Trading Alert : Oil Sector Is Not Yet At The Bottom

 

“This is the beginning, not the end, of the write-down process,” Paul Sankey, an energy analyst at Wolfe Research LLC, said on Bloomberg TV on Friday. “The biggest concern is that we’ll see weaker demand over the second half of the year.”

Exxon Mobil Corp. and Chevron Corp., the biggest U.S. energy producers, hunkered down for a prolonged stretch of weak prices after posting their worst quarterly performances in several years.

Exxon reported its lowest profit since 2009 as crude prices fell twice as fast as the world’s largest crude producer by market value could slash expenses. Chevron recorded its lowest profit in more than 12 years after the market rout forced $2.6 billion in asset writedowns and related charges.

Stung by the worst market collapse since the financial crisis of 2008, oil explorers are slashing jobs, scaling back drilling, canceling rig contracts and reducing or halting share buybacks to conserve cash. Chevron said the slump convinced it to lower its long-term outlook for crude prices.

“This is the beginning, not the end, of the write-down process,” Paul Sankey, an energy analyst at Wolfe Research LLC, said on Bloomberg TV on Friday. “The biggest concern is that we’ll see weaker demand over the second half of the year.”

Exxon cut share repurchases for the current quarter in half to $500 million after net income fell to $4.19 billion, or $1 a share, from $8.78 billion, or $2.05, a year earlier, the Irving, Texas-based company said in a statement on Friday. The per-share result was 11 cents lower than the average estimate of 20 analysts in a Bloomberg survey.

For Exxon, refinery profits fattened by lower costs for crude were more than offset by weaker results in the company’s primary business, oil and natural gas production, Exxon said. The company’s U.S. wells posted a $47 million loss.

Spending Cuts

Exxon reduced spending on major projects like floating crude platforms and gas-export terminals by 20 percent to $6.746 billion during the quarter, according to the statement. International crude prices fell 42 percent from the previous year to an average of $63.50 a barrel.

Chevron’s profit dropped to $571 million, or 30 cents a share, from $5.67 billion, or $2.98, a year earlier, the San Ramon, California-based company said in a statement. The per-share result was well below the $1.16 average estimate.

Chevron’s biggest business unit — oil and gas production – – posted a loss as the second-largest U.S. energy company recorded a $1.96 billion writedown on assets and another $670 million charge for taxes and projects suspended because they no longer make economic sense.

“The write-downs will get worse into the end of the year as companies complete their end-of-the-year SEC filings,” Sankey said. “The market still looks very over-supplied with oil and we’re in peak demand season globally.”

Pessimistic Outlook

Exxon Chairman and Chief Executive Officer Rex Tillerson was among the first oil-industry bosses to shrink spending as the crude rout began taking shape more than a year ago. After cutting the budget by 9.3 percent in 2014, this year’s reduction may exceed the original 12 percent target, the company disclosed during an April 30 conference call with analysts.

Tillerson, an Exxon lifer whose 10th year as CEO began in January, has been pessimistic about the prospects for an imminent oil-market rebound. On April 21, he told a Houston energy conference that the supply glut and low prices will persist “for the next couple of years” at least.

Those remarks proved prophetic: international crude prices that rose 45 percent between Jan. 13 and May 6 have since tumbled 21 percent, inaugurating the second oil bear market in 14 months.

“Chevron was a disaster; Exxon was a disappointment,” Fadel Gheit, an analyst at Oppenheimer & Co. In New York who rates the shares of both the equivalent of a hold and owns each. “A rising tide lifts all ships, but when the tide goes down, all ships go down.”

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Linn Energy : Motley Fool Review

LINN Energy LLC’s Earnings Are Full of Surprises
LINN Energy LLC and LinnCo LLC both ax their monthly distribution to conserve cash.

Linn Energy Llc Permian Tall
SOURCE: LINN ENERGY LLC

With the price of crude taking a second leg down over the past few weeks, it’s forcing oil companies to take a hard look at their future plans. Hard choices are also being made with LINN Energy LLC (NASDAQ:LINE) and affiliate LinnCo LLC (NASDAQ:LNCO) now making the difficult choice to suspend monthly cash distributions as a means to conserve cash as the downturn persists. But that was just one of the many surprises LINN Energy and LinnCo unveiled to investors in their second-quarter report.

