Tuesday, November 25, 2014

The 51% Chinese web stock crash that analysts never saw coming

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Analysts had high expectations for Sina Corp. last year, forecasting a 19 per cent stock rally in the Chinese Web portal operator.
It hasn’t quite worked out that way.
Sina plunged 51 per cent $38.32 in the 12 months through Monday, creating a 70 percentage-point gap between forecast and performance. That’s the biggest buy-rating blunder by analysts covering the 55 largest Chinese companies traded in New York.


The stock sank to a four-year low last week after Sina’s portal advertising business, which accounts for half its revenue, turned unprofitable this year amid a user shift to other platforms. While analysts had in part been drawn to Sina because of its controlling stake in the microblogging site Weibo Corp., that stock has slumped 24 per cent since Sept. 11 as rival platform WeChat grew and the government stepped up control over social media.
“People were too enamored of the power and upside of Weibo,” David Riedel, president of Riedel Equity Research in New York, said by e-mail yesterday. The company “will have difficulty monetizing, will always have the concern over government censorship hanging over them and will have slowing growth, all bad for stock price performance.”
Riedel was one of three analysts who had sell ratings on Sina last November, when 25 recommended buying and four advised investors to hold the shares. His price target was $55.94 when the stock was trading above $70, while his current recommendation is hold with a price estimate of $45.
Quarterly Losses
Analysts at Brean Capital LLC and Jefferies Group LLC were the most optimistic a year ago, setting 12-month price targets of $120 and $107, respectively. While their bullish calls on Sina were wrong, investors who followed the analysts’ recommendations to buy Baidu Inc. would have made money. The operator of China’s biggest search engine has gained 54 per cent in the past 12 months.
Brean Capital analyst Fawne Jiang didn’t respond to an e-mailed request for comment on her Sina recommendation. Cynthia Meng at Jefferies pointed out that she changed her rating to hold from buy in January, citing increased competition and tighter government oversight.
Sina, which has a market value of $2.6-billion, fell 0.1 per cent to $38.30 at 11:51 a.m. in New York. Analysts 12 months ago forecast that shares would be selling for $92.31. It’s the biggest negative surprise in that time period among the most– actively traded Chinese companies in the U.S. with a market value above $1-billion, according to data compiled by Bloomberg.
E-Commerce Focus
Shanghai-based Sina said this month that it lost $10.9-million on operations in the period July through September as expenses jumped 43 per cent. It was the third straight quarterly loss. Revenue growth of 8 per cent was the slowest in almost two years amid a shift in usage from the Sina.com website to other platforms such as mobile.
“On the portal side, we’re facing challenges as more marketing dollars from brand advertisers have been shifted to video, vertical sites and mobile,” Sina’s Chief Executive Officer Charles Chao said in a call with analysts on Nov. 13.
Cathy Peng, Sina’s Beijing-based head of investor relations, didn’t respond to an e-mail seeking comment on the stock performance.
Investor attention is shifting to Chinese Internet retailers such as Alibaba Group Holding Ltd., which has rallied 68 per cent since its September debut in New York, because portal websites like Sina and Sohu.com Inc. are declining in popularity, according to Eric Jackson, the founder of Ironfire Capital LLC.
“It’s hard to get excited about user growth in these businesses compared with e-commerce companies like Alibaba,” he said in a phone interview on Nov. 17.
Weibo Stake
While analysts were overly optimistic about Sina last year, the drop in its shares may have been excessive, according to Chiheng Tan, a Boston-based analyst at Granite Point Capital Inc., which invests in U.S.-listed Chinese Internet companies.
“If you add up Sina’s ownership of Weibo, Leju, Tian Ge, and its cash balance, the number should be bigger than its current market value,” Tan said in e-mailed comments on Nov. 19.
Sina’s retreat over the past year compares with a 2.8 per cent advance in the Bloomberg China-US Equity Index. The company holds stakes in Tian Ge Interactive Holdings Ltd., a social video platform, and home-listing website Leju Holdings Ltd. besides owning about 54 per cent of Weibo.
Analysts had estimated the value of Weibo would be $5.1-billion before its April IPO. It’s now valued at about $3.7-billion. China’s has stepped up efforts to rein in online defamation, with the nation’s top court saying last year that Web users could face jail time for defamatory rumors.
WeChat Competition
Weibo had 167 million monthly active users in September, compared with 468 million on WeChat, the mobile messaging application owned by Tencent Holdings Ltd., China’s second– largest Internet company.
“A lot of people have noticed the change of interest from Weibo to WeChat,” said Jackson, who sold his holdings in Sina before the Weibo spinoff. “They are not interested in putting advertising into Weibo, because it is less popular now.”

