Interesting commentary on the development of the Granite Wash play. Management projects $.015/unit per well of accretion after the well has paid back, liquids have played out and the well is in the "flat" part of the decline curve.
As these wells have extremely high liquids production initially, they get full payback within 6-18 months depending on volumes, liquids pricing etc.
So, in looking at it from another angle, if Linn had the acreage and capital, it could drill a total of 168 Granite Wash wells, which would amount to $2.52/unit in sustainable cash flow. My point is that they could replicate the companies cash flow with $840 million in capital (168 wells x $5 million per well).
While Linn is focused on low risk recompletions, stimulations, workovers etc and balancing it with high return drilling like the Granite Wash, they could shift their drilling capital to 100% Granite Wash type drilling. As their capital budget is 155 million, they could, in theory, drill 31 Granite Wash wells per year, which would result is $.46/unit in accretion!
My primary concern with Linn, and keep in mind, I am a big fan, but the MLP model is a huge drain on cash. I always get concerned with how long they can keep up the distributions and also maintain drilling inventory. They continue to reference the desire to make $500 million per year in acquisitions. Are the acquisitions really necessary?
Yeah, well you know you can take the boy out of Brooklyn but you can't take Brooklyn out of the boy. I grew up there and remember taking the subway to college in Grammercy Park and thinking that anyone who had a lawn was rich!
I remember the guys who used to trek up I 95 to see the Giants on TV in CT when I was a kid. Those players you mentioned were legends. These guys used to drive up in blizzards, rent a motel room in Stamford and watch the Giant's game due to NY blackouts of home games.
That brings back memories of yesteryear. Thanks for that.
LINE looks like it is marking time and I hope to see a breakout soon!! It sure is trading in a narrow range and somethings got to give; hopefully to the upside!
Stay tuned and I enjoy your posts!
The exit of Linn from day to day operations won't likely be a problem. I think he was necessary to float the idea to investors as he was viewed as a E&P guy, not just a finance guy, which is what Rockov is/was.
I'll confess that I don't honestly understand some of their decisions. I know they sold the legacy Appalachian assets because they did not want the risk of developing the Marcellus assets and that bringing on the Marcellus, with much higher pressures, would in essence prevent their shallow conventional Appalachia wells from getting into the gathering systems. I know that the high decline rates of 90% scare some, but my statement has been that if the well is getting anywhere near full payback within 1 yr, who cares if the decline rates are high the first couple of years. You drill the well, get full payback, take the proceeds, drill another well, repeat over and over en masse. This is a different approach that most E&P MLPs that want to buy properties that are 70% or more PDP and just sit back and do the infill drilling to keep production flat.
This was the point I was making previously about the Granite Wash. They mentioned on the conference call, that long tem, the Granite Wash wells would add $.015 per unit in accretion. This was after full payback and it had declined (I think they alluded to 3 or 4 years in). My point was this, if the Granite Wash well costs 5 million and adds $.015/unit in DCF, then one could in essence, replicate the company by drilling 168 wells (for a total of $840 million). Compare that to the current enterprise value. Granted, that $840 million doesn't take into account the acreage. If those wells are on 160 acre spacing, that comes out to 27,000 acres. If they pay $10,000/acre, that would be another $270 million. So, for a little over $1.1 billion, a company could buy 27,000 acres, drill 168 Granite Wash wells and have a portfolio that is producing a similar amount of cash flow that Linn is currently generating. While I like the idea of E&P MLPs picking up old properties that can be reworked and have very low decline rates, I think the idea of drilling and controlling your own destiny is also important.
" as a longtime NY Giants fan "
I knew there was a reason I liked reading your stuff...as a kid born and raised in NYC, I "grew up" with the "Umbrella Defense", Charley Conerly, Kyle Rote,Frank Gifford, and Em Tunnell. Watched the Giants on TV as a kid, and although I didn't have the scratch or the connections to get tickets, regularly trecked out to CT to watch July "Spring Training". Finally got connected in the 80's so I was privileged to see LT and "The Tuna" put together the Championship seasons of '86-'87 and '90-'91.
