Seadrill and Subsea7 face steep revenue losses as the Brazilian oil group tightens its belt.

By Paul Whitfield

Brazilian oil giant Petrobras SA (PBR)   is cutting back again. The company said on Tuesday it will reduce capital spending by 25% to $74 billion over five years, delivering its leanest budget in a decade as it seeks to reduce a $124 billion debt pile that is the biggest in the oil sector.

That's bad news for providers of rigs and pipeline vessels operating in Brazil's predominantly offshore fields, and potentially none more than Seadrill Ltd. (SDRL), the London-headquartered drilling contractor that made 20% of its revenue  from Petrobras' contracts last year.

Seadrill shares closed Tuesday at $2.04, down $0.07, or 3.3% on their Monday close. Petrobras headed in the opposite direction, with its shares ending Tuesday up 1% at 15.05 reais ($4.62).

Not all of Petrobras' savings will come out of exploration and production spending. Petrobras' new CEO, Pedro Parente, said on Tuesday he hopes to sell $19.5 billion of assets between 2017 and 2018, adding to the $15.1 billion already earmarked for sale during 2015 and 2016. As assets are sold, costs will be moved off the books.

Meanwhile, Petrobras' central role in a corruption scandal that has engulfed the Brazilian government may have cost the company as much as $13 billion in graft payments, a Federal prosecutor said last week.

Yet Petrobras has its eyes on reducing capital expenditure, as evidenced by an ambitious target to reduce its cost per barrel of production. The company said Tuesday it expects to be producing 2.8 million barrels per day of oil equivalent by 2021, up from the current level of close to 2.1 million barrels, despite its reduced budget.

Those sorts of "productivity gains (are) broadly negative for Brazilian exposed European oil services, as Petrobras will need fewer rigs and PLSVs (pipelay support vessels) for the same production profile," Goldman Sachs noted on Wednesday. "Seadrill and Subsea7 (are) most exposed."

Of those two companies Seadrill has the most to lose. The company booked 19% of its revenue with Petrobras in 2015, or $877 million of a total $4.34 billion. Subsea 7 ASA  made $263 million of its total $4.76 billion of revenue for 2015 in Brazil, which ranks No. 7 in terms of revenues by region at the company.

Both companies have already suffered at the hands of Petrobras' cost saving drive. In June Petrobras terminated a contract with the Subsea 7-owned Seven Mar, a PLSV, wiping out $47 million of backlog contracts.

In March the Brazilian group terminated a contract with the Sevan Driller and cut the day rate on another vessel, the Sevan Brasil, from $391,000 a day to $250,000. The operator of those vessels, Sevan Drilling ASA, is 50.1% owned by Seadrill.

There appears little that either contractor can do to avoid pain if Petrobras decides to target their contracts. About 120 rigs remain mothballed, or cold stacked to use the industry parlance, around the world, a floating testament to the massive oversupply that has left them exposed.

New Post has been published on http://freetraderchat.com/blog/swing-trade-watchlist-3-6-2016/

Swing Trade Watchlist - 3-6-2016

Below are the stocks we went over tonight in the weekly Sunday Night Swing Trader Chat. I’ll be watching these stocks throughout the week for a long entry. If the price breaks down the stock will be removed from watch.

My Stock picks for upcoming week

Symbol Company Start Date Start Price Current Price $ Change % Change

TackleBerry Picks

Symbol Company Start Date Start Price Current Price $ Change % Change

The start date represents when the stock was added to the watch list. Start price is where the stock closed last Friday.

Image Source: US Embassy

By Brian Nelson, CFA 

@ValuentumBrian

From January 15, 2016, the intro to the January edition of Valuentum’s Best Ideas Newsletter. Make sure you receive the February edition by subscribing here.

"Any man who may be asked in this century what he did to make his life worthwhile, I think, can respond with a good deal of pride and satisfaction: 'I served in the United States Navy.'" - John F. Kennedy

I felt inspired. Maybe it was President Barack Obama’s reference to a new “war on cancer” in the State of the Union speech, akin to that of John F. Kennedy’s mission to “go to the moon,” or maybe it was something else, but I was reminded of the great Jack Kennedy and the second quote above: what a man does to make his life worthwhile.