Surprise! We’re axing the distribution
After first halving the payout earlier this year, LINN Energy and LinnCo are now suspending it indefinitely. In commenting on the move in the earnings release, CEO Mark Ellis had this to say:

After careful consideration, management has decided to recommend to the Board of Directors that it suspend payment of LINN’s distribution and LinnCo’s dividend at the end of the third quarter 2015 and reserve approximately $450 million in cash from annualized distributions. The Board and management believe this suspension to be in the best long-term interest of all company stakeholders.

As Ellis points out, the move is being made to preserve cash as LINN will save $450 million over the next year by not paying distributions. It’s money the company can use to fix its balance sheet, which has come under a lot of pressure due to persistently weak oil and gas prices. While this is a very unpleasant surprise, in all honesty it’s a prudent move given how worried investors have grown over its debt-laden balance sheet.

Surprise! We’ve buying our bonds hand over fist
The second surprise is actually directly related to that balance sheet as the company announced it was taking advantage of investor fears to buy back a huge slug of its debt at a hefty discount. Over the past month, the company has repurchased $599 million of its outstanding senior notes for a total of $392 million, or a 35% discount to par value. This is actually a really great use of capital as LINN is basically earning a 50% return on its investment in buying back these bonds at such a discount.

With those repurchases, LINN has now reduced its debt by $783 million year to date, which will save it $54 million in annual interest payments. That’s a meaningful reduction in debt for the company and this isn’t likely the last of the debt repurchases as CFO Kolja Rockov hinted in the press release of “potential future repurchases.”

Surprise! We had better cash flow and production during the quarter
Another positive surprise was the company’s operational results for the quarter, which trounced its guidance. The company had expected to produce 1,100-1,220 MMcfe/d during the quarter but actually produced 1,219 MMcfe/d, which was 1.5% higher than the second quarter of last year. Further, as a result of production right at the high end of its guidance range, the company is now able to boost its full-year production guidance by 4% given what it sees on the horizon.

In addition to this, LINN Energy produced $71 million in excess cash flow for the quarter, which was a surprising bounty given that the company was expected to have a shortfall of $20 million for the quarter. The biggest driver here, aside from the higher than expected production, was a vast improvement in expenses. Overall, the company was able to reduce its lease operating expenses by 18% year over year.

The company expects these cost reductions to continue as LINN is reducing its full-year operating expense outlook by 6%, which will drive further improvement in cash flow. Overall, the company is expecting to pull a total of $225 million out of its overall cost structure as a result of interest savings and expense reductions.

Investor takeaway
There’s no way to sugarcoat things: The distribution and dividend cuts from LINN Energy and LinnCo sting. But given the persistent weakness in oil and gas prices it’s really the right move for the company to make until there’s a bit more clarity on prices. On a more positive note, the company did make significant progress on debt reduction and its operational results were actually quite good. That being said, LINN Energy and LinnCo have a lot of work to do considering the abundance of debt and no distributions to give investors a reason to keep holding.

For investors looking to limit risk, here’s a list of U.S. shale-oil producers with market values of at least $50 million and share prices above a dollar as of Friday’s close with the highest ratios of debt to equity:

Company Ticker Debt – most recent quarter-end ($mil) Total equity ($mil) Debt/ equity Total return – November Total return – YTD
Ultra Petroleum Corp. UPL,-6.55% $3,426.000 $5.198 65,910% -13% -8%
Midstates Petroleum Co. MPO,-0.38% 1,669.150 $334.277 499% -23% -65%
Memorial Resource Development Corp. MRD,-0.32% $2,111.800 $436.278 484% -20% N/A
Isramco Inc. ISRL,-2.55% $112.712 $26.740 422% 7% 10%
Jones Energy Inc. Class A JONE,-5.25% $770.000 $182.937 421% -18% -30%
Exco Resources Inc. XCO,-9.85% $1,549.439 $427.042 363% -4% -43%
PetroQuest Energy Inc. PQ,-2.80% $422.500 $130.059 325% -21% -14%
Goodrich Petroleum Corp. GDP,-5.20% $609.464 $214.587 284% -27% -64%
Linn Energy LLC LINE,-25.93% $12,310.146 $4,932.133 250% -26% -35%
Halcon Resources Corp. HK,-2.91% $3,533.852 $1,517.866 233% -27% -41%
Total returns assume dividends are reinvested. Source: FactSet

Memorial Resource Development Corp. completed its initial offering in June, priced at $19 a share, for a total return of 14% through Friday’s close at $21.60.