" I am prejudiced towards drilling and working stripper wells because I used to participate in them in the Osage in OK. They could be drilled cheaply, pay out in a month or so back then, and choked down or ramped up ( even by a few bpd) depending on the oil price and your gathering contracts. We've had some of those 9 bl wells producing for 12 years."
Achieving payback quickly and then having a producing well for 12 years is my idea of a great investment.
I only objected to the refernce to "stripper wells" because of a recent experience. Was considering buying shares of a "Young-Old" company - Magnum-Hunter...about to close on a deal to acquire a BK Appalachian driller. Part of the BK driller's assets included 2000 wells producing 1000 boe/day - characteristic of "stripper wells" - which made me wary of the caliber of the leases. I didn't make a meaningful investment in the "new" MHR until I heard the CEO explain that the wells were connected to an overpressured pipeline, and were pumping less than 2 hrs/day on average. One of the first jobs they were going to tackle was to bring in some compressors and drop the pressure in the pipe.
"As to the wildcatter's that is a whole different bunch of dudes. It's like those guys at the craps table in Vegas betting Yo's and Midnights while stripper well drillers and in fill boys are playing the Line, 6's and 8's."
Sounds like Gable and Tracy in "Boom Town" - a movie from my youth. Today's wildcatters have geologists on both their right and left sides - and have a core samples dating back to before EXXON and Mobil merged and at least 2-D studies, if not 3-D, to tell them where to drill. The only "wildcatting" they do, (at least during business hours) is prospecting for cash to lease the land and drill the wells.
"let's hope that LINN continues its nice roll"
Thanks for your post.
1. I do not have specific intimate knowledge of Mike Linn's thinking. From what I do know however is that he has sold a good number of Linn shares and retains a bunch. He has not left the company and continues in an advisory capacity.
I did notice the Steeler's Colors on Linn's logo and that means a lot, especially with the Company located in the Oil Patch with a few good teams there including America's Team (which as a longtime NY Giants fan I dislike immensely). Yet, I am sure that all football fans alike give the Steeler's enormous respect for their coal miners grit crushing defense as well as Ben's leadership on offense. BTW: Was Ben guilty of more off field shenanigan's lately?
To your point, if Mike relocates back to the 3 rivers to set up some other ventures, I too, would not be surprised.
2. I also agree with you on NG pricing and would never expect that a 6:1 ratio to be achieved. I do think that a $5 to $6 stabilized pricing range is possible and believe that LINN's short term hedges are fine at current levels. The amount of shale gas out there is huge. But I am sure that those in the industry smarter than me know when to drill and how to meet their margins in doing so. My wish here is to be sure that the distribution rate on my initial investment in the several MLP's I own is retained and that there is some upside level of appreciation. I consider the distribution rate as keeping a floor on the pps and that is a good hedge for me.
3.Andydee, I lived (in Tulsa) and breathed as a kid in the oil patch in TX and OK during the late 70's and early '80 and saw a few things there so I learned a little bit about drilling and drillers then. I agree with your comments about the MLP contribution to our economy by many of the rework activities. My preference is reworks and as we know that is an academic exercise in math. I am prejudiced towards drilling and working stripper wells because I used to participate in them in the Osage in OK. They could be drilled cheaply, pay out in a month or so back then, and choked down or ramped up ( even by a few bpd) depending on the oil price and your gathering contracts. We've had some of those 9 bl wells producing for 12 years. That's just me. As to the wildcatter's that is a whole different bunch of dudes. It's like those guys at the craps table in Vegas betting Yo's and Midnights while stripper well drillers and in fill boys are playing the Line, 6's and 8's.
I enjoyed your comments and let's hope that LINN continues its nice roll.
