The Zacks Analyst Blog Highlights: Kinder Morgan Energy Partners, El Paso Pipeline Partners, Iao Kun Group Holding, Full House Resorts and Caesars Entertainment

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Oct 14, 2014, 10:11 ET

CHICAGO, Oct. 14, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Kinder Morgan Energy Partners LP (NYSE:KMP-Free Report), El Paso Pipeline Partners LP (NYSE:EPB-Free Report), Iao Kun Group Holding Company Limited (Nasdaq:IKGH-Free Report), Full House Resorts Inc. (Nasdaq:FLL-Free Report) and Caesars Entertainment Corp. (Nasdaq:CZR-Free Report).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Monday's Analyst Blog:

Energy MLPs Set for Earnings Beats

The thriving or suffering of midstream energy players depend on crude oil and natural gas production. The higher the output, the more will be the business related to storage and transportation of oil and gas. And since the prices of these commodities are the impetus to production for upstream energy firms, the fate of a midstream business rests on the market rates of oil and gas.

A thorough understanding of the crude and natural gas pricing environment is warranted for any thesis on oil and gas production pipeline master limited partnerships (MLPs). The same holds true for their bottom-line projections ahead of an earnings season.

Q3 Crude Pricing Environment

During the last two months of third quarter 2014, West Texas Intermediate (WTI) crude traded significantly below the psychological threshold of $100 per barrel. Oversupply of the commodity along with weak global economic data was responsible for the rout. Strong U.S dollar also amplified the supply concern. Let's have a deeper look on the quarter's demand and supply scenario:

Lower Demand: Owing to weak global economic data, the European and Chinese refiners considerably lowered their demand for oil. On top of that, a strong U.S. dollar, following upbeat employment data, added to the concern as Asian and the European importers found crude quite expensive.

Oversupply: While looking at the supply side, we figured that domestic crude oil production was at the highest level since 1987. Crude inventories ballooned to 370 million barrels, thereby created a supply glut. (Read: What's Keeping Oil Prices Below $100 a Barrel?)

Q3 Natural Gas Pricing Scenario

From a peak of about $13.5 per million British thermal units (MMBtu) in 2008, natural gas traded below $4 per MMBtu throughout the entire third quarter, representing a decline of more than 70% over six years. Abundant supply of natural gas owing to shale revolution is primarily responsible for such a low price.

The Shale Revolution: With the advent of hydraulic fracturing (or fracking) – a method used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals – shale gas production is now booming in the U.S. Coupled with sophisticated horizontal drilling equipment that can drill and extract gas from shale formations, the new technology is being hailed as a breakthrough in U.S. energy supplies, playing a key role in boosting domestic natural gas reserves.

A weak third-quarter pricing environment is less likely to have offered explorers an incentive to produce oil or gas. As production is the key determinant of an oil and gas midstream business, an adverse effect is expected to be reflected in their financials for the quarter.

The Way to Pick Right Stocks

Picking the best stocks from the MLPs engaged in midstream operations especially during the unfavorable business scenario is not a simple task. Our proprietary methodology, however, makes the job fairly simple. You could narrow down the list of choices by looking at stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Earnings ESP.

Earnings ESP is our proprietary methodology for determining stocks with the best chance to surprise with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Here are two MLPs that are poised to beat estimates according to our methodology:

Kinder Morgan Energy Partners LP (NYSE:KMP-Free Report) is the largest independent owner and operator of petroleum product pipelines in the U.S. Its pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide and other products, while its terminals store petroleum products and chemicals and handle bulk materials such as coal and petroleum coke. It owns or operates more than 28,000 miles of pipeline and approximately 180 terminals.

Kinder Morgan Energy has an Earnings ESP of +1.61% and a Zacks Rank #3. The Zacks Consensus Estimate for the to-be-reported quarter is pegged at 62 cents per unit.

The partnership is set to report its third-quarter results on Oct15.

El Paso Pipeline Partners LP (NYSE:EPB-Free Report) is the owner and operator of natural gas transportation and storage facilities in the U.S. The partnership's interstate pipeline systems, which spread over roughly 13,000 miles, serve Rocky Mountain region, Midwest region, and the southeastern region.