If I were asked what I did to make my life worthwhile, part of that answer would include founding this “beacon for good” called Valuentum. If you look at what we’ve done in the short time we’ve been in existence, it is with a tremendous deal of pride and satisfaction that I can say we must have saved investors of all types billions and billions of dollars. I get an email almost every week along the lines of: “thanks for warning about SeaDrill (SDRL),” or “thanks for the unerring call on Kinder Morgan (KMI),” or “nice call on the MLPs (AMLP, AMZ).”

We’ve saved good people, good money.

I don’t think people know the story of Valuentum, but we’re the underdog; we’re the longshot. You know we don’t get a cut of your assets every month; you know we don’t get a commission when you buy or sell something, and you know exactly how much you pay our team for all the work we do. One of our members recently chuckled, “how do you make any money when you charge so little?” The reality is that I can’t see a scenario where someone couldn’t find value in our service. Whether you’re an advisor or an individual or a fund manager, having Valuentum’s newsletters and fair value estimates as a resource should be an absolute no-brainer.

I fear at times the Chartered Financial Analyst (CFA) designation may be losing some of its awareness among mom-and-pop investors. Believe it or not, the financials industry is the only one where you don’t need a specific designation to sign off on managing money for others – anyone can legally do it. Yet, you need a CPA to audit financials; you need an MD to practice medicine; you need a JD to practice law. You even need a driver’s license to legally drive a car! Yet, anyone can manage anyone else’s money. It puzzles me, but it also explains why there’s so much “stuff” out there (putting it politely).

Nowadays, there are even content “farms” that allow anonymous authors to write about companies they own…boy how far we have come since the Global Analyst Settlement that paved the way for independent research. Some may now even believe that it is a “good thing” for a writer to have “skin in the game.” My goodness, do they really think a “biased” author is going to be honest if something is truly wrong with the company before they get out first? Personally, if someone holds the charter, I’d give them a couple years to feel out their work. If they have the charter and have made the calls that we have, I’d say stick with them for a lifetime. We’ve done some pretty incredible things.

Last month marked a doubling of the Best Ideas Newsletter portfolio since its inception. The news came and went without much fanfare, but it was a rather big deal for our flagship product. We continue to make progress toward the goals of both newsletter portfolios. We cover over a thousand companies, but I think readers continue to keep a close eye on our work on MLPs. We keep saying that ship has sailed; after all, we’ve been warning about the group since the peak, even before Barron’s picked up our first bearish piece in mid-June. I still get readers telling me how wrong we were since Energy Transfer Equity (ETE) went from $8 to $10 to $12…(now it’s at ~$5!). Do they know we’ve been warning about this business model since ETE was $35? Remember when we warned about Kinder Morgan (KMI) at $40?

Sometimes it’s really hard to find a way to help people, but I won’t stop trying, which brings me this next rudimentary point. Since the March 2009 panic bottom in the markets, the S&P 500 has effectively tripled. In many ways, even a modest downdraft of 10%-20% in 2016 can be expected. This could pose a headwind for newsletter portfolio constituents. If investors move broadly out of equities, the nature of index funds and index ETFs almost guarantees pressure on the individual securities they hold. From my buyside days, it’s commonly known that roughly 30% of a stock’s return comes from the overall market, 40% from its industry, and 30% from individual characteristics, give or take. With the proliferation of indexing in recent years, broader market returns have probably only become more important to individual stock returns. This is reality.

With all of that out of the way, this (January) newsletter edition is one of my favorites. We’ve written up an updated take on the auto industry, and we’re taking a close look at Ford (F) and GM (GM) for addition to the Best Ideas Newsletter portfolio. Obviously, you know we’ve moved out of shares of Alibaba (BABA) and Rio Tinto (RIO) in the Best Ideas Newsletter portfolio, but we also talk about our wanting to scoop up Chipotle (CMG). To wrap things up, there are a couple well-traveled pieces about our definition of timeliness and how we think about forecasting, both in valuation and with respect to the dividend. I hope you enjoy! To access the January edition >>

The February edition of the Best Ideas Newsletter will be released February 15. Subscribe here to make sure it lands in your inbox.

Pipelines - Oil & Gas: BPL, BWP, DPM, ENB, EPD, ETP, EVEP, HEP, KMI, MMP, NS, PAA, SE, SEP, WES 

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Now that everyone else was wrong, what now? We think the new “sophisticated financing mechanism” is the firm’s very own revolving credit facility.