I originally compared the E&P industry to the textile industry to show how the first shale players (Devon via Mitchell) and others were like the textile manufacturers that invested in state of the art looms. The state of tha art looms made them a low cost producer just like the shales made the E&P's the low cost producer with low geologic risk. As other textile companies invested in newer looms, they brought the average production cost down, which in turn just lowered the overall selling price. We are now seeing the same thing play out with natural gas now that every E&P is a shale play.
The E&P's that have oil exposure will prosper while the natural gas E&P's will struggle to achieve strong returns without plowing 100% back into the business.
Fancy meeting you here.
Have you abandoned your notion that production and # of rigs is intimately related...remember the discussions we had about a year ago or so?
Anyway I'm back to MLPs, after ranging far afield, and the first one I put money on was my long-term favorite, LINE.
As I recall when Rockov and Linn were first making the rounds of the various conferences Rockov said their formula for success involved growing at least 3 to 5% per year organically and 7 to 10% a year by acretive acquisitions of long-lived assets. That's the reason they sold their Marcellus property to XTO for $600M - in order to make the most of those assets they would have to abandon their notion of how a "Proper MLP" operated.
Although I'm not particularly claiming to be an interpreter of Ed Cohen's machinations, I suspect that had a part in his decision to abandon the MLP form for ATN, as well.
As I understand the thesis, the MLP formula for success involves attracting investor's via tax-sheltered distributions. The greater the size of the distribution, the more attractive the stock, and the more likely new shares will be accepted by the marketplace. Every MLP has to seek new equity since they pay out a large percentage of their distributable income, thus the need to insure new investors are attracted to their offerings.
In order to assure large distributions the "maintenace capital budget" must be kept relatively low - that suggests inexpensive, 99% success-rate infill or PUD drilling and lots of work-overs, with only a moderate amount of "wildcat"(hardly) exploration.
I think the formula identified by the two founder's of LINE has worked pretty well thus far. Even though one of them, Mike Linn is gone, I don't see Rockov and Ellis changing it now...
Besides LINE, I've purchased some ENP, EVEP, and LGCY in the E&P arena and MWE, NGLS and EPD in the G&P arena. I've been away from MLPs since the late Spring, so I'm a bit out of it. I made these purchases based on my knowledge of those companies from my active days. I assume you are still in ATN and LINE - any other favorites?
You said "Have you abandoned your notion that production and # of rigs is intimately related...remember the discussions we had about a year ago or so?"
No, I still think they are linked. One must look at the rig and where it is at, but I believe a higher rig count means more production, be it a rig that is camped out for 2 months drilling an Austin Chalk well, a highly sophisticated rig drilling a Haynesville well or a truck mounted rig drilling a Cherokee Basin coal bed methane well that can be done in 2 days.
I also believe the whole industry is in for real trouble. I would draw the analogy to the textile industry. When one textile plant would make capital improvements and suddenly have a cost advantage, then the others followed suit and soon the advantage was gone and they ran themselves out of business. 10 years ago, Devon (by buying Mitchell) had a huge advantage with the Barnett Shale. They could drill hundreds of wells, and provided they weren't asleep at the wheel, they were virtually assured of hitting gas. Once they cracked the code on how to drill and complete, it was off to the races. Soon others joined the fray. Now virtually every E&P company bills itself as an unconventional resource play typeo f E&P.
I think for anyone to make any money in E&P, you need a heavy liquids exposure. That is why I like Linn and have become less interested in Atlas.
It will be very hard for gas to go back to $7.50/mcf. The economics of the shale plays are driving gas down to $5.00/mcf.
As for the model, I dislike the need to constantly acquire new properties. In my own mind, what Linn is doing is drilling just enough to keep production going up and paying out everything else. If a company like Williams can grow reseres and production by 10% a year, they could just as easily choose to grow the production and reserves at 3% and use the cash that they could have drilled with, to pay dividends or buyback stock etc.
As for favorites, Williams is dirt cheap when you net out the pipeline holdings and Canada.