This morning (11/13/18), BHGE and GE announced a series of long-term agreements that amended the commercial and technological relationship between the two companies. Perhaps most importantly, the agreement removed the lockup that restricted GE from selling BHGE shares before 2019, a move that portends an accelerated GE exit from BHGE with 1) GE initiating a secondary offering of a portion of its Class A shares, and 2) BHGE initiating a repurchase of Class B GE shares. A fully-underwritten Class A allotment and concurrent BHGE repurchase of $1.5B Class B/LLC units would reduce GE’s ownership interest in BHGE to ~50.4% (from 62.5%). The net impact equates to an approximate 6% reduction in BHGE share count.
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This morning (11/13/2018), AAP reported Q3 SSS of 4.6% vs Cons. of 2.5%/our 2.0%. Adj. EPS of $1.89 beat Cons. of $1.76/our $1.68. EBIT margins of 8.5% beat Cons. 8.3% and our 8.0%. AAP raised FY comps and FCF by 30%. AAP was +11% vs S&P +0%.
It was a short but timely visit to Dallas on Monday (11/12/2018) where we met with PXD following a strong quarter that delivered a bit of a message. We discussed plenty of what’s in focus near-term, but key from our meeting was a sense that there will be long-term structural winners as the Permian moves into development mode and PXD is one of them.
NEXT is developing the Rio Grande LNG (RGLNG) and Rio Bravo Pipeline (RBPL) projects, as well as earlier stage concepts elsewhere in the US and overseas. RGLNG would be in Brownsville, TX and, at its full scope, would produce up to 27MM tons per annum of LNG, fed by the 4.5 bcf/d RBPL. Brownsville offers significant geographical advantages for potential LNG operators, but we see limited upside in NEXT shares for the initial Phase 1 FID of the project (9MM tpa), which is behind original schedule due to numerous factors. Our YE19 target price is $5.50, which implies less upside than development LNG peers and guides our rating.
We believe TELL’s Driftwood project is promising and the company will deliver milestones over the next 12 months, however uncertain timing and a wide risk/reward paradigm drive our Peer Perform rating. Between potential catalysts of FERC approval, offtake contracts, upstream acquisitions, and Driftwood equity agreements, the former is likely the nearest term, but everything is likely to be a post YE18 timeframe. Ultimate upside is unique in not just the development LNG space but all of energy, and we believe this is story investors should be focused on.
Investors have been waiting for the GLNG to blossom for a long time. With BP a significant upgrade in counterparty quality for the Tortue project, and the LNG shipping market finally supporting a potential spinoff of the segment, we believe the bloom is near. The FLNG segment in particular has experienced a few false starts, but fundamentals of the space have always been strong enough to support the growth ambition, and with the stock still well off its highs we believe GLNG shares remain positioned for upside re-rating. Our initial YE19 $35 price target only accounts for one FLNG unit at Tortue even though the project could ultimately support 2, while Golar Power is underappreciated, and a potential shipping segment spin can absorb more than half the current debt load.
We are initiating coverage of the Development LNG sector – GLNG (OP), TELL (PP), and NEXT (UP) – with a Market Weight sector weighting. We believe the long-term supply/demand fundamentals for liquefied natural gas support a robust generation of development projects and startups, and business models in the public space are diverse enough to cater to multiple investor preferences (leverage, geography, commercial model). However, the industry is hyper-competitive and inhabited by well financed Integrated Oil giants, and so progress in the development space is likely to be slower than hoped a year ago. Additionally, the US/China trade war has been bad for the industry, and a clean relationship between the US and China – the world’s largest center of LNG demand growth – is necessary for the space to function.
Once a quarter, we comb through corporate filings and summarize the most noteworthy datapoints. At a high level, developments during the quarter reinforced our view that investors should be Underweight Autos and Auto Parts, Underweight Dealers, and Overweight a relatively small selection of companies that fall into the Auto 2.0 category. In our view the U.S. Auto Cycle is in its 8th or 9th inning, with looming pressures on vehicle affordability. China is experiencing its first real Auto Industry downturn, and we are not convinced that the Central Government will step in to specifically prop up Autos. Europe also faces a number of challenges: These include potential trade risks (7% of Europe produced vehicles are exported to the U.S.), political risks (Brexit), and regulatory risks (vehicles more expensive to produce, at the same time that pricing has become more challenged).
HFC has agreed to acquire specialty products maker Sonneborn for $655MM in an all cash transaction, including $72MM of working capital. Sonneborn produces a consistent annual EBITDA of $60-70MM, and HFC expects to extract $20MM of synergies over a 24-month period. The Sonneborn assets should consume $10MM of maintenance capex annually, also on a consistent basis. On 2019 estimates, which would not capture much of the synergy guidance due to timing, we see the acquisition as value-neutral on our FCF-yield based methodology and leave our price target unchanged.
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