Thursday, November 6, 2014

3 Reasons Why U.S. Natural Gas Prices Will Remain Low


  • US natural gas prices should remain low over the next few years, unless we're on the cusp of a new ice age.
  • Associated gas production from liquids-rich plays continues to grow, while increased drilling efficiency, process innovation and improved completion techniques have enabled operators to extract more gas from fewer rigs.
  • An uptick in domestic demand and exports are still a ways off.
  • Overlooked shadow capacity in the Haynesville Shale and other plays will ensure that any meaningful increase in natural-gas prices is short-lived.
Despite persistent weakness, pundits continue to call false bottoms in natural gas prices and recommend shares of companies that produce primarily natural gas.
Far too many investors and talking heads were head-faked by the weather-driven spike in natural gas that occurred in early 2014, buying shares of Cabot Oil & Gas Corp (NYSE: COG) and other names with sizable acreage positions in the Marcellus Shale.
Here's why North American natural gas prices should remain low over the next two to three years.

Reason No. 1: US Natural Gas Production Remains Strong despite Low Prices

The investment media made a big deal about last winter's upsurge in natural gas prices, a phenomenon that stemmed from severely cold weather, not a lasting change in the underlying supply and demand conditions.
Many investors and media outlets focus on the spot market, where volumes are available for immediate delivery. This price benchmark is much more vulnerable to seasonal weather conditions.
In contrast, oil and gas producers focus on the 12-month strip, or the average cost of natural gas for delivery over the next year. This forward-looking benchmark smoothes out weather-related fluctuations and other temporary blips, providing better insight into the producer's full-year price realizations.

On this basis, North American natural gas prices have fluctuated around $4 per million British thermal units over the past four years, with the high and low end of this range marked by the no-show 2011-12 winter and the polar vortex earlier this year.
Plummeting natural gas prices from mid-2008 to late 2009 prompted many upstream operators to scale back drilling activity in the Haynesville Shale and other plays that primarily produce this out-of-favor commodity.
However, the decline in gas-directed drilling activity hasn't resulted in a commensurate decline in US production.

Prior the shale revolution, a decline in the number of active rigs targeting natural gas would translate into lower production - exactly what happened when drilling activity slumped from mid-2001 to mid-2002.
But the traditional relationship between the gas-directed rig count and production completely broke down in 2008.
Although the number of rigs targeting natural gas collapsed from more than 1,600 in mid-2008 to 310 units in April 2014, US production has soared from 57 billion cubic feet per day to 70 billion cubic feet per day in July 2014.
This divergence reflects two factors:
Producers ramping up drilling activity in liquids-rich plays that also yield significant volumes of crude oil and natural gas liquids; and
Huge gains in efficiency as producers hone their drilling and completion techniques and address supply-chain bottlenecks.
You can read more about these trends in Breaking Down the US Onshore Rig Count and Salute Your Drillmasters: Efficiency Gains Lower Production Costs.
As the energy industry has transitioned to pad drilling and optimized well designs and completion techniques, operators have produced more natural gas from fewer active rigs.

Over the past two years, output per rig has increased by more than 50 percent in the Marcellus Shale, effectively lowering producers' break-even costs to about $2 per million British thermal units in the play's liquids-rich fairway.

Source: Crestwood Midstream Partners LP
These efficiency gains, coupled with readily available credit and independent producers' imperative to grow their hydrocarbon output, mean that natural-gas prices near $4 per million British thermal units are no longer a disincentive to production.
But back in 2008, many producers needed natural gas to fetch $7 to $8 per million British thermal units to support drilling activity in higher-cost resource plays.
In addition, 15 percent to 20 percent of US natural gas production comes from oil wells, a figure that could increase in coming years as more gas-gathering and processing infrastructure comes onstream in the Bakken Shale.
Bottom Line: As long as crude oil remains above $70 per barrel, volumes of associated natural gas should continue to climb.
We also expect North American crude-oil output to remain more resilient than some expect because of hedging programs that lock in prices on future output and independent producers allocating more capital to core acreage that generates the best internal rates of return.

