Daily Archives: January 15, 2007

Steve Jobs’ Leave Of Absence

Steve Jobs has finished what he needs to do for Apple (AAPL) in 2007. The iPhone and iTV initiatives are launched. The new MacBooks are out. iPod sales will undoubtedly set a record in the calendar fourth quarter of 2006.

The back-dating options probe, expecially as it relates to grants to Mr. Jobs, is not going away. On Friday, the US Attorney in San Francisco opened a criminal investigation into the matter. The Apple board has exonerated Jobs, but it is hard to see how they could have done otherwise without a dead body and a video of the crime. He is arguably more important to the fate of his company than any other large-cap  CEO in the world.

Which is precisely why Jobs should take a leave while the matter is resolved and remove any hint that his finger may be on the scales as the investigation proceeds.

Giving Jobs the benefit of every doubt, perhaps he knew nothing about the changes in options paperwork and all of the nastiness went on among people well below him in the chain of command. It should not take long to figure that out, and, in the meantime, he would do his shareholders a favor.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 15, 2007 – 8:05 pm in Law

Microsoft And Ask.com Go Searching For Users

The rich get richer. According to Comscore, December online search query volume rose 30% from a year earlier. Google (GOOG) and Yahoo! (YHOO) picked up tiny bits of share. A few tenths of a percent. Google’s figure hit 47.3% of the search market. Yahoo!’s hit 25.8%.

That the large sites are doing well is not news.

But, Microsoft (MSFT), which really needs a flagship product to help resurrect MSN.com and kick off Microsoft Live, keeps dropping in the search category. In just one month, from November to December, its share dropped from 11% to 10.5%.

For all the chest thumping that goes on at Barry Dillers IAC/Interactive (IACI), its Ask.com search operation watched its share of the market drop from 5.5% to 5.4% in a month. Ask is going exactly no where.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 15, 2007 – 7:23 pm in Internet

BP Gets An “F”

James Baker, the former US Secretary of State has been busy writing recently. He was involved in the Iraq report, written for the President. And, in just the last two days, he handed British energy giant BP his report on safety at its US refining operations. The reports was several hundred pages long, so he may have had some help.

The content of the document was ugly. As quoted in the FT, the reports states that “BP has not always ensured that it identified and provided the resources required for strong process safety performance at its US refineries.’’

Aside from the embarrassment for BP management, the assessment will throw gas on the fire of a number of civil suits filed against the company. There is also a criminal investigation into a fire at a BP refinery in Texas that killed 15 people.

BP may want to consult the firms that handled the litigation for Altria’s Philip Morris unit or Merck’s management in the Vioxx suits that have cropped up by the dozens.

The company’s stock traded for over $76 in May. Falling oil prices and management turmoil pushed it below $62 last week. The shares have staged a brief rally as a new CEO has been named and oil prices have become more stable.

The little rally may not last for long.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 15, 2007 – 6:51 pm in Oil & Gas

Sony Management Files For Unemployment

Nomura, the largest brokerage firm in Japan, has reported that the Playstation3 will only hit 75% of its sales goal for the period ending March 31, 2007. Their financial forecast is that Sony will only ship 4.5 million units against the company target of 6 million.

Nomura also cut is forecast for Sony’s fiscal year PS3 sales from 16 million units to 10 million.

Sony (SNE) management has committed to a Playstation  financial breakeven in a fairly short period of time. That is a dangerous bet.

Goldman Sachs has also gone out on a limb for Sony, based primarily on its expectation that LCD TV sales are going well. The banking firm upped Sony to a "buy".

Sony’s shares have staged a relief rally, rising from under $38 in mid-October to trade at over $47 recently.

That rally is almost certainly about to end.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 15, 2007 – 6:16 pm in Consumer Electronics

Google’s Headache: Why YouTube Can’t Make Money

One of the criticisms of Google (GOOG) is that it still gets 99.99% of it revenue from text advertising using its search technology. Google spreadsheets, Google finance, Google earth, Google this, Google that. None of it make money.

YouTube is joining that crowd. Not because the studios and TV networks will come after the video sharing site for violating the copyright of their content. Although that may happen.

The problem is more basic. The videos that get the most viewing action on YouTube are awful, and, in some case, barely watchable. As a matter of fact, research firm Screen Digest has released a study that predicts that user-generated content sites will do poorly in their attempts to get online ads.

The most popular video at YouTube is idiosyncratic. There is nothing wrong with that per se, and it may be the huge site’s major charm. YouTube attracted 24.5 million unique visitors in November. That made it the 18th most visited site in the US.

