For the summer schedule (May-Aug) system seat capacity ticked up ~5bp to +3.9% y/y. Domestic U.S. capacity growth was unchanged at +3.8% y/y, although UAL added back the ~25bp it cut last week. International capacity was unchanged at +4.9% y/y. We saw no network changes this week to suggest carriers are retaliating against UAL's new growth, at least on the capacity side (pricing much harder to gauge).
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We refresh our sensitivities file in this week’s note, extending the analysis out to 2019. The file is available on request and shows relative multiple, EBITDAx/cash flow, and financial leverage sensitivities across a range of commodity price inputs. We walk through a few examples of the file in action inside this note with the following general takeaways – Given the recent weakness in oil prices, names with relatively high financial leverage have been underperformers despite visibility on free cash flow and leverage reduction over the near / medium term. We think that this positions such names, especially those with monetization catalysts ahead (We highlight NBL and COP in particular) as potential beneficiaries – both from company level catalysts (divestiture of non-core assets) and from the seasonal inflection in crude oil demand…
With Republicans officially waving the white flag on ACA repeal, we expect stocks in the hospital and Medicaid MCO universe that benefited most from sustained coverage expansion to perform well this morning, with national MCOs likely underperforming as the market attempts to digest the increased probability of the health insurer fee returning in 2018 and what it means for earnings and membership growth next year. From here we expect investor focus to shift to potential changes to the individual market (more below), tax reform and Medicaid changes among others (more below). We will host a webcast this morning at 10am ET (slides attached to this note) to go over our early thoughts on both groups- invitation to follow shortly.
Republicans’ failure to get a healthcare bill through the House is a clear ‘shot across the bow’ of our bullish outlook. Importantly, ‘repeal and replacement’ of the Affordable Care Act has not been a core part of our bullish investment case. However, we now believe that GOP dysfunction places other ‘pro-growth’ measures at significant risk — the most important of which is tax reform. We are not turning outright bearish at this time, because global growth has positive momentum and the Washington policy situation is likely to remain very fluid. However, if it appears that tax reform is going to go the way of healthcare reform, we will have no choice but to downgrade our optimistic outlook for both the economy and equity markets.
Have to admit, a little surprised by Friday’s announcement that SLB (OP) and WFT (PP) will be forming a NAM onshore completions JV, named OneStim. We knew WFT was exploring a potential partnership; it’s that SLB has not historically been too keen on pressure pumping given such low barriers to entry. That said, we think SLB is really after WFT’s NAM multistage completion business, in particular their lower completions. However, we see this as a win-win for both, better positioning SLB to exploit its integrated completions model while WFT sells a non-core business for cash ($535mm) and also receives a sizable equity stake (30% in OneStim) in a much better positioned NAM completions company than what WFT could replicate. Big Red (HAL [OP]) has some competition at the top now.
The Texas PUC will hold its first open meeting to discuss the NEE/Oncor acquisition this Thursday. Ahead of that, we expect commissioner memos early this week that could address their initial views on the deal including concerns and conditions. The Texas PUC decision process must be done in open so it can be volatile and worth watching. One more open meeting is scheduled for 4/13 and a final order is due 4/28.
Our WR Transport Index fell another 3% last week and is now flat YTD. Transport stocks have underperformed the S&P 500 for 6 weeks in a row, and just 5 of the 30 freight transport stocks we cover are outperforming the S&P 500 YTD. Last week, the TLs (-6%) and the LTLs (-5%) underperformed the most, while the more defensive non-asset Forwarders (-1.5%) were relatively best. So we’re in a clear risk-off period for transport stocks right now. The question is… what’s changed this year after transports outperformed so materially last year?
Our research suggests that Kroger has significantly increased its promotional stance in a number of markets, including both Atlanta and SoCal, but also likely in some Midwestern markets. Kroger appears to be hitting back hard at competitors after posting its first negative comp in 4Q17 in more than a decade. Indeed, with Wal-Mart having moved its price lowering activities into the Midwest at the start of the year and with WMT and ALDI competing aggressively for traffic with very sharp prices on staples items, Kroger, in our opinion, was left with little choice but to go loco. While we applaud the return of the Kroger we know and love, a company that grew market share for years by being uncompromising on price while out-executing competitors on in-store experience, it appears we have entered a new phase of the grocery price wars as major competitors to WMT fight back. WMT, in our opinion, will be unrelenting in its efforts to get prices down, however, as it sees opportunity to gain significant share from weaker traditional competitors and fights what we believe it views are existential threats from the hard discounters ALDI and Lidl, as well as from Amazon.
As always there is good stuff in the Sunday Sankey, a chart of the week comparing long versus short lateral economics in the Permian; updated global crude supply-demand balance; seven fresh energy-related article links for weekend reading; a new book recommendation from Silvio; outlook for the Week Ahead, a review of the Week Behind; and the dozens of informative charts on the oil and gas market, industry and stocks.
In an effort to preserve market share, HAL is reactivating 2x prior budgeted HHP this yr, all starting up by mid-17. Further, 40% spot exposure to rapidly increasing spot frac sand prices and continued int’l sluggishness will negatively impact 1Q, resulting in low single-digit EPS vs WR/Cons of 12c/13c. On our mostly unchanged ‘18/’19 EBITDA estimates (see Exhibit 1), HAL is trading at 11.3x/9.0x vs FY1/FY2/NTM 10-yr average of 9.7x/7.7x/9.2x, not cheap (nothing in OFS is cheap) but still a 10% CAGR to our ’20 mid-cycle stock price of $70 (see Exhibit 3). Maintain OP but reducing PT to $56 (12x/8.5x our ‘18/’19 EBITDA), down from $62 on lower multiples as we are becoming increasingly concerned around US rig activity slowing in 2H17/’18.
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