Archive for the Investment Category

Is O’Charley’s(NASDAQ:CHUX) the steal of the century or a value trap?

Posted in Investment on August 18, 2010 by nedgrace

O’Charley’s has been on my radar screen for quite awhile as a beaten down restaurant stock offering seeming real value. However, only recently have I been comfortable with the likelihood of real positive catalysts on the horizon that can turn around the downward spiral that the this Company has been in. There are 235 company-owned O’Charley’s, 116 company-owned Ninety Nine restaurants, and 11 company-owned Stoney River steakhouses for a total of 362 company owned restaurants. There are also 10 franchised O’Charley’s.

Let’s look at a very quick analysis of the value as of today:
Company owned Units: 362
Shares Outstanding: 21,681,919 shares as of 8/6/10
Market Capitalization: $130M (@ $6 stock price)
Long Term Debt: $117
Total Enterprise Value: $247M

Real Estate Owned : According to Raymond James analyst, Bryan Elliot there was an appraisal done of the 100 units REO(real estate owned) early this year that showed a value of almost $200M, which is about $4 a share after the long term debt is paid. But let’s just be real conservative and give it a value of $150M which would more than wipe out the debt. So then take the Enterprise Value of $247 and subtract $150M, which leaves us at $97M for 362 company owned units. So we get to a market value per unit of an eye-popping $268,000…….WOW….now, that is some serious value. The cost to build and equip a unit today on average on leased land is likely between $1.5 and $2M. Free cash flow yield for 2010 is projected to be 20% according to RJ’s Elliot. Also by the way, EV/EBITDA is 4x 2010 EBITDA, and 5x 2010 FCF.

Now for the cataysts:

1. Phil Hickey, a friend and former remarkable value builder at RARE Hospitality(took over RARE at less than$200M market cap and sold to Darden for $1.3B) is the Chairman and Acting CEO today. He just filed with the SEC that he just personally purchased 20,000 shares this week at $5.46. The Company with Phil as the lead has just hired David Head to begin as CEO on September 1. Read the release by clicking here . Phil is a very smart operator and I have faith that Phil truly believes that David Head has the horsepower to succeed in a CHUX turnaround. Phil is staying very involved too which is important.

2. Private equity guys are actively looking for bargains in the restaurant space. I have received more calls that ever before with regard to any  ideas I might have. This situation is just too cheap for a smart PE firm to ignore. Also a PE firm could do a NNN transaction on the REO, so out of pocket would be quite nominal.

I would be far more wary if Phil wasn’t the Chairman, but he is! Phil is one skilled class act, so I am betting big on him and his pick, David Head to lead a multi-year turnaround of the company, regardless of whether a PE firm  picks it off.

For full disclosure, I own both the common stock and the 2013 bonds of O’Charley’s Inc.


Plenty….after all, this is a poor performing company in the casual dining restaurant business in a very soft economy.


API Study on Hydraulic Fracturing – Platt’s and NY Times

Posted in Investment on July 2, 2009 by nedgrace


Platt’s – The American Petroleum Institute issued a new study Wednesday saying that
legislation pending before the US Congress to regulate hydraulic fracturing
could cost the US economy as much as $374 billion in the year 2014 alone.

The three-part study, which IHS Global Insight performed, is the latest
in a series of studies and reports that energy industry advocacy groups issued
in an attempt to block proposed legislation that would impose federal rules on
the well-completion process of hydraulic fracturing, or “fracking.”

“More than one million wells have been completed using this technology,”
API President Jack Gerard said in a statement. “Unnecessary additional
regulation of this practice would only hurt the nation’s energy security and
threaten our economy.”

The study compared three scenarios–a total elimination of fracking, a
restriction of the fluids that can be used in fracking operations, and the
implementation of additional federal underground injection control compliance
regulations on top of current state and local rules that govern the practice.

Restrictions on fracking would limit US oil and natural gas production,
resulting in sharply increased imports by 2018. The study adds that
international purchases of oil and gas would surge nearly 60% under a
no-fracking scenario, almost 30% under the fluid-restriction scenario and
nearly 14% under the UIC compliance scenario, the study says.

Losses in US Gross Domestic Product, in 2008 dollars, would rise
substantially in five years to reach $374 billion under the no-fracking
scenario, $172 billion in the fluid-restriction scenario and $84 billion in
the UIC compliance scenario, the study says.

The study also says that legislation restricting fracking would lead
to peak employment losses in 2015 of nearly 3 million jobs in the no-fracking
scenario, 1.4 million jobs in the fluid-restriction scenario and 676,000 jobs
in the UIC compliance scenario.

Additionally, the US deficit would expand under each of the restricted
fracking scenarios–by $139 billion in 2014 in the no-fracking scenario, by
$66 billion in the fluid-restriction scenario and by $32 billion in the UIC
compliance scenario, the study says.