But, if Wall St. looks carefully at YouTube as a business, it is a collection of video with the most watched content being the most bizarre. The most viewed videos of all time at YouTube include videos called Smosh, viewed over 45 million times. This is a collection of short videos done by a young film maker who thinks he has a sense of humor. A lot of people must agree. But, the quality and length of the clips leaves a lot to be desired.

Another popular set of videos are from LonelyGirl15. These have over 30 million views. She seems to spend her time talking about being lonely. Spell-binding.

There is a set of NBC promotions. About 23 million all time views for those.

There are few independent band pieces. The quality is so poor that it looks like the lenses were Coke bottles. Might be a good promotion for Coca-Cola there.

Peculiar, Yes. Popular, Absolutely. Commercial, No Way.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 15, 2007 – 3:17 pm in Internet

Citigroup At $55: A Break-Up Analyst Hits The Number

In September 2005, the chief analyst at BankStocks ran a break-up model on Citigroup (C).

Based on the work, Citi would be broken into four companies and each would be a listed company: 1) the consumer bank, Citibank, 2) Salomon Brothers would be the croporate and investment banking company, 3) CitiGlobal which would have the internationa consumer business, and Smith Barney which would take the individual wealth management and private banking business.

The idea made some sense. The stock was trading at $45 at the time, and BankStocks said that number would be $56 in a break-up.

Citi did not break up, but the analysis became, in essence, a forecast, and a good one. Citi now trades just below $55.

Douglas A McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 15, 2007 – 2:20 pm in Mergers and Buy Outs

Is Sprint Worth 60% More Than Its Current Value? Break-Up Analysis (Revision 1)

Private equity firms and M&A operations are constantly trying to find dislocations between where the stock market values a company and how it might be valued if it were broken into pieces. The new, independent units could be sold to related companies or traded on the exchange as several companies instead of one.

There are several ways to value companies by looking at their parts. About a year ago, investment bank Lazard did this for Carl Icahn, a large holder of Time Warner. The report ran 371 pages. Valuations were based on analysis of comparable companies, discounted cash flow, and recent M&A transactions for related firms.

Sprint (S) is a company that trades at a little over $17, near the bottom of its 52-week price range of $26.89/$15.92. The company has a market cap of $50 billion which is about 1.1 times its current annual revenue run rate.

By some measures, the company does look cheap. Its price-to-book is less than 1. The average from Sprint’s industry is 3.1. Its price-to-cash-flow ratio is 3.9 compared to 9 for the industry. The company is clearly hurt by the perception that it management is inept and that the integration of NexTel has gone poorly driving down subscription growth compared to its major competitors Verizon Wireless and Cingular. Sprint also has long-term debt of about $20 billion.

If Sprint’s debt is subtracted from its market cap, the remaining value is $30 billion, about .7x sales.

Sprint has two operations. Wiresless phone service is one. That business has revenue of about $36 billion a year. The long distance part of the company has annual revenue just shy of $6.5 billion.

The largest wireless company in the world, Vodafone (VOD), has a market cap of $168 million or about 2.8x sales. If the market cap is adjusted downward for debt and cash, its value moves to $140 billion. That would take the valuation down to 2.2x revenue. That would give Sprint’s wireless unit a value of $79 billion.

For the long distance unit, the most comparable company is probably Qwest (Q). The long distance company has a market cap of $16 billion. Taking into account debt, cash, and the difference between payable and receivables, Qwest’s value would have to be knocked down by about $12 billion, making its multiple of value to sales .3x. If this multiple is applied to Sprint’s long distance business, it yields a value of about $2 billion.

Based on this break-up analysis, Sprint’s market cap would be about $81 billion. That is $27.50 a share.

By that measure, Sprint is undervalued.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 15, 2007 – 12:09 pm in Mergers and Buy Outs

Skype TV

Wall St. has to wonder what the fine print looks like in the sales documents from the Ebay (EBAY) purchase of Skype. It must read that, after we buy your VoIP company for a ludicrous price, please use the money to start a promising tech company in the ultra-hot video industry.

The founders of Skype and file-sharing company KaZaA have launched a new firm that will use peer-to-peer tech to send television shows and movies to PCs all over the world. The company also appears to be lining up some major content owners to be part of the venture. Targeted advertising will be another part of the revenue base.

The use of peer-to-peer technology will utilize the customers’ PCs as "mini servers" to forward content to other customers. The operation is, therefore, inexpensive to run and should not require a huge edge-server provider like Akamai.

There is the temptation to write the new video company, the Venise Project, as yet another in a string of video-to-the-home start-ups that has little chance of succeeding. But, given the management provenance of the company, that would be a mistake.

Skype and KaZaA both signed up tens of millions of customers in relatively short time periods. It could be argued the Skype did as much or more to change the traditional telephone industry as any company in the last few decades.