El Paso Pipeline Partners' third-quarter prospects look bright as it has an earnings ESP of + 7.69% and a Zacks Rank #3. The Zacks Consensus Estimate is 39 cents per unit.

The partnership is expected to report its third-quarter results on Oct. 15.

Gambling Stock Roundup

Last week ended on a mixed note. Weak performances in the Golden Week – the seven-day National Day holiday in China – proved yet again the heaviness in the region. Share prices of companies operating there continued to tumble. In fact, the declining revenue trend in Macau over the past four quarters is expected to continue in October.

However, the pessimism was partially tempered by the Rolling Chip Turnover results declared by Iao Kun Group Holding Company Limited (Nasdaq:IKGH-Free Report) that were up 5% year over year. Meanwhile, Full House Resorts Inc. (Nasdaq:FLL-Free Report) seems to be on the path of recovery with a move taken by its three shareholders to appoint a new set of directors on its board. (Read last to last week's development: Gambling Stock Round Up for Oct 6, 2014)

Recap of the Week's Important Stories:

1. Though visitation pattern was high in Macau during the Golden Week, average daily revenue was reportedly only 1.2 billion Macau pataca during that period, down 33% year over year. Per the analysts, mass floors were busy, while VIP gambling remained weak. We believe that the government's anti-corruption drive has affected footfall keeping away VIP gamblers from the casino floor.

However, this has been the trend for some time now, resulting in revenue declines in the region for the past four months. September witnessed an 11.7% fall in revenues. What is more concerning is that the situation is not expected not improve in the near term.

With more troubles rearing their head up, a few analysts expect a steeper decline for the month of October. For example, restriction by China to issue group tour visas to Hong Kong because of the protest as well as the recent implementation of ban on smoking in the casinos are expected to hurt results.

2. Iao Kun Group Holding announced last week that Rolling Chip Turnover for VIP rooms in Macau for the month of September was $1.18 billion, up 5% year over year. Meanwhile, win rate for the month was 2.84%. Notably, Rolling Chip Turnover is used by casinos to measure the volume of VIP business transacted and represents the aggregate amount of non-negotiable chips players purchased.

3. Three shareholders of Full House Resorts who own 6.2% of the outstanding shares of the company sent a letter to the other shareholders. Per the letter, they intend to call a Special Meeting in order to expand the board of directors to ten of which five would be highly qualified individuals. These shareholders are concerned that the company has of late not performed diligently.

These shareholders particularly mentioned that over the past one year, the company has lost almost 60% of its share price. They claimed that over the past five years, executive compensation has increased by a substantial 59% which is unjustified given the size and performance of the company.

To add to it, the company has not performed well over the past few quarters. In fact, during the last quarter, Full House Resorts posted disappointing results given the ongoing competition and soft economic conditions, particularly in the Midwest .

Despite weak performances and three poorly performing acquisitions, they stated that the company entered into agreements to acquire Fitzgerald ' s Casino in Tunica, MS in Mar 2014 for $63 million, exclusive of working capital and expenses. In the current acquisition agreement of Fitzgerald ' s Casino, the company failed to manage risks and lost 97% of its escrow deposit.

As things stand at the company, these shareholders believe that the board requires additional experience and independence. It stated that the company requires a board that will work diligently to manage existing properties and focus on strategic alternatives.

4. Caesars Entertainment Corp. (Nasdaq:CZR-Free Report) has also been struggling to restructure a portion of its $24.2 billion long-term debt and has appointed Keith Causey as Senior Vice President and Chief Accounting Officer. Causey will replace Diane Wilfong, who has left the company.

Causey will be responsible for overall corporate accounting and internal audit functions and will report to Donald Colvin, Executive Vice President and CFO of Caesars Entertainment. Prior to joining the company, Causey has gathered critical experience in various fields at General Motors Company and DIRECTV. The company believes that with more than 20 years of experience, Causey brings with him an extensive technical accounting background as well as regulatory compliance expertise making him an ideal candidate.

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