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David Beard
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David E. Beard, CFA, is founder and CIO of Winterport Capital (www.winterportcapital.com). Winterport provids asset management services for individuals and institutions. Prior to founding Winterport, David co-managed a US equity focused long short hedge fund at portfolio at Morgens, Waterfall,... More
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  • BP “Where’s the Cash?”
    BP “Where’s the Cash?”
     
    Let’s start with some disclosures: I am not an oil analyst, nor do I follow British Petroleum (BP) all that closely and I do have a position in out of the money puts on BP common stock.
     
    Now maybe my position as a generalist enables me to take an unbiased look at BP’s financials, and they look pretty grim. However, my lack of detailed understanding of the company means I could miss something, most importantly 1. A rise in oil prices could dramatically boost BP’s cash flows*, 2. Sales of “hidden assets” (i.e. assets which are valuable but contribute to current EBITDA or cash flows)
     
    Summary and Conclusions:
    1.       Company cash flows is tight. For example, they borrowed to pay the 2009 dividend.
    2.       Post Spill analysis says company’s free cash flow is very low ($3b or about 30c/share)
    a.       This doesn’t support dividend resumptions any time soon
    b.       Low free cash flow could mean greater downside risk in the common stock
    3.       The CDS and bond markets seem to be much more worried about BP lack of free cash flow
    a.       The CDS market is pricing in a 30-50% chance of bankruptcy, where as the equity at $30-ish is NOT, in my opinion.
    b.       No wonder banks are asking for 10% coupons on new debt. Most likely they have done a much more detailed, through analysis yet have come to the same conclusions.
    4.       No wonder the Company is trying to raise $50b from new bank loans and asset sales. They need the CASH!
     
    Selected BP Financials:
                                                    Reported                                              
                                                    2009A
    Production                            3.95mmboe/d                                                                     
                                                    Up 4% y-y            
    Reserves                                18.0 MMboe
    Reserve Value                      Using $10/bbl reserve value
    assume $40b npv Spill costs
    NAV is about $40/share
    Finding   Costs                      $4/bbl
    Lifting Costs                          $7/bbl
     
    Memo: March Balance Sheet
    Cash                                                       $8.5b
    Debt                                                       $25.1b
    Net Debt                                                $16.6b
     
    POST SPILL ASSUMPTIONS:
    Oil Price                                 $70/bbl
     
    Revenues                              $300B
    EBITDA                                $35B
    CAPEX (net)                        $15B cut from current $19B
    Dividends                              no divi’s paid
    Cash Taxes                           ($7B)
    Cash Interest                        ($2B)
    Cash Acquisitions                --- no more acquisitions
     
    Post Spill
    Spill Costs                             ($8B) $2b/quarter no cap
     
    TRUE FREE CASH FLOW = +$3B
    EBITDA - CAPEX - Taxes – Interest – Acquisitions - Spill Costs = +$3B
     
    *A $10 Change in the Oil Price Assumption could contribute about $10b in free cash flow
     
     
    David E. Beard, CFA – Founder & CIO – Winterport Capital – dbeard@winterportcapital
     