"Disruptive technology" is an overused term. Let’s use it here anyway.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 15, 2007 – 9:14 am in Media

Europe Markets 1/15/2007 Smith’s Group Up, Alcatel-Lucent Down

Stocks:  (BEA)(BCS)(BP)(BT)(GSK)(PUK)(RTRSY)(UN)(VOD)(BAY)(DCX)(DB)(DT)(SAP)(SI)(ALU)(AXA)(FTE)(V)

Markets in Europe were up at 9 AM New York time.

The FTSE rose .5% to 6,270. BEA Systems was up 2.2% to 426.5. Barclays was up 1.6% to 772. BP was up .6% to 550. BT was down 1% to 313. GlaxoSmithKline was up .7% to 1380. Prudential was down .1% to 722. Reuters was up .7% to 454. Unilever was up .4% to 1414. Vodafone was down .5% to 148.5. Smiths Group was up 13.2% to 1115.

The DAXX was up .4% to 6,733. Bayer was down .2% to 43.13. Daimler was up .5% to 47.01. DeutscheBank was up a fraction to 104.27. Deutsche Telekom was down .5% to 14.57. SAP was up .7% to 39.28. Siemens was up .5% to 77.81.

The CAC 40 was up .2% to 5,631. Alcatel-Lucent was down 1.4% to 11.5. AXA was down .2% to 32.87. France Telecom was down .7% to 22.01. ST Micro was up .4% to 14.66. Vivendi was up .6% to 32.02.

Data from Reuters.

Douglas A. McIntyre

Posted on: January 15, 2007 – 9:00 am in International Markets

GE Fights Mediocrity

GE must be getting sick of a stock price which still sits below where it was five years ago.

The company is talking about selling its underperforming plastics unit.

And, now it is buying the aerospace unit of Smiths Group in the UK. GE (GE) will pay $4.8 billion.

And, why not? The operation sells aircraft components. GE is already in the aircraft engine business, and its financial services business handles aircraft leasing. According to GE, the deal would have been accretive if done in 2006.

The Smith Groups aerospace unit currently supplies big aircraft builders lik Boeing (BA) and Airbus. GE is betting the the increase in orders at these companies will continue as the introduce new models like the A380, 777, and 747-8.

Since Jack Welch left, GE is like the best team in football never to win the SuperBowl. The management is obviously trying to retool the company after saying 2007 would show an EPS growth rate lower than 2006.

If management can reshape the company, the stock might get above $40. And, banish Jack Welch’s ghost.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 15, 2007 – 8:46 am in Conglomerates

Media Digest 1/15/2007 Reuters, WSJ, NYTimes, Barron’s, FT

According to Reuters, GE (GE) is buying the aerospace unit of Britain’s Smith Group. The price is $4.8 billion. GE hopes to use the business to take advantage of the growing order base of new aircraft.

Reuters writes that US communications tech firm Arris is buying Tanderberg Television of Norway. The price is $1.2 billion.

Time Warner’s (TWX) AOL units is offering $900 million for the Sweden’s online ad company Tradedoubler.

The Wall Street Journal reports that the US Navy ordered Lockheed Martin to stop work on a new warship due to cost overruns.

The New York times reports that Citigroup (C) may shorten its name to Citi.

The New York Times reports that Google’s (GOOG) YouTube has help create significat buzz for Hollywood films prompting them to consider working with the video sharing site.

The FT reports that the amount of debt that is rated CCC (junk) is rising and now represents 16% of the debt rated in the US.

Barron’s reports that GE (GE) may be looking for a tech deal in the internet or communications industries.

Douglas A. McIntyre

Posted on: January 15, 2007 – 5:30 am in Press Digest

Asia Markets 1/15/2007 China Unicom, Sony Rise

Stocks:  (CAJ)(FUJ)(NIPNY)HIT)(HMC)(NTT)(SNE)(TM)(CHL)(CHU)(PCW)(HBC)

Asia markets rallied

The Nikkei was up .9% to 17,210. Bridgestone was down 1.1% to 2590. Canon was down .9% to 6480. Fuji Film was up 1.1% to 4770. Hitatch was up 1% to 798. Honda was up 1.7% to 4690. NEC was up .7% to 609. NTT was flat at 612000. Softbank was down .8% to 2440. Sony was up 2.5% to 5700. Toshiba was up 1.1% to 828. Toyota was up 1.5% to 7840. Yahoo Japan was down 1% to 46150.

The Hang Seng was up 2.3% to 20,069. Cathay Pacific was up 2.7% to 20.85. China Mobile was up 3.6% to 68.35. China Unicom was up 6% to 10.68. HSBC was up .5% to 140.1. PCCW was flat at 40.75.

The KOSPI was up .2% to 1,391.

