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| IN THIS ISSUE – July 2, 2010 | www.bullmarket.com |
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Feature Article By BullMarket.com: Member Q&A: Encore Energy By BullMarket.com: Cisco Unveils New Tablet Device By NextInning.com: Member Q&A - QCOM and Android By BullMarket.com: A Look at Monsanto's FQ3 Results
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Member Q&A: Encore Energy A) Encore is an oil & gas producing MLP that primarily operates in the Big Horn Basin in Wyoming and Montana, the Williston Basin in North Dakota and Montana, the Permian Basin in West Texas and New Mexico, and the Arkoma Basin in Arkansas and Oklahoma. Approximately 69% of Encore's production is oil and 31% natural gas. The company had 43,047MBOE in reserves at the end of 2009. Oil reserves accounted for 67% of total proved reserves, and 92% of total proved reserves are developed. Encore is fairly well hedged, with 2011 oil production hedged at about 98% (based on Q1 production) and 73% for 2012. Natural gas, meanwhile, is 71% hedged for 2011 and 41% for 2012. Encore reported Q1 results in May, generating distributable cash flow of 27.9 million, up from 25.9 million a year ago. The company paid out a 50-cent distribution, with a coverage ratio of 1.22x. The company paid out the same distribution a year ago, but the coverage ratio was 1.54x due to less units outstanding. The payout was a drop sequentially from Q3 when it distributed 53.8 cents due to lower cash settlements on oil and natural gas commodity contracts. Production for the first quarter totaled 9,034 BOE per day as compared to 9,254 BOE per day in the fourth quarter of 2009. Going forward the company expects production to continue to be on a lower decline for the remainder of 2010. In March, Denbury Resources (DNR, $14.82, -0.83) acquired Encore's parent, Encore Acquisition, giving it a 46% stake in the MLP and its GP rights. At the end of April, Denbury said it was going to explore strategic alternatives for Encore. CEO Phil Rykhoek explained the decision in more detail on the Q1 conference call, saying: "As most of you saw late last week, we announced that we were reviewing strategic alternatives for ENP. We’ve received numerous inquiries about the implications of this pending sale on our future plans for ENP, and I’d like to address that briefly. As you also know, we recently announced Denbury’s entered into an agreement to sell most of the southern region assets that we acquired through Encore assets primarily in the Permian, mid-continent and East Texas. Several of these properties could have been potential dropdown candidates for ENP, given the nature of their reserves and production, but as a result of the sale they will no longer be available for dropdowns assuming the sale closes as expected." "Furthermore, most of Denbury’s remaining assets require significant capital expenditures in order to recognize their potential value and therefore would not be appropriate properties to drop down to ENP given – and given the nature of our focused EOR strategy, it’s unlikely we would acquire properties that are appropriate dropdown candidates in the future. So from Denbury’s point of view, we want to explore growth strategies for the ENP other than a traditional series of dropdowns from MLP’s general partner." "In light of these considerations, we intend to explore a broad range of strategic alternatives to enhance the value of ENP units including but not limited to, those involving a sale or merger of ENP or of Denbury’s interest in the general partner. Quite simply that means we could possibly merge ENP with another MLP or we may sell the general partner interest of ENP to another entity. But in either case the goal would be to do a deal with someone that will continue to manage and grow ENP, and we will attempt to structure any possible transaction such that it is not dilutive to cash flow per unit or asset value per unit." "One other thing we’d like to accomplish in the strategic review is to find a way to recognize the potential value of CO2 tertiary projects that are in ENP, the biggest of which is Elk Basin Field. I think we’d all agree it is not practical to do an EOR flood within an MLP due to the substantial capital investment required for a tertiary flood. So Denbury is reviewing alternative structures or transactions which could be pursued by ENP, Denbury, or a combination to allow development of this field, again, the focus being without diluting the value of ENP’s units or reducing ENP’s distributions per unit. Of course there is no assurance that a review of strategic alternatives will result in the completion of any transaction." BMR Take: The sale of Encore's parent to Denbury and its subsequent sale of the southern region assets it acquired is a clear negative for Encore, as the MLP's growth strategy largely revolved around purchasing drop-downs from its parent. In fact, before Denbury entered the picture, Encore would tout at investor conferences how growing by drop-down acquisitions was superior to drilling. This avenue is no longer available. However, the company is pretty well hedged, the balance sheet is in decent shape, the stock is trading at a higher yield than its peers, and it’s a potential acquisition candidate. It wouldn't be our first choice in the E&P MLP space, but it has its merits for slightly more aggressive income-oriented investors. As for the Conflicts Committee, it was just created to represent the interests of Encore unitholders because Denbury is looking at strategic alternatives for Encore. Since Encore and Denbury share the same management team and their interest lies with Denbury first and foremost, it makes sense for Encore unitholders to have an outside advisor on any sale or other strategic move that is made.