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“Buy and hold investing has done more to turn perfectly decent people into the worst sort.”

As others are poo-pooing Kinder Morgan’s (KMI) third-quarter report, we wanted to share a few observations. Our $29 per share fair value estimate for the corporate is unchanged, as we note the low end of our fair value range is $23 per share. We’re reiterating our “neutral” view on the company.

First, we were beyond pleased to see Executive Chairman Richard Kinder come to terms with emphasizing the fact that Kinder Morgan is not totally immune to commodity price impacts. He said as much in the press release. Though top analysts on Wall Street are well-aware of this (or they should be), there are thousands, if not more, investors--some even portfolio managers (managing billions?)--that may not be aware of this. We simply applaud the executive team’s step toward “straight talk,” and we hope that this will extend in the future to disclosing widely-accepted measures of non-GAAP free cash flow, as defined as cash flow from operations less all capital expenditures.

Rewards in the form of higher share price may not happen anytime soon, however.

For those that need a background on our efforts to help the investor avoid the collapse in Kinder Morgan’s shares (from $40), please view our work here, here, here, here, here, here. You might say, “big deal, right? These days, everyone and their mother can publish on an idea. Well, this one was different--something like 80%-90% of sell-side analysts had a “buy rating” on the stock. Many had price targets close to twice today’s levels. The cult of “buy and bash everyone else” investors on other websites may be far greater with Kinder Morgan than any other equity. Kinder Morgan has been traditionally viewed as “immune” to commodity price changes, and we had to move mountains to redefine how investors should be looking at the midstream entity. It was as bold a call as it gets, like no other I’ve ever seen in my career. Some are still in denial.

But why was it a great call?

First, because all of the facets of our thesis that were outlined in the June 11 “5 Reasons” piece remain valid: The Valuation Paradigm Has Changed (it has), Kinder Morgan’s Dividend Growth Endeavors Will Disappoint (they have), The Company’s Net Debt Load is $40+ Billion (it’s still growing), The Company Is Trading at 40+ Forward Earnings (it’s even worse), and the Natural Reactions from Shareholders Will Be Skepticism and Disbelief (yes). That the last part was true probably rubbed most every skeptic the wrong way, but what are we supposed to do? They may still be in disbelief. Should we have followed the herd and set a $50+ price target like most everyone else? Should we not have outlined what we really thought was going to happen? These things go against everything we stand for as an independent research firm. We’re not selling newspapers or looking to generate trading commissions or help the firm raise more capital. We’re genuinely trying to help people, many of which “already know everything,” unfortunately.

I remember the name-calling toward us when we first went public on our views, the lady that said “bozo”, the gentleman that said “moron,” and some even worse—it’s simply horrible out there. Buy and hold investing has done more to turn perfectly decent people into the worst sort. Let’s end the “buy and hold” client brainwashing, please. Personally, I think it’s a shame that people on the Internet can’t take back the hurtful things they say after the fact when they finally “see the light,” or at least acknowledge that they might be wrong. It’s exhausting. It happed to us with the mortgage REITs here, it happened with our August 30, 2012 piece regarding SeaDrill (SDRL), “We Don’t Think SeaDrill’s Dividend Is Sustainable,” and now it’s happened with Kinder Morgan. My goodness, when will readers start saying, “we know what we’re talking about.” Never mind the significant risk-adjusted outperformance in the Valuentum newsletter portfolios.

We won’t parade around saying that comment sections on websites are completely useless, but their usefulness is close to nil. The proliferation of online abuse has simply gotten out of control, and it is getting worse. For one, the abuse that is happening on Twitter (TWTR) may completely destroy the company’s business model, if not checked. When will we as a society realize that it is not Twitter that is the problem, it is society. If you’re one of those abusers, better known as an ‘Internet troll,’ stop it! Stop it now!

Personally, we have thick skins (sometimes)—you have to in this business—and we know that in the words of Taylor Swift, “people only throw rocks at things that shine,” or maybe the better line is “shake it off,” (yeah, we just quoted Taylor Swift, not once but twice), but the comments on other websites can also confuse and harm readers. It is simply frightening what readers can be led on to believe. It’s downright scary the conclusions that some arrive at. Are they purposely trying to deceive?