The Straits Times was up .9% to 3,036.

The Shanghai Composite was up 4.7% to 2,795.

Data from Reuters.

Douglas A. McIntyre

Posted on: January 15, 2007 – 5:14 am in International Markets

The Monday Edition- US, China & Japan Relationships – India & FDI

By Yaser Anwar, CSC of Equity Investment Ideas

It is my belief that to profit in financial markets, whether you’re a trader &/or investor, one needs to understand the implications of intermarket relationships, especially in our global economy, where everything is intertwined.

Today I’d like to discuss three such relationships. 1) US & China Trade 2) US & Japan and 3) India & FDI

US & China Trade

  • The boost from US consumer driven imports from China, may be nearing its peak, which could have negative implications for that economy given that it is benefiting from an approximate $215 billion annual trade surplus. Hence, the Democratic Congress’ urge to push a more protectionist line of action against China could have catastrophic consequences for the US & China.
  • China’s industrial production growth is starting to come down in light of the Central Bank’s rate increase to curb inflation and excessive capital investment. This effect is somewhat spilling over in commodities and can be part of the reason for the recent commodity weakness. Furthermore, we’re seeing money flow out of the Natural Resource funds, depicted in the image below, at the highest rate in the past few years.

  • As you know, demand for credit is robust and there are no signs of a significant shift in fundamentals. However, credit quality is a potential problem for aggressive lenders. Credit risk profiles have been deteriorating as the low interest rate environment has stimulated demand for money. As a result, credit card use is up and consumer bankruptcy is at record levels.
  • As the image below indicates recessions of ‘90–91 & 00–01 did not occur right when delinquency rates began to pick up off the bottom. Hence, it would seem foolish to contend that a consumer-driven recession is imminent on the basis of this trend reversal.

US & Japan

  • Japanese economy saw negative economic growth rate both in nominal & real terms (in 01), and a huge amount of non-performing loans in the financial sector. Through subsequent efforts toward structural reform, the Japanese economy has been continuously shifting from prolonged stagnation to economic growth led by private sector demand, normalizing the non-performing loan problem among major banks (the ratio of non-performing loans held by major banks decreased from 8.4% at the end of 01 to around 2% as of the end of 2006) and enhancing corporate structures by eliminating three excesses (excesses in employment, capital stock and debt) in the corporate sector which had been hindering growth.

  • Japan is still an export nation, albeit one that is increasingly less reliant on the US. Growth is being driven by Asia, but also by domestic consumption as a new generation allows itself luxuries its wartime predecessors would not.

India & FDI

  • According to Inside Global Markets- "While all emerging markets have been beneficiaries of flood of capital to some extent, India has been among the most popular by far, receiving an estimated 25% of total portfolio flows into EM markets. According to Morgan Stanley, in the three years through 2005, non-foreign direct investment (FDI) flows accounted for 83% of total capital flows in India, compared with an average of only 32% for a basket of other top emerging markets, including Russia, Mexico, Turkey, and China."
  • As you can see, a tidal wave of big money investment is the primary reason the Indian market has done so well of late. However, institutional investors are very fickle, so the market is vulnerable to enormous potential declines once the trend reverses. Which is exactly what happened during the May 2006 sell-off, the Indian EM funds declined the most out of all EM ETFs.
  • If you’d like to benefit in India, I’d suggest looking into the Cellular Market. With 6.8 million new subscribers a month in November only, India recently surpassed China as the fastest growing cell phone market in the world. India still lags behind China in total subscribers, with a mere 143 million compared with China’s 449 million. But that’s almost double the 75 million amassed a year ago, and India is closing the gap with rival China fast. India has set a goal of reaching 500 million subscribers by 2010.
  • No wonder Vodafone is looking to invest in China (cell phone penetration is 40-50% in cities but is an abysmal 3-4% in villages). When a global telco like Vodafone looks to invest, so should you (prime example of trend following).

http://www.equityinvestmentideas.blogspot.com/

Posted on: January 15, 2007 – 4:55 am in International Markets

Will NCR’s Teradata Make it to the Public Markets?

By William Trent, CFA of Stock Market Beat

NCR recently announced plans to spin out its Teradata data warehousing business. Already some are speculating it will be taken over – possibly before it even hits the public markets

The deal should take six to nine months to complete. However, according to a report from The Daily Deal [a paid service], Teradata may not even hit the public markets. That is, it could be bought-out.By private equity firms? Well, given Teradata’s cash flows – and long-term contracts – it would be attractive to a financial buyer. But, the company would also make a great fit for major tech companies, such as Oracle (ORCL), IBM (IBM) and even Hewlett-Packard (HPQ). All of these companies have been quite acquisitive.