Cisco Unveils New Tablet Device The tablet has been designed specifically for video-based collaboration applications such as high-definition video and videoconferencing. It weighs only 1.15 pounds, has a 7 inch screen, two cameras -- a front-mounted 720p HD camera and a 5-megapixel rear-facing camera -- and is WiFi-enabled. SVP for Voice Technology, Barry O'Sullivan, meanwhile, told Forbes that Cisco is working with virtualization providers to equip the device with virtual desktop software that would allow users to put the Cius into a dock with a landline handset so that it could be used as a traditional computer. Cisco has not yet set a price for the Cius, but said it would cost less than $1,000. BMR Take: Unlike Apple's (AAPL, $251.53, -4.64) iPad, which is mostly targeted at consumers, the Cius is clearly aimed at the enterprise market (although we're sure that Apple would love to get a toehold in the enterprise market as well). The Cius is more than just selling a new device, though, as it plays into some strengths of the company's core businesses of business collaboration tools, video, and networking. In other words, if the Cius proves to be a success, it will also help drive growth elsewhere at the company. That said, we don't necessarily think Cisco has to be a big winner on the device side (note the company has had some success in this area with the popular consumer-focused Flip video recorder). As long as new tech gadgets continue to advance the use of data and video usage, the company will continue to have a ton of opportunities on the infrastructure end. We continue to rate the stock a "Buy," and think it is undervalued.
Member Q&A - QCOM and Android A) I checked what I posted yesterday and I don't think it implied that QCOM's Snapdragon was not well-suited for the Android operating system. Snapdragon works just fine with the Android operating system and has been the processor of choice for most Android smartphones. However, the single core 1.0Ghz Snapdragon would offer less than stellar performance in a tablet environment (particularly when it comes to embedded video support)and probably wouldn't match up well against the new Apple (AAPL) A4 processor. My thinking here is Lenovo decided it would be better off running with Android, which is rapidly becoming an industry standard, than its own proprietary operating system. I think there is also a pretty fair chance that Android is a bit more processor intensive than the Lenovo developed operating system and would, therefore, tax the potential performance of the single core 1.0Ghz Snapdragon. Based on what I've read since we published that post, it appears that Lenovo will wait for the new dual-core Snapdragon processors that will run at 1.5Ghz (may have to introduce using the 1.2Ghz chip until the 1.5Ghz version is available). However, given the delays we've seen from QCOM for those processors, I don't think we should consider it to be an absolute lock until Lenovo states its intent. This is why I included the statement that "I don't want to fully discount the possibility that it [Marvell (MRVL)] may find its way into Lenovo Android based designs at some point in time." This is not to suggest the odds of MRVL displacing the Snapdragon in the noted applications are high - I think the odds are very low. However, as we move forward, I think MRVL will be a robust competitor in the tablet sector and may "find its way into Lenovo Android based designs at some point in time." The short story here is the Android computing market will be served by a number of processor companies and while I think QCOM will be one of the larger players, I think MRVL will be very aggressive and one of the top-three players in the sector. Disclosure: At the time of this publication, out of the companies discussed herein, Paul McWilliams had long positions in AAPL, MRVL, and QCOM. In addition to these, he also had a short position in QCOM January $42.50 calls.
A Look at Monsanto's FQ3 Results For the quarter ended May 31st, the company earned $384 million, or 70 cents per share, down -45% from $694 million, or $1.25 per share, a year ago. Excluding restructuring charges, adjusted EPS was 81 cents, just ahead of downwardly revised estimates of 80 cents. Revenue fell -6% to $2.96 billion, coming in below the consensus of $3.17 billion. Sales of seeds and genomics rose 6% to $2.36 billion, driven by a 26% jump in cotton seed sales. The Agricultural Productivity segment, which includes RoundUp, saw sales tumble -34% to $600 million. RoundUp sales dropped -56% to $269 million. Looking at some other measures, gross margins dropped to 46.8% from 58.0%. Seed gross margins were 59.5%. Free cash flow through the first nine months of its fiscal year is a use of cash of -$1.15 billion compared to a use of -$145 million last year. Looking forward, the company said it expects full-year free cash flow of $400-$500 million. Adjusted EPS is expected to come in between $2.15 to $2.41. On the conference call, CEO Hugh Grant defended RoundUp, saying: "A lot’s been written lately about the pending demise of Roundup as an effective herbicide and what that in turn means for a biotech franchise. I can tell you that’s misplaced and, if anything, there’s a new practical opportunity emerging. Basically, we’ve built Roundup as the centerpiece of simple, affordable weed control. And the process that creates the incentive for farmers to proactively get ahead of weed resistance broadly rather than reacting once resistance has become an issue. … Part of the reason that resistance has been delayed in cotton is because of the widespread use of multiple herbicides as a part of the standard regimen. As we move forward on our Roundup positioning this is exactly the practice that we will build on. We will wrap other active ingredients around Roundup to create a complete weed control system. With Roundup coming down in price and with the ability to pair that with effective generics that means that for less than what you’re paying for weed control today a farmer gets a total weed control package that actually fights against weed resistance before it’s ever an issue. That simple, cost effective weed control program then sets the stage as we transition into multiple modes of action via our next generation biotech traits." BMR Take: We continue to believe Monsanto is a "show me" stock, and nothing this quarter changed that. With RoundUp revenue and margins shrinking and farmers pushing back on seed price increases, Monsanto isn't expected to show the growth once promised. Throw in anti-trust investigations, and we think the company only deserves a 13x multiple, 15x tops given its new growth outlook. That would be a $40-$46 target based on next year's analyst consensus, which looks a little high to boot. We'd continue to avoid the stock.
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