It was colder in Oklahoma than NYC last week, but you couldn’t tell that from inside Chesapeake Energy Arena where Westbrook and the Thunder were on fire en route to a blowout victory. This was the second stop on our corporate tour, heading to Tulsa and OKC post our Denver trip the previous week (link here), and we again came away encouraged that messaging to come on spending, returns, free cash flow, and portfolio management should be able to carry the positive momentum the group has had since late last year. Texas based producers, we’ll see you post earnings season. Company notes within and see our Midstream team’s note for WMB and ENBL takeaways.
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Scheduled system capacity from U.S. airlines in the Jan-Apr four-month period is unchanged w/w at +4.1% y/y. Domestic seat growth is still at +4.7% y/y and there were no material changes to international capacity, which is set to shrink -0.3% y/y. We aren’t really expecting schedules through April to shift much from this point and we’ll move forward to tracking the summer schedule (May-Aug) in the beginning of February. As schedules stand today, summer domestic seat capacity is +4.5% y/y with ASMs +5.3% y/y. While we’re not focusing on the summer period yet, we note it appears UAL added a good amount of capacity in May (+1.7pp y/y), as well as Jun-Aug (+1.0pp y/y). UAL’s seat growth for May-Aug is now +3.4% y/y, up from +2.3% y/y last week. But SAVE made the most changes in the current period (Jan-Apr), taking seats down in April and, to a greater extent, in May.
Excluding Venezuela write-down ($385mm pre-tax) and non-cash tax reform discrete charges ($882mm), HAL reported 4Q17 EPS of $0.53, beating Cons/WR of $0.46/$0.49. EBITDA of $1,157mm beat Cons by 6%, led by much better-than-expected topline growth of 9% q/q. Operating margins increased 120bps q/q to 12.9%, a little shy of our 13.1% estimate. NAM and international revenues increased 7% q/q and 11% q/q, respectively, slightly below SLB’s +8% q/q in NAM but significantly outperforming SLB’s +2% q/q internationally. D&E really drove the beat with EBIT up 62% q/q, which likely benefited from strong year-end completion tool and software sales. C&P seq incrementals of 10% were a bit disappointing. See variance for more details.
On Friday (01/19/18) the Albuquerque Journal reported that the New Mexico Human Services Department named three plans to operate the state’s Medicaid Managed Care program: incumbents BCBS and Presbyterian Health as well as newcomer CNC. Recall that MOH’s contract loss was reported on 1/9/18 and subsequently confirmed by the company. While not confirmed we believed that UNH also was not selected. Interestingly the state will not add a 4th plan (RFP specified 3-5 plans, currently 4 in the state) which removes the possibility that ANTM or WCG was awarded a contract
We reached out to the CFOs of all the U.S. airline, A&D, and transport companies we cover and asked a few basic questions about tax reform, including: (1) how will your capital spending plans change, (2) how likely will your company compete away the benefits, (3) how will tax reform change your decisions to buy or lease capital equipment, and more. We are aggregating all responses into a few charts and providing a high-level summary below. We’re keeping the identities of respondents anonymous.
After three years in the wasteland of supply-destruction/demand encouragement pricing, the oil market is now pricing for demand destruction/supply encouragement. There are three levers: two on the supply side: 1) either OPEC (read Saudi Russia) or 2) US E&P managements, blink. So far, OPEC has not blinked. The ball is now in the court of US E&P managements, as we enter Q4 EPS and 2018 capex reporting. We don’t think they blink unless they want a market beating, having taken one already in 2017. The set up looks good for 2018, if the US E&Ps can follow our Renaissance thesis, and exert capital discipline, generate free cashflow, and thereby keep the oil market tight. The market will punish anyone who wobbles.
On Friday (01/19/18), KSU reported 4Q EPS of $1.38 vs. Cons. of $1.36 and our est. of $1.42. KSU reported 10% revenue growth which should be best among the rails in 4Q. KSU expects mid-single digit volume growth to continue in C18, but mgmt believes mix could be a headwind and also guided to several non-operating EPS headwinds this year. The stock initially opened down 3%-4%, but rallied through the day and finished down just 1%.
We met with CEO Alan Armstrong and CFO John Chandler on our trip to Oklahoma last week (see Josh Silverstein’s note here for the E&P takeaways), and it was clear that there is a lot of confidence in the growth plan. Williams continues to be one of our favored gas-focused US midstream companies. It ticks the boxes for the names we like - solid growth, low risk, reasonable leverage/coverage, and no IDRs – all at an attractive value.
Investors lost patience with NRG last week punishing the stock for missing the YE asset sales target and likely coming in well below initial proceeds targets. We get the frustration but we also view this as a great buying opportunity. This company will have more cash than they know what to do with (even with lower asset sales) and is very committed to return it to shareholders.
SLB believes the tide is turning for them. We agree. If Brent prices hold $60/bbl, we see the most upside for international. Thus, we believe there could be some rotation out of NAM stocks, which remains the Consensus trade, and into stocks with more international exposure, like SLB. And on pgs 2-4, we discuss why believe SLB may not be expensive as the bears think. Reiterate OP with new $91 PT (15.0x ’19 EBITDA).
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