Gold Can’t Find A Bid : Barry Ridholtz

This article was published on The Big Picture Blog of Barry Ridholtz -July , 2015

It is well worth reviewing and keeping on hand:

 

This was the week Greece inched closest to chaos, as a bank holiday and a technical default caused markets around the world to erupt in turmoil. They recovered somewhat Tuesday, and futures looked stronger Wednesday morning, but on Monday, the NASDAQ Composite Index lost 2.4 percent, the Standard & Poor’s 500 Index lost 2.09 percent and the Dow Jones Industrial Average fell 1.95 percent. Volatility exploded, as the Chicago Board Options Exchange Volatility Index surged 35 percent, its biggest increase in two years, to 18.85.

One would imagine that such a scenario might be constructive for gold. It has been called the best measure of fear, the only real currency, a refuge for those who plan for panic. So how is it doing these days? Spot prices were soft on Monday, despite the wild volatility in equities, drifting down a few bucks from about $1,180 an ounce to about $1,176. They fell a few dollars more yesterday, and are soft Wednesday.

I thought gold was an investor’s best friend during Armageddon.

I have kidded the goldbugs over the years, but the muted response to the latest crisis is surprising, even to a precious metal skeptic. Gold simply can’t find a bid.

This isn’t the sort of response we have come to expect from the “catastrophe metal.” Earlier this month, gold spiked to $1,202, from $1,172, raising hopes of a turnaround. The gold mavens began to dream of a new technical setup, perhaps even a resurrection of the currently deceased trend. There were renewed whispers about $5,000 price targets.

And then … nothing.

I have been writing critically about gold since it peaked in 2011. Its story has become an object lesson in how to manage your positions without letting emotion get the better of you.

Why is gold no longer responding to global catastrophes? Nobody knows for sure, but a few different theories might help to explain its behavior in the most recent crisis:

1) The old narrative has failed. Without a new and improved rationale, buyers aren’t motivated to accumulate more gold.

2) The U.S. economy has slowly improved, and much of the rest of the world is healing, too.

3) Other asset classes have been far more productive and rewarding investments in the last five years.

The failure of the classic gold narrative, recounted in great detail last year, is one explanation. The storyline was essentially a clever sales pitch filled with specific frightening details — the Fed was going to cause hyperinflation, the dollar would collapse, and so on. All of this proved to be false.

Further reducing enthusiasm for gold is the gradual improvement of the U.S. economy. Despite forecasts of imminent collapse, the major economic data — including employment, wages, spending, housing, autos and consumer sentiment — have all trended higher over the last five years. Tales of an impending depression were greatly exaggerated.

Then there are other asset classes. U.S stocks are up 167 percent over the last 5 years. China’s stock market, despite the recent 20 percent drop, is still up almost 10 percent for the year, and it has been on fire the last 2 years.

Each of these is a possible explanation for the lack of response to the Greek crisis. Perhaps a default to the International Monetary Fund is no big deal, and gold has no reason to rally.

Regardless, gold seems to going nowhere fast. Feel free to send me an e-mail explaining how wrong and stupid I am. I have an archive of all the messages warning me that gold would teach me a lesson in humility. “You’ll see” these e-mails smugly assure me, “your comeuppance will be here any day now.” My plan was to respond to each on its fifth-year anniversary with a chart showing the performance of gold versus all other asset classes and the details of how much money has been lost.

What once seemed like a snarky and amusing idea just looks cruel today.

Gold teaches the careful observer many lessons — about narratives, emotion, managing positions, leverage, one-way, can’t miss trades, the efficiency of markets, and story-tellers with product for sale. This is why you should never ever drink the Kool-Aid.

Astute traders ignore these lessons at their own risk.