    Disclosure: Long BP Puts
    Tags: BP, energy, oil spill
    Jun 21 11:55 AM | Link | Comment!
  • The Black Hole of Internet Advertising: John Wannamaker’s Question has been answered
    How many times have we heard “consumers spend 1/3 of their time on the internet but the internet captures only 10% of the advertising dollars? Just wait until the flood of traditional advertising dollars start to flow to on line companies. Everyone will make money.”
    Every year, $412B (yes Billion!) is spent on traditional advertising in the USA and an equal amount in the rest of the world, mainly in Europe.  However, these dollars have NOT moved one for one from the traditional print, TV, radio to internet advertising.  
    So why do dollars seemingly “disappear” down a Black Hole as we shift from traditional to on line advertising? The answer is that companies and consumers are choosing to pocket the increased efficiency of internet advertising instead of spending it on more advertising.
    This theory is based on two critical assumptions: First, the elasticity of demand relative to advertising dollars flattens out at some point. Second, we seem to have answered John Wannamaker’s age old question as to which half of his advertising was wasted.
    Our  investment conclusions imply that the advertising pie is not as big as we all think, thus incumbents such as GOOG will beat smaller players (VCLK) and old media (newspapers, TV). International markets however, might witness net new dollars flowing into on line advertising, as their traditional advertising industry was less developed to begin with.
    The first assumption rests on its simplicity. If you could sell more by simply advertising more, you would. Obviously there is a point of diminishing returns. The second assumption brings us back to the post Civil War era of John Wannamaker (1838 - 1922) of Philadelphia. He founded what is now considered the modern department store in the 1870’s based on the principle of “one price and goods returnable”.  He is also considered the father of modern advertising and is credited with this insightful statement. "Half the money I spend on advertising is wasted; the trouble is I don't know which half".
    Well, it took over 100 years and the help of the internet to answer that question. Google (GOOG) claims they can tell you exactly how your dollars are spent. Thus you know which “half” of your advertising budget is wasted. Thus advertisers are not spending money they believe is wasted and the pie shrinks during the move from traditional to internet advertising.
    This theory hit home a few weeks ago, as we held a massive yard sale. When the issue of advertising for the sale came up, we felt we had three choices, 1. Nailing up cardboard road signs, 2. Putting adds in the four local papers and 3. Placing an ad on Craig’s List. Without the internet, we would have put ads in all four papers. However, we chose to advertise in only two. Next, we put an ad on Craig’s List; however, we did not advertise “more” on Craig’s List just because it was free. One ad was enough.
    In fact, a senior executive at a Silicon Valley advertising company explained it like this. Let’s assume advertising dollars for classified ads in a local newspaper total $100,000 per year before Craig’s List enters the market. After Craig’s List enters the market, the newspaper and Craig’s List split $10,000 in total advertising revenue. That’s a 90% drop in advertising dollars in a market with presumably the same consumer satisfaction. By the way, our yard sale was a hit.


    Disclosure: As of the date and time of this posting, we had no positions long or short in any of the stocks mentioned in this article.
    Tags: GOOG, VCLK, WPO, NYT, internet advertising
    Jun 09 12:27 PM | Link | Comment!
  • Selected New Highs/Lows - The sign of a slow day

    HILO List

     

    This screen attempts to look at new highs and lows accompanied by significant volume increase, as it’s our belief that price and volume must work in concert to find the best buy and sell candidates.

     

    We collect facts and news on new highs in the Russell 1000 Index where volume is more than 40% over the 30 day average volume, the stock price is over $10/share and the company has a market capitalization of over $250mm. We exclude ETF’s. For the sake of time, sanity and manageability, we reserve the right to limit the list to 10-15 names; therefore we could exclude the lower market capitalization companies.

     

    This list is NOT a “buy” or “sell” recommendation.

     

    We think it’s a good place to start doing some research and we often find our best longs and shorts from this screen.

     

    Please feel free to contact me with any feedback.

    David E. Beard, CFA

    Founder and CIO

    Winterport Capital, LP

    646-352-3684

    dbeard@winterportcapital.com

     

    Selected New Highs: (3 out of 72)

    INAP – Internap - $6/share, $315mm market cap – This company seems to be transition its business from a declining IP services company to an data center service provider (think EQIX or a “telecom hotel”).  INAP has $1/share in net cash on the balance sheet, generated 41c/share in free cash flow last year and is now expanding it San Jose and Houston data centers.

    OEG – OGE Energy - $38/share, $3.7b cap – OGE operates over eight thousand miles of pipeline in the South Central USA, Oklahoma and western Arkansas. OGE sports a 4% yield and mid single digits growth rates. We’ve seen some insider buying and the company just reaffirmed current earnings guidance.

    PETM – Petsmart Inc - $31/share, $3.8b cap – The company operates 1,100 pet supply stores, selling 10,000 products in the US and Canada. . Reported and raised guidance last week. Same Store Sales turned positive at +1.5% and expenses have been well managed. Cash flow looks strong enough to pay a dividend and buy back stock as the store base is not growing.

    Selected New Lows: (0 out of 2)



    Disclosure: no positions at the time of posting
    Tags: INAP, PETM
    Mar 11 2:55 PM | Link | Comment!
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energy, Internet, internet advertising, oil spill
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