In all likelihood, NCR considered the potential of a sale before announcing the spin-out. However, any sale would likely result in capital gains (and therefore taxes) while a spin-off could be tax free to shareholders. Furthermore, if the spin-out is achieved buyers would have to wait two years to get their hands on it, or the taxes would be due retroactively. So we are betting against a deal, though it is a possibility.

Furthermore, we would scratch HP from the potential acquiror list. As noted in a recent InformationWeek Article (Inside HP’s Data Warehousing Gamble, January 8, 2007), HP CEO Mark Hurd ran NCR (and the Teradata division) and CIO Randy Mott installed Teradata systems at both Wal-Mart (WMT) and Dell (DELL).  Yet despite their extensive experience they chose to develop an in-house data warehousing system, Neoview. The InformationWeek article notes:

Mott says HP considered Teradata for its [internal] data warehouse, as well as a “go to market partnership” with the company.

But HP engineers had been developing data warehousing capabilities… and Mott needed to give that project a look and determine quickly if HP’s in-house technology was ready for wide use. For four months in late 2005, his team ran test loads in the lab. The [HP] system worked to Mott’s satisfaction.

So while there may indeed be a buyout in Teradyne’s future, we are betting it occurs in three years or so, and doesn’t involve Hewlett Packard.

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: Union Pacific (UNP) put options; Air Products (APD) put options; Nasdaq 100 (QQQQ) put options; FedEx (FDX) put options; Intuit (INTU) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Three Five Systems (TFS); IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Landstar (LSTR) put options; Ceradyne (CRDN) put options; Dell (DELL) put options; Plantronics (PLT) put options

http://stockmarketbeat.com/blog1/

Posted on: January 15, 2007 – 4:52 am in Mergers and Buy Outs

Legacy Reserves (LGCY)

Posted by Bill in General
2007-01-06
LGCY – Legacy Reserves

LGCY – Legacy Reserves plans on offering 4.3 million units at a price of $18.50 – $20.50. Note that LGCY filed an additional offering registration back in November. It appears the total number of shares that will be offered over in January 2006 will actually total 7.7 million units at a range of $18.50 – $20.50. Essentially all the shares in this offering will be coming from selling shareholders. There are no proceeds going to LGCY from this offering.

Wachovia will be lead managing the deal. Post-offering LGCY will have 25.4 million units outstanding for a market cap of $495 million in a $19.50 pricing.

LGCY was formed in 10/05 by combining various oil and gas properties in the Permian Basin of Texas and New Mexico. Controlling ownership post-ipo is made up of the original majority owners of those properties.Moriah Properties will own 32% of all outstanding units post-offering and along with Brothers Production will control the general partnership. Note that LGCY’s general partnership will have no incentive distribution rights.

Note that in 10/06 LGCY held a private equity offering for accredited investors. The price of this offering was $17.25 per unit.

From the prospectus:

‘We are an independent oil and natural gas limited partnership, headquartered in Midland, Texas, focused on the acquisition and exploitation of oil and natural gas properties primarily located in the Permian Basin of West Texas and southeast New Mexico…Our primary business objective is to generate stable cash flows allowing us to make cash distributions to our unitholders and to increase quarterly cash distributions per unit over time through a combination of acquisitions of new and exploitation of our existing oil and natural gas properties.’

Via acquisition, the formation of LGCY and exploitation of their properties, as of 12/31/06 LGCY has: proved reserves of approximately 20.0 MMBoe, of which 70% were oil and 81% were classified as proved developed producing. Proved reserves to production lifespan is 16 years.

As a unit offering, LGCY will distribute essentially all cash on hand to unit-holders quarterly. LGCY plans on paying $0.41 quarterly to unit holders, $1.64 on an annualized basis. On a pricing of $19.50, LGCY would be yielding 8.4% annually. This is a strong initial yield. Keep in mind however that since LGCY is primarily an oil E&P operation, they’ve substantial yield reliance on the underlying price of oil. LGCY is similar in structure and scope of two recent E&P ipos, CEP/ATN. The biggest difference is that CEP/ATN focus primarily on natural gas exploration and production, while LGCY’s is mostly oil. Also LGCY does not have the strong ‘parent’ relationships that CEP/ATN possess. At current prices ATN/CEP both yield approximately 7 1/2% annually. E&P unit offerings due tend to trade at a higher yield level then the traditional midstream asset unit ipos dues to 1) the underlying resource price risk to yield and 2) E&P activities generally require a hefty amount of capital expenditures, which can effect future cash flows and in turn future yield growth.

Permian Basin – LGCY’s properties are all located in the Permian Basin, one of the largest oil and natural gas producing basins in the US. The Permian Basin extends over 100,000 square miles in West Texas and southeast New Mexico and has produced over 24 billion Bbls of oil since its discovery in 1921. The top five producers in the Permian Basin account for 40% of production.