 

Originally published as: Gold Shrugs Off Armageddon

“ The Gold Investor’s Handbook “ by Jack A. Bass, B.A. LL.B. ( available from Amazon)

 

 

Stress Testing Gold Miners / Sector Review As Gold Plunges :$1,100 Gold Is Critical

from Morgan Stanley

While the analysts expect gold will probably end up around $1,050, they do say an interest rate hike in the U.S., another correction in China’s stock market, and further selling of reserves by central banks could result in that worst-case scenario of $800 (and some very grumpy gold bugs).

Why the end of the era? Here’s what the analysts say:

But price stability in Precious Metals has ended. Indeed, gold and silver prices have been in trend decline since May. Why? The passing of deflation risk, anticipation of the US Federal Reserve’s first interest rate hike, another debt resolution for Greece, and the collapse in China’s equity markets (prompting loss-covering asset sales) – have all hit these prices over 8-10 weeks. So the PBoC’s announcement last week, about China’s surprisingly low official gold holdings, was really just the latest in a string of bearish events. It’s possible that the next short-term driver in metal markets will be declining oil prices (WTI & Brent down 10-16% in 4 weeks).

 

from Royal Bank of Canada

July 21, 2015 Precious Metals & Minerals NA Gold & Silver Equities: Stress Testing the Balance Sheets (3) Equity value erodes below $1,100/oz. With gold having dipped below $1,100/oz and silver below $15.00/oz, we have once again run a balance sheet sensitivity analysis for the North American listed precious metal producers in our coverage universe over the H2/2015 to 2018 period. As highlighted in previous research, the difference for the equities in the current gold price sell-off, versus prior price declines, is that the precious metals producers now have significantly greater levels of debt (Exhibit 2).

In conclusion, the companies best positioned to operate in a $1,000/oz price environment are the royalty-streaming companies Franco-Nevada, Royal Gold, Silver Wheaton, and Osisko Gold Royalties.

The gold producers that are best positioned to withstand a sub-$1,100/oz gold price are Acacia, Alamos, Centamin, Fresnillo, Goldcorp, Goldfields, Klondex, Newmont, Randgold, SEMAFO, and Tahoe (Exhibit 1).

While a number of companies have already cut or eliminated their dividends, we believe Barrick, Centerra, Goldcorp, Goldfields, Pan American, and Yamana could reduce their dividends. Stress testing at lower gold prices after growth capital is frozen. Our base case is $1,100/oz gold & $14.50/oz silver with scenarios at $1,000/oz & $13.25/oz and $1,200/oz & $15.75/oz.

We provide a onepage summary for 35 gold producers (Page 5) that includes: (1) annual operating forecasts, liquidity estimates and key credit ratios; and (2) a discussion of our scenario analysis for each company. We assume that the companies do not draw down on their existing short-term credit facilities, as many banks are likely reviewing the credit risk of these facilities. We model similar levels of sustaining capital and assume that new mine development capital is suspended, with the exception of development capital that is more than 50% complete, such as Goldcorp’s Cochenour project and Eldorado’s Olympias and Skouries projects. Stress test highlights $1,100/oz as a critical level •

At $1,100/oz gold and $14.50/oz silver, the North American gold sector remains ex-growth. In addition to the cost-cutting measures that have occurred to date, producers will need to place their highercost mines in harvest and accelerated closure mode or on care and maintenance. We would expect to see a reduction in management and board compensation and the use of private aircraft travel curtained. And below $1,100/oz, we believe some companies could see their lines of credit reduced or withdrawn, and companies with elevated levels of debt may be forced to hedge revenues, sell streams on mining assets, and/or raise distressed equity.

At $1,100/oz, companies that would need to continue making cuts to discretionary and fixed costs to improve their balance sheets include AngloGold, Barrick Gold, Hochschild, IAMGOLD, Kinross, Pan American, Primero, Teranga, and Timmins. • At $1,000/oz gold and $13.25/oz silver, we would expect mine production to begin to contract as mines are placed on care and maintenance or moved into accelerated closure. In addition to the cost-cutting measures mentioned above, we believe a number of the gold producers would need to consider mergers to capture operating synergies or other financial benefits. At $1,000/oz, all of the gold/silver producers in our coverage universe would continue to make cuts to operating and discretionary costs and the most leveraged companies would seek alternative sources of equity. • At $1,200/oz gold and $15.75/oz silver, we believe most of the sector can sustain their current operating mines, but mines with AISC above $1,100/oz would likely go into “harvest mode” with significant development capital spending deferred. In addition, at $1,200/oz the producers can still implement cash-saving measures, with further cuts to G&A, exploration, and sustaining capital. Priced as of prior trading day’s

