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8/14/2019 October 20th Sell Pitches: Hugoton Royalty Trust (HGT) and Regis Salons (RGS)
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Two Sell Pitches:
Hugoton (HGT) and Regis (RGS)
October 20th
James Cullen
Portfolio Manager
Boston College Investment Club
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8/14/2019 October 20th Sell Pitches: Hugoton Royalty Trust (HGT) and Regis Salons (RGS)
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Portfolio Management Perspective
We Still Own 35Stocks Too Diversified (i.e.
Closet Index Fund)
Raise and RedeployCash Are HGT and RGS
Best Ideas?
Hidden OpportunityCosts
Liquidity is Key NowVia Malkiels Random Walk
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8/14/2019 October 20th Sell Pitches: Hugoton Royalty Trust (HGT) and Regis Salons (RGS)
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Hugoton Royalty Trust (HGT)
Hugoton is a Royalty Trust Collects 80% of Profits from Natural Gas
Production on Properties Owned
Producing Properties in Kansas, Oklahoma,and Wyoming
A Spinoff of XTO Energy (BCIC Owns XTO)
Club Owns 12 Shares = $253
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8/14/2019 October 20th Sell Pitches: Hugoton Royalty Trust (HGT) and Regis Salons (RGS)
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Lets Sell Hugoton (HGT)
Natural Gas Price Volatility Already Have Portfolio Exposure (XOM, XTO)
Insider Selling a Negative CEO Topped List of Insider Sales When WeInitially Tried to Sell
Overpriced vs. Underlying Commodity
Dividend Yields Can Be Deceiving
Natural Gas Prices Fell Off a Cliff
Durability of Property Production a Question
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8/14/2019 October 20th Sell Pitches: Hugoton Royalty Trust (HGT) and Regis Salons (RGS)
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Natural Gas Price Volatility
BCIC Portfolio Also Holds XTO and XOM XTO: 84% of Reserves are Natural Gas (McfE Basis)
XOM: 61.5% of Production is Natural Gas (BOE Basis)
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8/14/2019 October 20th Sell Pitches: Hugoton Royalty Trust (HGT) and Regis Salons (RGS)
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HGT Insider Selling
Per TheStreet.com, Hugoton Chairman and CEO BobSimpson Topped the List of Insider Sales by DollarVolume for the Week of Sept. 30th
Simpsons sales were all above $29; HGT last closed at $21
Tangentially Related: Who is Jeff Gendell? Manager of Multi-Billion Dollar Hedge Fund Tontine Partners
Tontine Down Massively YTD; Liquidating Positions
Gendell Has a Great Reputation, Look at Positions He is Being
Forced to Sell as Potential Buy Pitches
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8/14/2019 October 20th Sell Pitches: Hugoton Royalty Trust (HGT) and Regis Salons (RGS)
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Hugoton vs. Natural Gas
Natural gas prices drive Hugotons ability to pay dividends. So, it makes sensethat the price of HGT will track with the price of natural gas. The above chartshows the relative performance of HGT relative to a natural gas ETF (UNG)
but note the divergence of late, and how HGT is still overpriced relative to UNG.
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8/14/2019 October 20th Sell Pitches: Hugoton Royalty Trust (HGT) and Regis Salons (RGS)
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Dont Trust The Dividend
Not All Dividends Are Created Equal Hugotons Dividend Has Doubled With Natural Gas
Prices This Year
But Id Prefer a Coca-Cola (KO) Dividend i.e., Over 340 Consecutive Payments, Since 1920
A Simple Run-Rate off the Last MonthlyDistribution Gives a 23% (!) Yield Sounds too good to be true(the Cal-Maine Principle)
No One True Yield for HGT; Dividend Floats/ChangesMonthly With Natural Gas Prices
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8/14/2019 October 20th Sell Pitches: Hugoton Royalty Trust (HGT) and Regis Salons (RGS)
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What Will Happen to Hugotons Dividend?
Distributions have a lag period. The most recentdistribution comes from a time of peak prices.
5 = 50 Rule of Commodities A 5% Price Decline Cuts Profits by 50%
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8/14/2019 October 20th Sell Pitches: Hugoton Royalty Trust (HGT) and Regis Salons (RGS)
10/17
Conclusion: HGT is a Sell
Pro Forma 10-Year NPV $8.00/Mcf Price, 10% Discount, 5% Annual
Production Declines $13.30/share
$2.70 Dividend 13% Forward Yield
Producing Fields Declining, RequiringMore Capital Investment
Better Natural Gas/Oil Plays, If We Want Dividend is Red Herring
And Well Pause for Questions
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8/14/2019 October 20th Sell Pitches: Hugoton Royalty Trust (HGT) and Regis Salons (RGS)
11/17
On to Regis Salons (RGS)
Operates or Franchises Over 10,700 Salons in NorthAmerica and Europe 5 yr. Total Salons Basically Flat, But Hides Shift in Mix
Away from Franchised (-45%) Salons Owned +38%, Aggressive Expansion Between
Construction and Purchases
Also Beauty Schools and Hair Restoration Centers
Target Consumer is Middle/Lower Class Point of Concern Given Discretionary Spending Trends
Club Owns 225 shares = $3,500
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8/14/2019 October 20th Sell Pitches: Hugoton Royalty Trust (HGT) and Regis Salons (RGS)
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Regis (RGS) vs. S&P 500, YTD
Regis is down roughly in-line with the S&P 500 year-to-date. I believe Regis line ofbusiness is more economically sensitive than the S&P 500 as a whole, and will likelyunderperform going forward in this spending-constrained environment.
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8/14/2019 October 20th Sell Pitches: Hugoton Royalty Trust (HGT) and Regis Salons (RGS)
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How Regis Has Grown
Concept Segment (Avg. Ticket, % Store Change, % Overall)
Regis Salons ($39,
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8/14/2019 October 20th Sell Pitches: Hugoton Royalty Trust (HGT) and Regis Salons (RGS)
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Other Problems
No Organic (Same-Store) Growth All Through Store Base Expansion
Consistent Poor Comps No Good Leverage
Negative Tangible Book Value
Value of a Salon Above Book?
EPS Estimates Still Too High Only Down 15%
Low Return Business (ROE < 10%)
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8/14/2019 October 20th Sell Pitches: Hugoton Royalty Trust (HGT) and Regis Salons (RGS)
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The Balance Sheet
Equity of $976mm as of 6/30/2008
Market Cap of $668mm at Fridays Close
Discount to Book? It Depends Goodwill + Intangibles = $1.015b
45% of Total Assets
Negative Tangible Equity Also, Current Ratio < 1.0
More Liquid Liabilities Than Liquid Assets
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8/14/2019 October 20th Sell Pitches: Hugoton Royalty Trust (HGT) and Regis Salons (RGS)
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Balance Sheet, Part II
Long-Term Debt Nearly Tripled Since 2004
L-T Debt Maturity Schedule
This Year: $217.5mm 1 to 3 yrs.: $128.3mm
Credit Rating Downgraded to Speculative
Can Regis Roll Over Borrowings? A Must to Continue Expansion Grow Revenues
If So, At What Cost? (c.f. Credit Spreads inEarlier Presentation)
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8/14/2019 October 20th Sell Pitches: Hugoton Royalty Trust (HGT) and Regis Salons (RGS)
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Conclusion: RGS is a Sell
Target Consumer Under Pressure
Poor Long-Term Economics and Returns
Questionable Strategy: Lever Up to ExpandDuring Economic Boom Time
Margin of Safety (