Hedging – Much like previous E&P unit ipos, LGCY does participate in hedging a significant amount of their forward production. As of 12/31/06, LGCY has hedged approximately 69% of expected oil and natural gas production through 2007 and approximately 61% of expected production from 2008-2010. This hedging does help protect the yield going forward, however with 30-40% of expected production next 4 years currently unhedged, there does remain commodity price risk for LGCY. However, since LGCY hedges their oil production up to 4 years out, the company actually received a higher price in 2006 for unhedged production. Unhedged oil sales were over $60 per barrel, while total sales factoring in hedging were $49 per barrel. LGCY has actually hedged future production at much higher levels then overall in 2006. For example 2007 hedged oil production is over $67 per barrel. In fact LGCY has locked in such a large % of oil production through 2010 at $60+ per barrel, I would expect any drop in oil prices going forward to have little effect on LGCY’s yield until 2011+.

Financials

Debt post-offering of $107 million. This will not impact LGCY’s operations all that much. Debt servicing costs however will total approximately $0.30 per unit annually. I would fully expect LGCY to lay on greater debt going forward as they acquire additional properties in the Permian Basin.

Capital expenditures are expected to total roughly $10 million in 2007. This includes the costs of drilling 22 development wells.

LGCY has made numerous acquisitions, including the formation in October 2005. Due to the recent formation and these acquisitions, historical financials are not relevant here. Total net production will be 1,356 MBoe for the year ending December 31, 2007. LGCY is projecting cash levels to be strong enough to pay full dividend for 2007. Note however that LGCY has projected higher oil/natural gas sales prices on their unhedged production then current commodity prices. LGCY however is projecting approximately $0.15-$0.25 more available cash on hand per unit in 2007 then current expected distribution of $1.64 annually. I think LGCY can easily make the full 2007 distribution, with a good possibility of a bit of an increase later in the year.

Conclusion – Much like similar offerings over the past year, the strong yield here makes this deal work. On a pricing of $19.50, LGCY will yield 8.4%. In an environment in which long term treasuries yield below 5%, LGCY’s strong yield is enticing. Also LGCY has hedged a substantial portion of their oil production through 2010 at $60+ per barrel. That alone should mean a fairly secure yield going out a few years, even if oil prices fall. LGCY is not as strong a deal as ATN/CEP, due to the strong ‘parent’ companies involved in those deals. However, I would put it in the class of 2006 E&P unit ipos LINE/BBEP/EVEP. The current yield on all those ipos is in the 6 1/2% – 7 1/2% range. At 7% yield, LGCY would trade at $23 per unit. I would expect LGCY to trade in that $19 – $24 range over the next year or so and yield in the 7% ballpark. Recommend in range due to strong yield. I’ll be a buyer here on a muted pricing/open. Any initial pricing/open enthusiasm however will come close to pricing in that yield going forward. The higher the initial yield here, the more I’m interested – in other words the lower the pricing/open, the more attractive LGCY looks to me.

http://www.tradingipos.com/blog/index.php
Posted on: January 15, 2007 – 4:48 am in IPOs

Outdoor Channel: When Intangibles Attack…

From AAO Weblog

… they bite. Hard. Then they go away into the night.

Outdoor Channel Holdings, Inc. filed a non-reliance 8-K on January 9, putting its 2005 fiscal year filings and subsequent 2006 10-Q’s into reliance limbo. The issue: an intangible asset for the value of distributor relationships acquired by the company in its September 2004 purchase of the minority interest of The Outdoor Channel, Inc. A “change in the company’s strategy to increase the number of subscribers” to The Outdoor Channel rendered the value of those distributor relationships worthless in the third quarter of 2006, though the filing is silent on how the change in strategy backfired so badly.

It’s also silent on how the company went from an indefinite life on the intangible to a life of 21.33 years to totally worthless. (Two decimal places – that’s pretty definite!) The firm concludes that the error in the estimated life will cause them to restate their financials; there’ll be about $1 million of amortization recognized through the third quarter of 2006, and the remaining balance of $9.5 million will be written off in that revised third quarter. On an after-tax basis, the amortization for 2005 amounted to a little shy of 14% of the net income. A big bite, and the entire write-off is a big bite when you consider that the attacking intangibles amounted to about 7% of year end 2005 total assets.