$1,100 gold is a critical level for North American precious metals companies

At $1,100/oz gold, most of the companies in our coverage universe are expected to continue to cut G&A, exploration, and sustaining capital spending. We could also see producers begin an accelerated closure process for their higher-cost, shorter-life mines by spending on reclamation rather than sustaining capital and mining out residual reserves over a 2- to 3- year period. Another alternative would be to place mines on care & maintenance, which would still require ongoing security/maintenance costs, although this would avoid burning cash for longer reserve life mines during a period of high sustaining capital spending associated with major waste stripping or underground development.

However, at or near $1,000/oz gold, we would expect companies to announce that their high-cost mines are being placed on accelerated closure, even mines that previously had long reserve lives given the potential for significant cash burn. We believe that most of the gold and silver producers in our coverage universe would struggle in a $1,000 gold environment if they do not defer discretionary costs, cut capital, and close cash-burning mines.

The companies that currently have the highest AISC costs include AngloGold, Centerra Gold, Detour Gold, IAMGOLD, Kinross, Newmont, Perseus, Pan American, Silver Standard, Teranga, and Timmins Gold. High-quality producers and royalty-streaming companies We believe the current gold price pullback presents an opportunity to buy gold mining equities with strong balance sheets that offer an attractive risk-reward.

In our view, in a sub- $1,100 gold price environment, the most resilient North American listed gold producers with solid yet flexible business plans and strong balance sheets would be Acacia, Alamos, Centamin, Fresnillo, Goldcorp, Goldfields, Klondex, Newmont, Randgold, SEMAFO, and Tahoe (Exhibit 1). These companies have low net debt, a low capital spending to cash flow ratio, and low-cost mines. The gold companies with the most robust business models and in a sharply lower gold price environment are the royalty and streaming companies, including Franco-Nevada, Royal Gold, Silver Wheaton, and Osisko, which have little or no debt and minimal operating and capital exposure. Exhibit 1: NA Precious Metal Producers leverage versus AISC margins clearly show

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Morgan Stanley Oil Warning: The Crash / Glut Continues

Morgan Stanley has been pretty pessimistic about oil prices in 2015,

drawing comparisons to the some of the worst oil slumps of the past three decades. The current downturn could even rival the iconic price crash of 1986, analysts had warned—but definitely no worse.

This week, a revision: It could be much worse

Until recently, confidence in a strong recovery for oil prices—and oil companies—had been pretty high, wrote analysts including Martijn Rats and Haythem Rashed, in a report to investors yesterday. That confidence was based on four premises, they said, and only three have proven true.

1. Demand will rise: Check 

In theory: The crash in prices that started a year ago should stimulate demand. Cheap oil means cheaper manufacturing, cheaper shipping, more summer road trips.

In practice: Despite a softening Chinese economy, global demand has indeed surged by about 1.6 million barrels a day over last year’s average, according to the report.

2. Spending on new oil will fall: Check 

In theory: Lower oil prices should force energy companies to cut spending on new oil supplies, and the cost of drilling and pumping should decline.

In practice: Sure enough, since October the number of rigs actively drilling for new oil around the world has declined by about 42 percent. More than 70,000 oil workers have lost their jobs globally, and in 2015 alone listed oil companies have cut about $129 billion in capital expenditures.

3. Stock prices remain low: Check 

In theory: While oil markets rebalance themselves, stock prices of oil companies should remain cheap, setting the stage for a strong rebound.

In practice: Yep. The oil majors are trading near 35-year lows, using two different methods of valuation.

4. Oil supply will drop: Uh-oh 

In theory: With strong demand for oil and less money for drilling and exploration, the global oil glut should diminish. Let the recovery commence.

In practice: The opposite has happened. While U.S. production has leveled off since June, OPEC has taken up the role of market spoiler.

OPEC Production Surges in 2015

Source: Morgan Stanley Research, Bloomberg

For now, Morgan Stanley is sticking with its original thesis that prices will improve, largely because OPEC doesn’t have much more spare capacity to fill and because oil stocks have already been hammered.