The study adds that the US trade balance would deteriorate, with the
most dramatic impact — a widening of $135 billion in 2014 — seen with the
no-fracking scenario. The current account deficit on trade in goods and
services would widen by $95 billion in 2014 in the fluid restriction scenario
and by $46 billion in the UIC compliance scenario.

The API report is the latest salvo in an exploration-and-production
industry campaign to derail passage of a bill that was introduced last month
in both houses of Congress. The bill would repeal a portion of the Energy
Policy Act of 2005 that states hydraulic fracturing is not subject to
regulation under the US Safe Drinking Water Act.

The Fracking Responsibility and Awareness of Chemicals Act, or FRAC Act
— sponsored by Democratic lawmakers Senator Bob Casey of Pennsylvania,
Representatives Diana DeGette and Jared Polis of Colorado and Maurice Hinchey
of New York — also would require industry to disclose what chemicals are used
in the fracking process.

Representatives for two of the lawmakers on Wednesday dismissed the new
study, calling it part of a campaign of “scare tactics” that the energy
industry has employed to defeat the proposed legislation.

“The continuous scare tactics by the industry lead me to believe that
maybe they have something to hide in the chemicals that they’re using,”
Kristofer Eisenla, a DeGette spokesman, said in an interview. “Our bill simply
repeals an exemption to the oil and industry and requires them to play by the
same rules as everybody else,” Eisenla said.

DeGette, who is also vice chairwoman of the House of Representatives’
Committee on Energy and Commerce, wants to “hold a hearing and commission a
study that looks at the economic and environmental impacts of fracturing,”
Eisenla said.

Hinchey spokesman Jeff Lieberson said in an interview that the IHS study
should be discounted, as it was not conducted independently.

“It’s just ridiculous,” Lieberson said. “Their forecasting, showing
production going down dramatically, doesn’t make sense because all we’re
trying to do is to go back to the way things were in 2004, before the loophole
was inserted in the 2005 energy bill.”

NY Times on this subject:

Of Hydraulic Fracturing and Drinking Water


A bill introduced earlier this month would bring federal oversight of hydraulic fracturing fluids – chemical mixtures pumped at high pressure into oil and gas wells in order to unlock deposits trapped deep underground.

Environmentalists welcomed the bill, but representatives of the natural gas industry say the legislation could lead to increased costs, job losses and increased competition for water — particularly in the West.

The bill, known as the Fracturing Responsibility and Awareness of Chemicals Act, (FRAC) was introduced in both the House and Senate by representatives from Colorado, Pennsylvania and New York. It essentially seeks to overturn a 2005 legislative tweak that placed fracturing fluids outside the regulatory purview of the Safe Drinking Water Act.

“Our legislation says everyone deserves to have safe drinking water by ensuring that hydraulic fracturing is subject to the protections afforded by the Safe Drinking Water Act,” said Representative Maurice Hinchey, a New York Democrat and one of the bill’s authors, in a prepared statement. “The bill also lifts the veil of secrecy currently shrouding this industry practice.”

Several kinds of fracturing fluids are used by the gas industry. Some are merely water or compressed gases injected underground at high pressure. Others are slurries that contain a host of chemicals and “proppants” — granular substances composed of resin-coated sand grains or similar synthesized materials — that expand in the ground and hold open fissures for gas and oil to pass through.

Hydraulic fracturing fluids were developed by Halliburton in the 1940s, but their use has increased recently as exploration of deep gas fields in places like the Marcellus Shale and Colorado’s Roan Plateau has stepped up.

Today, nine out of 10 gas wells in the United States currently use fracturing fluids, according to the Interstate Oil and Gas Compact Commission, a multistate government group.

Whether or not those fluids are polluting water supplies is a matter of debate, though a lengthy report by the investigative site ProPublica last year noted that this is often difficult to determine — not least because the precise makeup of fracturing fluids are considered trade secrets in the industry.

The pending legislation would require disclosure of ingredients.

Amy Mall, a senior policy analyst with the Natural Resources Defense Council, said that the push for regulation under the Safe Drinking Water Act is not without precedent, and that the proposed legislation would simply bring hydraulic fracturing in line with other industry practices.

“Mines and companies that inject waste underground are already regulated by the E.P.A.,” said Ms. Mall. “It’s not like they’re being asked to do something completely new.”

Gas industry representatives, however, insist that states already regulate hydraulic fracturing, and that federal oversight is unwarranted.

“In the past 50 years, more than one million wells have been fractured under state regulation, and not a single well has been linked to drinking water contamination,” said Jeff Eshelman, a spokesman for the Independent Petroleum Association of America, in an e-mail message.