It’s an odd set of circumstances: from indefinite life in one quarter, to a definite life of 21.33 years the next, a revision of history to the present, then a total writeoff. There’s no reason not to call this is an “error” in the initial recording of the asset, as the firm describes it. But one has to wonder how effective their reporting controls really were at the end of 2005 when the management “concluded that our disclosure controls and procedures were effective as of December 31, 2005.” You’d think an effective set of controls would have ascertained that the intangibles had a definite life before they were completely impaired, and amortization would have started sooner than when recognized in a restatement.

http://www.accountingobserver.com/blog/

Posted on: January 15, 2007 – 4:45 am in Accounting

Friday’s Top Biotech and Medical Stocks

Biotechnology

CYTRX CP [CYTR] +12.90%
INTROGEN THERAPEU [INGN] +10.95%
SENESCO TECH [SNT] +10.37%
IDERA PHARMACEUTICAL [IDP] +10.00%
CYTORI THERAPEUTICS [CYTX] +9.26%

Diagnostic Substances

INFINITY PHARMACEUTI [INFI] +5.07%
IMMUNOMEDICS INC [IMMU] +4.62%
ORCHID CELLMARK INC [ORCH] +4.16%
BIOSITE INC [BSTE] +4.02%
IMMUCOR INC [BLUD] +3.70%

Drug Delivery

ALKERMES INC [ALKS] +8.47%
BIOPROGRESS PLC [BPRG] +5.87%
NEKTAR THERAPEUTIC [NKTR] +4.66%
GENEREX BIOTECH CORP [GNBT] +4.65%
COLUMBIA LABS INC [CBRX] +3.90%

Drug Manufacturers

NITROMED, INC. [NTMD] +19.67%
TELIK INC [TELK] +10.40%
QUICK-MED TECHNOLOG [QMDT.OB] +8.11%
EXEGENICS INC [EXEG.OB] +6.92%
ALLOS THERAPEUTICS [ALTH] +6.03%

Medical Appliances & Equipment

SIGNALIFE INC [SGN] +16.00%
HANSEN MEDICAL, INC. [HNSN] +7.89%
VNUS MEDICAL TECHNOL [VNUS] +7.59%
CAMBRIDGE HEART INC [CAMH.OB] +6.42%
SIRONA DENTAL SYS [SIRO] +5.99%

Medical Instruments & Supplies

MILESTONE SCIENTIFIC [MLSS.OB] +20.00%
IVAX DIAGNOSTICS INC [IVD] +9.73%
MESA LABS INC [MLAB] +9.47%
ENDOLOGIX INC [ELGX] +6.16%
HOME DIAGNOSTICS, IN [HDIX] +5.75%

Medical Laboratories & Research

MEDASORB TECHNOLOGS [MSBT.OB] +14.48%
NEOGENOMICS INC [NGNM.OB] +4.85%
ARRAY BIOPHARMA IN [ARRY] +4.25%
BIO-IMAGING TECH [BITI] +3.23%
NATL DENTEX CP [NADX] +2.62%

http://www.biohealthinvestor.com/

Posted on: January 15, 2007 – 4:43 am in Biotech

Osiris and Aastrom: the Best Stem Cell Plays

by Andrew Vaino

I’ve resisted recommending stem cell stocks. While I’m still not a huge fan of them, I think it might be worth owning at least one as part of a diversified biotech portfolio. With all the media hype surrounding stem cells, I have no doubt everyone is aware that they are cells that have yet to acquire specific characteristics. Theoretically, stem cells could be used to regenerate any tissue. That would be pretty powerful.

I think there are some parallels between stem cell companies and companies engaging in RNAi drug discovery. That is, the idea is great, but implementation still remains elusive. I wrote in September that I thought RNAi discovery company Alnylam Pharmaceuticals (ALNY) was trading too high, and that the price was being buoyed by hype. The Market, however, disagreed, and has pushed the stock up over 50% since then (I did recommend waiting until ALNY’s technicals degraded, which they haven’t, before shorting). I remain convinced I’ll be right on ALNY this year. In the meantime, buying into some stem cell hype is probably a smart move.

In my opinion, the best stem cell company right now is Osiris Therapeutics (OSIR). They went public just last year, and the stock price has doubled since. They are looking at three different products in clinical trials, and have a product, Osteocel, on the market to aid in bone regeneration. As I mentioned, I think this is the best of the stem cell companies, but would not recommend buying until the price retraces a bit.

Other stem cell companies include Viacell (VIAC), StemCells (STEM), and Aastrom (ASTM). While none of these companies is going to the profitable any time soon, they are likely to trade higher based on hype.

Of the smaller stem cell stocks I think Aastrom has the best pipeline. They will soon announce results of a one year follow up on a Phase 1/2 clinical trial for bone regeneration, have an ongoing Phase 1/2 study underway for spinal fusion, and completed a small trial in Spain for patients required bone regeneration prior to dental implantation.