Reason No. 2: The Demand Response Won't Move the Needle Right Away

Over the past few years, energy companies have proposed the construction of more than 30 terminals to export liquefied natural gas (LNG). Thus far, the Federal Energy Regulatory Commission (FERC) has approved only four projects - about 6 billion cubic feet per day - to move forward.
But the market itself will dictate how much LNG export capacity the US adds; given the capital intensity of these projects, only terminals that have secure volume commitments from customers will be able to obtain the necessary financing. (See Understanding the Appeal of US LNG Exports.)
The case for LNG exports is deceptively simple: Whereas the 12-month strip for US natural gas prices hovers around $3.60 per million British thermal units, this commodity fetches $9 per million British thermal units in Europe and $16 per million British thermal units in Asia.
When you factor in the $6 to $7 per million British thermal units that it would cost to liquefy and ship LNG from the Gulf Coast to Asia, these price advantages appear slightly less compelling. Liquefaction and shipping costs for cargoes headed to Europe are expected to range from $3 to $4 per million British thermal units.
Cheniere Energy Partners LP's (NYSE: CQP) Sabine Pass facility is slated to start exporting LNG from the US Gulf Coast in late 2015 or early 2016. More capacity will come onstream by 2020. By 2021, the US will also export more natural gas to Mexico and Canada via pipeline than it imports.
All told, the Energy Information Administration (EIA) forecasts that the US will export about 2 trillion cubic feet of natural gas annually by 2020 - about 7 percent of projected supplies.

The EIA's longer-term outlook contemplates the US exporting 5.8 trillion cubic feet of natural gas per year and 37.5 trillion cubic feet in annual production. Although long-range projections in the energy patch should be taken with a grain of salt, US exports would account for only 15 percent of domestic output in this scenario.
And if US natural gas prices were to rally temporarily, the price advantage for customers in Asia and Europe would diminish, eroding demand in the international spot market.
Commentators who predict a surge in natural gas demand from electric utilities likewise overlook the scope that power producers have to switch between coal and natural gas at their plants, depending on which thermal fuel offers the best economics.
Natural gas consumption in the power sector spiked in 2012 after the no-show winter depressed the price of this commodity.
But electric utilities have reduced their natural gas consumption over the past two years. In July 2014, the power sector burned about 7.8 billion cubic feet per day of natural gas less than in 2012.

The catalysts for this trend: Depressed coal prices and natural gas prices that remained elevated after the severely cold 2013-14 winter, a situation that incentivized electric utilities to switch fuels.
In July 2014, US electricity demand fell 2.3 percent year over year because of a more than 12 percent drop in total cooling degree day. Natural gas consumption in the power sector tumbled 7.3 percent, while coal demand dropped 1.9 percent.
Stricter regulation of carbon dioxide emissions will lead to the shutdown of as much as 50 to 60 gigawatts of coal-fired generation capacity in the US-roughly 15 percent to 20 percent of the current fleet. About 30 gigawatts could be shuttered by the end of next year.
Although the anticipated reduction in coal-fired capacity will be offset by an increased reliance on natural gas, the 1 trillion cubic feet per annum in incremental demand that's expected to materialize by 2020 won't offset a 4.5 trillion cubic feet jump in annual production.

Reason No. 3: Overlooked Shadow Capacity

In the global crude-oil market, analysts pay close attention to OPEC's spare production capacity, or oil fields that could ramp up output quickly to offset a supply outage and rebalance the market.
Saudi Arabia controls much of this spare capacity and stepped up its output in 2011 to dampen the Libyan civil war's effect on global oil prices.
Similarly, North America boasts a number of prolific natural gas plays in which producers could accelerate drilling activity if prices were to climb to between $4.50 and $5 per million British thermal units.
Based on total reserves, Louisiana's Haynesville Shale is one of the largest gas plays in the US. However, this play has fallen out of favor because it produces negligible volumes of crude oil and natural gas liquids, higher-priced hydrocarbons that help to boost economics.
This unfavorable production mix explains why drilling activity in the Haynesville Shale slumped sharply after 2008 and gas production from this field had plummeted by almost one-third from its peak.
However, the Haynesville Shale's rig count and production levels appear to have bottomed last winter, suggesting that natural gas prices over $4.50 per million British thermal units would incentivize producers to accelerate drilling activity in the play's core region.
Most analysts estimate that natural gas prices of $5 per million British thermal units would enable producers to make money in the marginal portions of the Haynesville Shale.
The region already boasts sufficient pipeline and processing capacity to handle an increase in production, while its proximity to proposed export capacity on the Gulf Coast is another plus.
In short, any sustained upsurge in North American natural-gas prices would be stymied by an influx of output from the Haynesville Shale and other plays.
The current natural gas futures curve projects that prices generally will remain below $5 per million British thermal through at least the middle of the coming decade.

Futures market expectations for gas prices are lower today than they were a year ago; the rapid build in inventories has convinced the market that significant structural changes will need to take place to tighten the supply-demand balance for more than a month or two.

Wednesday, November 5, 2014



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