Mr. Eshelman argued that regulation would increase the costs of building and maintaining gas wells and ultimately lead to the loss of jobs. Pointing to Alabama, the only state where E.P.A. Safe Drinking Water Act statutes have been applied to the underground injection of fracturing fluids, Mr. Eshelman also suggested that water scarcity could become more acute under a new regulatory regime.

According to Mr. Eshelman, the 11th Circuit Court of Appeals ruledin 1997 that only “federally certified” drinking water could be used as a fracturing agent in Alabama coal bed methane projects.

In 1997, the 11th Circuit Court ruled that fracturing fluids used in Alabama coal bed methane projects must be regulated under the Safe Drinking Water Act. To meet federal regulations, the state of Alabama developed a rule stipulating that “federally certified” drinking water must be used in fracturing fluids.

While the 11th Circuit decision was voided after the 2005 Energy Policy Act exempted the regulation of fracturing fluids under the Safe Drinking Water Act, Mr. Eshelman said that the FRAC Act could trigger similar rulings across the country and potentially put gas companies in direct competition with municipalities for water.

“This could pose a serious issue for parts of the country, such as out West, where water supplies are a major concern,” wrote Mr. Eshelman.

Estimate Places Natural Gas Reserves 35% Higher

Posted in Investment on June 19, 2009 by nedgrace

Honda and Toyota are manufacturing a vehicle that uses natural gas(LNG)

June 18, 2009

Thanks to new drilling technologies that are unlocking substantial amounts of natural gas from shale rocks, the nation’s estimated gas reserves have surged by 35 percent, according to a study due for release on Thursday.

The report by the Potential Gas Committee, the authority on gas supplies, shows the United States holds far larger reserves than previously thought. The jump is the largest increase in the 44-year history of reports from the committee.

The finding raises the possibility that natural gas could emerge as a critical transition fuel that could help to battle global warming. For a given amount of heat energy, burning gas produces about half as much carbon dioxide, the main cause of global warming, as burning coal.

Estimated natural gas reserves rose to 2,074 trillion cubic feet in 2008, from 1,532 trillion cubic feet in 2006, when the last report was issued. This includes the proven reserves compiled by the Energy Department of 237 trillion cubic feet, as well as the sum of the nation’s probable, possible and speculative reserves.

The new estimates show “an exceptionally strong and optimistic gas supply picture for the nation,” according to a summary of the report, which is issued every two years by a group of academics and industry experts that is supported by the Colorado School of Mines.

Much of that jump comes from estimated gas in shale rocks, which drilling companies have only recently learned how to tap. They have developed a technique called hydraulic fracturing, in which water is injected at high pressure into wells to shatter rocks deep underground, helping to release trapped gas.

The method, perfected in recent years in places like Texas and Pennsylvania, has set off a boom in new drilling, but is coming under increasing regulatory and environmental scrutiny. Shale gas accounts for 616 trillion cubic feet of reserves, or a third of the total, according to the report.

“New and advanced exploration, well drilling and completion technologies are allowing us increasingly better access to domestic gas resources — especially ‘unconventional’ gas — which, not that long ago, were considered impractical or uneconomical to pursue,” said John B. Curtis, a geology professor at the Colorado School of Mines and the report’s principal author.

The huge increase in estimated gas supplies comes just as concerns about energy security and climate change are prompting the most profound shift in energy policy since the oil shocks of the 1970s.

The Obama administration has sought more stringent fuel standards for new cars, and Congress is debating regulations that would progressively limit carbon dioxide emissions throughout the economy. The administration has taken a cautious approach to conventional energy resources, freezing leases to develop oil shale reserves and carefully reviewing future offshore leases for oil and gas.

Instead, the administration seeks to increase the share of renewable energy, especially wind and solar power. But experts say that meeting these goals will prove challenging given the scale of the nation’s energy use and the costs involved in switching from fossil fuels.

Shale gas currently provides a small fraction of the nation’s total gas production. But many experts believe the rising supply of natural gas means it can substitute for other fossil fuels. With the output of conventional gas forecast to decline, the Energy Department expects that shale production will rise substantially to meet higher demand, as will imports.

Natural gas accounts for about a quarter of the nation’s total energy use, and 22 percent of electrical production. Coal accounts for about half of the nation’s power generation, while oil dominates transportation fuels. While gas generates less carbon dioxide than oil or coal, it still accounted for about 20 percent of domestic energy-related emissions in 2006.

The Energy Department estimates that demand for natural gas will rise by 13 percent by 2030. In the power sector, utilities have been switching to natural gas from coal, but further increases in the use of gas will most likely depend on whether Congress puts a price on carbon dioxide emissions, as it is considering. That would favor cleaner fuels like gas.

“It’s nice to have aspirations about renewable energy and efficiency, but we need to recognize these are long-term goals and that we need something to get us there in the meantime,” said Guy F. Caruso, a former administrator of the Energy Information Administration. “Natural gas has a role to play as a bridge because of the long lead time and scalability issues of renewable fuels.”