Kinder Morgan’s third-quarter report spoke a lot about the character of management, and we think they are working toward the right answer. I think the team sees some of the issues related to their overleveraged business model that generates a deficit in free cash flow, as measured by cash flow from operations less all capital spending, after dividends paid. I think they recognize how external financing initiatives are supporting the dividend, and they are looking to change that.

After all, it should not come as a surprise to readers that management’s planned pausing of equity share issuance has been accompanied with an expected slowing of dividend growth. Kinder Morgan now expects 8% dividend growth in 2016 (6%-10%) from expectations of 10% previously. We’ve been talking about how external capital-market issuance has been fueling the dividend for some time—this very idea was included in our “5 More Reasons” piece (yes, 5 More). We had pounded the table.

We like that management is doing all that it can to meet the needs of its income-investor base, but those same investors are driving it to the brink of disaster. I don’t think those investors give a darn about earnings or free cash flow or the health of the balance sheet – all they care about is that dividend, and not even if it is organic or financially-engineered. We think management knows it’s going to be near-impossible to meet its 10% compound annual dividend growth target for the next 5 years without external capital assistance, and frankly we don’t know what they should say to their investor base. In many cases, the executive team has made the right move: stay near-term focused, and hope (pray?) that commodity prices will rebound in time?

We wish we could go back in time and say, “you might be overpromising and end up under-delivering” with your 5-year dividend growth outlook, but the team at the time had to jump ship in a hurry from the sticky MLP situation, which itself was even worse. The company ended up paying far too much for its own MLP assets at the time, something we had outlined in our “5 Reasons” piece as well. It’s probably worth noting that we’re reiterating our view that the MLP (AMLP) business model may not survive over the long haul. Energy Transfer (ETE) very well may have overpaid for Williams (WMB), too.

Go ahead: tell us how we’ll be wrong again, how weak our analysis is...how we don’t “get it." The future starting today, one of a near-0% federal funds rate is far different than the future of yesterday, one that started with a 20% federal funds rate in 1980, for example. Today’s future will be much different than the past, and MLPs are ultra-interest-rate sensitive, perhaps more so than any other product. The long term is the enemy of the MLP, not its friend. The time of near-zero interest rate policy (ZIRP) will be looked back upon as the peak of MLP exuberance, in our view. Why don’t long-term investors see the very real hazards of the long term that they hold so dear?

Kinder Morgan’s third quarter net income before certain items dropped to $348 million from $537 million in the prior-year period. The firm generated less than $400 million in net income during the quarter, and its market capitalization is nearly $65 billion. Management continues to present its performance as an MLP, even though it is a corporate, pointing to internally-derived measures of “cash flow,” but we maintain our view that non-GAAP free cash flow, as measured by cash flow from operations less all capital spending, is the best measure to present to investors regarding internal free cash flow generation. We continue to believe “distributable cash flow” is misleading in that it ignores growth capital spending that is vital to net income, which itself is a component of “distributable cash flow.” “Distributable cash flow” is an imbalanced metric, and we think management teams across the midstream space should add the widely-accepted form of non-GAAP free cash flow to disclosures.

We’re awaiting the release of Kinder Morgan’s 10-Q to better evaluate cash flow trends, but based on a proxy for cash flow from operations, net income + D&A, cash flow from operations approximated $1.05 billion in the period, and if we assume that management spent one-fourth of its annual capital expenditure-budget in the third quarter, that would indicate about $875 million in total capex, translating into about $175 million in free cash flow generated in the quarter. This measure compares to ~$1.1 billion in dividends paid, revealing nearly a $1 billion free cash flow shortfall in the period. In the quarter, the company raised $1.275 billion in new equity, “under its at-the-market equity distribution program,” conveniently covering the shortfall. Through the first nine months of the year, Kinder Morgan has raised $3.884 billion in equity, almost enough to cover expected dividend obligations of $4.4 billion for the year.