But another possibility is that the supply of new oil coming from outside the U.S. may continue to increase as sanctions against Iran dissolve and if the situation in Libya improves, the Morgan Stanley analysts said. U.S. production could also rise again. A recovery is less certain than it once was, and the slump could last for three years or more—”far worse than in 1986.”

“In that case,” they wrote, “there would be little in history that could be a guide” for what’s to come.

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Gold miners on ‘knife edge’ : “Gold is on the ropes”

Gold miners on ‘knife edge’ as slump wipes out $19-billion

Gold’s slump to a five-year low this month is squeezing the world’s biggest producers of the precious metal, already struggling to rein in costs and pay down debt.

A rout in bullion has sapped investor confidence in gold miners, sending the benchmark 30-member Philadelphia Stock Exchange Gold and Silver Index of the largest producers to its lowest since 2001. A five-day losing streak through Monday wiped $19-billion off the index, which includes Barrick Gold Corp. and Newmont Mining Corp.

Reuters Jul. 22 2015, 6:27 AM EDT

 India goes cold on gold

The metal’s plunge is eroding profits at mines across the globe and stressing balance sheets in an industry where the biggest producers are weighed down by a record debt load of $31.5-billion. Gold futures in New York are heading for their longest losing streak since 1996 amid increasing speculation U.S. interest rates will climb this year, weakening the appeal of bullion.

“The whole industry is on a bit of a knife-edge,” said James Sutton, a portfolio manager at JPMorgan Chase & Co.’s $2-billion Natural Resources Fund who is underweight gold stocks. “They are making very, very small margins. Really everybody in the industry needs higher prices. You’re going to see some companies run into trouble.”

The industry, on average, needs about $1,200 an ounce to break even when all costs are considered, according to Sutton. Bullion for immediate delivery declined to $1,086.18 an ounce on Monday, the lowest since March 2010. It fell 0.9 per cent to $1,091.20 an ounce at 2:56 p.m. in London.

Wood Mackenzie Ltd. said Wednesday that about 10 per cent of gold miners would be loss-making with bullion at $1,100 an ounce.

Investors Souring

Investors have soured on gold miners as they battled to contain ballooning costs and the outlook for prices dimmed. Some producers have been obliged to enact bailout plans. Petropavlovsk Plc, a Russian miner once valued at more than $3-billion, was forced to tap shareholders for emergency funds earlier this year after its stock slid 99 per cent in five years.

“There’s a lot of pain to be taken in this sector,” Clive Burstow, who helps manage $44-billion at Baring Asset Management in London, said by phone. “Everyone has had to rationalize balance sheets, you’ve seen management turnover, you’ve seen dividends being either pared back or cut.”

Companies like Randgold Resources Ltd., a producer in West Africa, and Vancouver-based Goldcorp Inc. are best-positioned to weather the price slump, Burstow said.

Randgold, which built its business making its own discoveries in Mali, Senegal and Ivory Coast, has a war chest of at least $500-million to buy assets from distressed rivals.

“Another $50 off the gold price and this industry is toast,” Randgold Chief Executive Officer Mark Bristow said July 15, when bullion traded at about $1,150 an ounce.

1986 Low

The Philadelphia Stock Exchange Gold and Silver Index posted its biggest one-day fall in seven years on Monday, with Toronto-based Barrick declining to the lowest since 1986. The benchmark has tumbled 29 per cent in 2015, led by North American miners, with IAMGold Corp. down 51 per cent, Yamana Gold Inc. 48 per cent and Kinross Gold Corp. 41 per cent.

“This is a correction that has to take its course,” Markus Bachmann, CEO of resources-focused investor Craton Capital, said in a phone interview from Johannesburg. “Corrections do not stop halfway. Fundamentals do not matter. A lot of it is sentiment driven.”

Prices could fall below $1,000 an ounce for the first time since 2009, Jeffrey Currie, Goldman Sachs Group Inc.’s New York– based head of commodities research, told Bloomberg in an interview Tuesday.

“Gold is on the ropes,” Ross Norman, CEO of dealer Sharps Pixley, said in an interview with Bloomberg Television. “I suspect we’ll have another bear raid before long. I don’t think the bears have finished their game, they’ll keep punching it until it stops moving.

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