That the nation’s gas reserves were bigger than expected does not mean they will necessarily be developed, Mr. Caruso warned. “There are some things to be cautious about,” he said, “and obviously one of them is cost, and the other is regulatory risk.”

In recent years, industry executives and analysts have been surprised by the discovery and successful development of new supplies of shale gas, like the Barnett Shale in the area around Fort Worth.

But higher drilling costs and the extensive use of water to fracture shale rocks have raised concerns about the long-run commercial potential of these supplies. Some environmental groups fear that hydraulic fracturing will pollute drinking water, and Congress is considering tighter regulation of the practice.

Mr. Caruso said that gas prices needed to be around $4 to $6 per thousand cubic feet to justify developing shale beds. They have fallen below that level at times in recent months, though gas settled Wednesday at $4.25.

For advocates of the gas industry, the report vindicates the potential of natural gas in the economy.

“Natural gas is part of the solution for a low-carbon future, and not an impediment,” said Chris McGill, the managing director for policy analysis at the American Gas Association, a trade group. “It has been difficult to get policy makers over that hump. Many have a vision of gas as a resource we’re running out of, and that’s just not true.”

Copyright 2009 The New York Times Company

David Rosenberg say Market grossly overbought

Posted in Investment on June 2, 2009 by nedgrace


“Two historical factoids underscoring just how overbought this market really is:

Going back to 1950, not once has the S&P 500 managed to surge more than 40% in advance of the recession ending. I think mostly everyone would agree that while the recession may be in its final stages, it is not over just yet.

On average, the S&P 500 rallies 20% from the lows to the end of the recession. I realize that the comeback is that we hit an egregious low, but we always do in bear markets. I am just talking about what the ‘norm’ is, in terms of rallies that typify the late stage of the recession in the real economy. So, it would not be untoward to see a 20% correction just to mean revert this rally from the lows, assuming that this is all about hopes of the recession coming to an end. Yes, that would be 750-plus. As an aside, Sam Stovall from Standard & Poor’s stated in the Sunday NYT that 800 on the S&P index is an inevitable retest point.

Again, back to 1950, by the time the S&P 500 was up 42% from a bear market low (as is now the case), not only was the economy not in recession at that point, but it was typically nine months into recovery mode. So even if the consensus is correct that the recession ends by September, the market right now is trading where it would ordinarily be in May 2010. What are we going to do for an encore? ”

So says respected economist David Rosenberg who has left Merrill Lynch and joined the Canadian firm, Gluskin Sheff.

A Call to Arms from Matt Simmons on Energy Situation

Posted in Investment on May 24, 2009 by nedgrace

This is Matt’s presentation to The Oklahoma State University Energy Symposium in Tulsa on May 17 2009

View this document on Scribd

Followup – Steve Leuthold May Boost Stock Holdings to Almost 70%

Posted in Investment on May 20, 2009 by nedgrace



By Lynn Thomasson and Betty Liu

May 20 (Bloomberg) — Steve Leuthold, who turned bullish this year after profiting from the equity market rout in 2008, said he may invest almost 70 percent of some funds in stocks as the economy stabilizes.

He’s betting that large investment firms, which have cut equity holdings, will put more of their assets in U.S. stocks in an effort to avoid underperforming the Standard & Poor’s 500 Index as the market continues to rally. Leuthold, who spoke in a Bloomberg Television interview, also said he’s buying gold, silver and Asian stocks on speculation the dollar will weaken.

Leuthold’s Grizzly Short Fund returned 74 percent last year as the S&P 500 posted the steepest annual retreat since 1937. He turned bullish in March, five days before the index sank to the lowest level in 12 years, telling Bloomberg TV that “every investor ought to be considering putting money into equities.” The measure has surged 30 percent since then, approaching his prediction of 1,100.

“When I said 1,100, people thought I was smoking something,” Leuthold, 71, said today. “Now it seems like a much more rational thing, and we are seeing many, many, many people that have said, ‘Hey, I’m going to wait until next year when the economy is improving,’ that are now saying, ‘Uh oh, I think we maybe better move before that.’”

On April 14, Leuthold said in an interview that the S&P 500 would surge to 1,100. The index closed at 908.13 yesterday, after sinking as low as 676.53 in March.

While the Grizzly Short Fund gained as the S&P 500 dropped in 2008, the Leuthold Core Investment Fund lost 27 percent. Still, that was less than the 38 percent retreat by the benchmark index for U.S. stocks.

See my March 4th posting on Steve by clicking here – he called the bottom!

Matt Simmons Latest Presentation on Natural Gas and Oil

Posted in Investment on May 20, 2009 by nedgrace

Here is energy guru Matt Simmons latest Presentation:

View this document on Scribd