We’re awaiting the 10-Q for more polished numbers, and we encourage investors to compare total debt in the press release to the SEC filing when it comes, but at the moment, net debt, or debt net of cash, stood at $42.5 billion at the end of the third quarter, 5.8 times that of adjusted EBITDA. We’re paying very close attention to net-debt-reported-EBITDA, which may be approaching 7-8 times, something the credit agencies can’t possibly still be ignoring. That management plans to pause equity issuance means that it may have to rely even heavier on more sophisticated financing, or quite the contrary, it may have to rely heavier on debt issuance. We would expect Moody’s and S&P to eventually place Kinder Morgan under a review for a credit downgrade to junk status. It’s possible that this conversation might have already happened, prompting the reduction in the expected pace of dividend growth. Kinder Morgan is “junk rated” across almost every key metric.

Source: Moody’s Financial Metrics™ Key Ratios by Rating and Industry for Global Non-Financial Corporations, December 2007, Kinder Morgan regulatory filings

Our guess is the “alternative means to fund its growth capital” that management is talking about is its revolving credit facility, a savvy consideration as borrowing bases are being cut back. Linn Energy (LINE) just noted a cut to its borrowing base, and while lenders haven’t taken a full axe to them, something that might not happen until early 2016, we think Kinder Morgan has taken notice. In some ways, it may serve the company well to “max” out its revolver so banks cannot take it away. But this isn’t good either.

The credit rating agencies have to be taking note of this possibility. If we assume a generous 10% discount rate on a stand-still $4.4 billion annual dividend obligation, that’s a present value of $44 billion in cash, debt-like obligations to add to the $42.5 billion tangible total net debt the company has. Kinder Morgan generated less than $400 million in reported net income in the period against an implied debt load of ~$87 billion! This is not an investment grade company, in our view. We fear bond holders may be hurt the most out of all of this as reality sets in that either they’re not getting their money back or the equity investors aren’t getting a dividend. Both sets of stakeholders can’t have it their way.

Kinder Morgan also outlined the distinct possibility that it will run at negative “distributable cash flow” coverage relative to the dividend in coming periods. This is not free cash flow, as measured by cash flow from operations less all capex. What management is talking about is its own internal measure of “cash flow” that completely ignores cash outlays related to growth capital spending. We wrote extensively about the application of financial-engineering to prop up an artificial dividend in the energy sector in the following piece, “Understanding Your MLPs Financially-Engineered Equity Value.” Kinder Morgan is a corporate that wants to still be an MLP. The company will be a significant federal tax payer in 2020. Surely the Street is reducing estimates by the statutory rate at that time, right?

To our question of the title, “no.” We have very little interest in Kinder Morgan’s shares, and we point to free-cash-flow rich and net-cash-rich companies such as Apple (AAPL) and Microsoft (MSFT) for long-term dividend health. Overleveraged companies that have cut their dividend outlooks just don't make the cut.

Image Source: Samle

Corrections performed November 2, 2015.

The S&P 500 index closed up 0.64% yesterday, the largest one-day percentage gain since Oct. 31st.  Interestingly for an up day, the CBOE composite put/call ratio closed at 1.13, its highest level since Oct. 22nd.

1.  VIX – The put/call ratio for the VIX closed at 1.67, its highest level in more than a year.  The main driver for the skewed ratio was the large buying in the Dec 12.5 put line, which was bought 100k times for 0.13 in the morning, and traded over 180k at an average price of 0.12.  The last VIX settlement below 12.50 was in August.  VIX settlement has been between 11 and 16 in every month in 2014 (see the CBOE site for all VIX settlement values).

2.  PBR – Petrobras made a new 10 year closing low.  Despite the weakness, there was one large put seller, selling 50k of the July 8 puts at 0.83 to open.  PBR has not traded below $8 since 2004.

3.  BWP – Trader rolled a call position, selling 83k of the Jan15 17.5 calls at 0.50 to buy 86k of the March 17 calls for 1.60 to open.  BWP is still down 35% year-to-date after unexpectedly cutting its distribution in February.

4.  SDRL – Seadrill has declined for each of the past 6 trading sessions, and is down nearly 40% in that period.  Offshore drilling is one of the worst performing sectors globally in 2014.  Bullish risk reversal traded in the afternoon, however, with the trader selling around 32k of the Jan15 11 puts at 0.25 to buy around 28k of the Jan15 17 calls for 0.25, both to open.

5.  SPLS – Buyer of 15k of the June 13 calls for 1.75 midday.  The break-even on that trade is $14.75.  SPLS last traded above that level in January 2014.  The stock has traded between $10.57 and $17.30 since May 2011.