So, I think OSIR is the best of breed stem cell company, but am a bit concerned it’s trading too high. At less than $1.50 I think ASTM (which is looking to close the week off 10%) is a good, highly speculative, stem cell play. This is certainly not a long term investment, and I would look to cash out when the stock takes an inevitable bump on hype in the next couple of months.

http://www.biohealthinvestor.com/

Posted on: January 15, 2007 – 4:41 am in Biotech

Project BioShield Has Given Biotechs Little Motivation to Protect Americans

by H.S. Ayoub
BioHealth Investor

The anthrax letters that contaminated the U.S. Postal Office system, and the traces of ricin found in congressional buildings had added to the mass hysteria that began on that dark day in September. Pressed by the public president Bush had no choice but to initiate a plan for protecting Americans against the deadly biological attacks.

The Project BioShield Act was unanimously approved by the Senate, and signed by President Bush in 2004. One of the key measures of the act was to secure a funding source for the government to purchase “next-generation” vaccines and counter measures to biological agents that could be used in terrorist attacks. Almost $6 billion were allocated for purchasing products from biotech companies over a 10 year period.

As many of the common vaccines were still not improved upon since the 60’s and 70’s, Project BioShield was supposed to spur on a flurry of biotech research in an effort to establish a stockpile of vaccinations and medications using 21st century technology. This has yet to happen as biotech companies were given little motivation to increase research into the field.

The problem is with the way the government wants to ‘fund’ research. The $6 billion were not intended to fund research into new vaccines exactly. Rather, the government would purchase vaccines after the research has proven them safe and effective. So for little biotech companies to reap the rewards of a contract they would have to put up funding from internal sources, carry out the research to prove the effectiveness and the safety of the vaccines, and only then would the government pay out the cash. This focuses the financial risk squarely on the companies themselves, as the government can cancel any contract under the Termination for Convenience clause.

VaxGen (VXGN) is a perfect example of how the project could prove to be a financial disaster for a little biotech. The company won a $1 billion contract to provide a stockpile of 75 million doses of anthrax vaccine for the government. But after securing funding, and increasing its staff and research efforts VaxGen received the bad news; the Department of Health and Human Services (DHHS) cancelled the contract. This of course had a devastating effect, and forced the company to cut half of its staff and replace the CEO shortly after.

Many argue that even if a biotech company finally secures the monetary funding the government promised it would have little future revenue to look forward to. Under Project BioShield the government makes a one time purchase of vaccinations and does not enter into a long term contract. So companies who see a surge of revenue could suddenly find themselves with nothing.

This could mean that companies will be forced to look elsewhere, most likely to other nations, such as Europe and Asia. Cangene (CNJ.TO) of Canada for example won two contracts under the project to deliver anthrax and botulism counter measures. The total contracts would be worth almost $600million. The company expects to deliver the products later in 2007. But Cangene is not relying on just those two contracts. Expecting the sudden falloff in revenue the company is already in talks to deliver to countries outside of North America.

Another possibility would see outside companies selling vaccines to Americans. Cipla is a generic drug company in India who is looking to enter the U.S. and other Western nations very soon. While it intends on selling generic versions of anti-depression drugs as its entry point into the U.S. market, it does have a large stockpile of generic anti-anthrax drugs on hand. It is very conceivable that if Project BioShield fails to deliver on its promise Americans could look to foreign nations to deliver the goods. During times of great desperation, such as a national bioterrorist attack, patriotism could possibly fall behind capitalism. This could prove harmful as unregulated drugs would make their way into the U.S. market.

Critics also argue that companies are not flocking to the program because of weak liability coverage. Until concrete and detailed indemnification guidelines are outlined companies will be too cautious to enter a program designed to provide drugs and vaccinations to be used under unique emergency conditions.

So far, under BioShield only nine contacts are currently active, and the U.S. continues to have a less than ideal stockpile of vaccines and medications against terrorist attacks using biological agents. In an effort to improve the performance of the project and to motivate more companies to get involved President Bush signed into law the formation of a new regulatory division, the Biomedical Advanced Research and Development Authority (BARDA).

BARDA was formed to provide $1 billion as funding for research and development of vaccines and treatments under Project BioShield. The government would help with the cost of establishing domestic manufacturing facilities. It will also provide liability coverage to those companies whose products will be used during biological attacks and are not yet licensed with the Food and Drug Administration (FDA). In order for a company to be sued the DHHS would have to find clear evidence of intentional misconduct. BARDA would also allow funding for the development of experimental animal models for testing of drugs against disease conditions that are too dangerious for humans.

Time will tell if BARDA would give the biotech industry enough motivation to protect America.

http://www.biohealthinvestor.com/

Posted on: January 15, 2007 – 4:39 am in Biotech