAR) with the assumption that Hummer is gone, Nummi is gone (Corolla going to Ontario), you can see that Automotive will be down 22% for the year.  On top of the decline in Energy and Industrial, I feel that UNP is headed for some headwind in Q2 earnings. 

Next up will be my analysis of the other segments (other than Energy) to see if UNP is overvalued or not....

Disclosure:

non