I've been a critic of Linn the past year or so, especially with the acquisition spree when they should have been focused on the much higher return Permian infill and development drilling and of course, the Granite Wash.
I believe with the benefit of hindsight, Linn management will regret buying properties like they just acquired, when instead of trying to be big, they should focus on seeking the highest return properties and investing heavily in them.
Instead of maximizing per unit exposure to the Granite Wash, and remember, the GW wells, on average, pay out in about 1 yr, with some paying out in as little as 4 months!! and some taking maybe 18 months. Point is, the GW is by far the crown jewel of the company in terms of development, with perhaps the Berea in California being the crown jewel of cash flow (with its 3% nearly flat decline rate).
Instead of essentially doubling the unit count over the past 3 years, they should have sat tight, put every penny they could into the GW and they could have created a significant amount of value rather than just bloating up the company buying depleted fields and arbitraging the difference in the private market value and what the public will accept for a return.
I keep stressing the point that Rockov said more than once, that each GW well, after 3 or 4 yrs and once it was in the flat part of the decline curve, added 1.5 cents of DCF per unit (that was when they had around 100 million units outstanding).
At the time, they had more than enough locations to in essence, double the distribution (keep in mind that it would take quite a few years to drill their inventory).
Anyway, point is, Linn has gone a different direction, opting for the quick and easy dcf increases via the acquisition of heavily PDP reserves, knowing that down the road, it will be even that much more difficult to make accretive deals.
As always, I tip my hat to the company for being well managed in terms of taking care of their properties, but they are now approaching a $8 billion market cap. They can drill all of the GW wells they want, but now they will add only half the amount that they would have, since Linn has essentially doubled the unit count.
The latest acquisition in E Texas was 100% PDP. They essentially have no additional drilling opportunites in that location aside from infill drilling. To offset decline, they will have to put capital to work in another basin or acquire contiguous acreage. What was the purpose of adding yet another geographic basin to the portfolio since it will likely be in decline from here on out? This looks like a very foolish purchase.
For example, they bought 24,000 mcf/d of production with, say a 8% decline rate for $175 million.
They could have drilled say, 25 Haynesville wells (also dry gas like the east texas cotton valley sands and ended up with as much or more flat lined production in 3 or 4 yrs, while also likely getting a lot more capital back. The problem is that it takes time. These deals are easy. You get cash coming in on day 1 and you pay for it later when 5 or 6 yrs from now, you struggle to keep DCF at 1.0x because you are fighting the decline curves.
Do any of you Linn long time holders actually believe that acquiring 100% PDP properties with no upside is beneficial for Linn long term? Shouldn't Linn be focusing on drilling wells that are high return rather than acquiring wells that are flat and declining? Linn already has plenty of flat line production, what they need is a growth component composed of drilling in high return areas like the Permian and GW where they can literally recycle capital every 12 months and offset declines with the drill bit.
On your Granite Wash comment.... might you want to reconsider?
There were already 152 permits surrounding their "monster" well, back in July of 2010.
Here is the location, who is near it (like CHK, NFX, ect) & some details.
I don't know why Linn's essential strategy isn't being considered here: hedging. 2013 ng prices are in the mid-3s; 2014 prices are in the high 3's. Beyond that prices reach into the 4s. Fixed price swaps, which is what Linn is concentrating on, should be at the same prices as puts, if not a bit higher. So if Hugoton and the East Texas properties are accretive at current prices, wouldn't higher hedged prices bring more profit as time (and not much of it) goes by? (Because of the swaps, I think that many of the contracts are not open-market trades. I'll check with Clay J. and post the info.)
I guess it depends on whether you want LINE to be an MLP or a growth company. I purchased units in an MLP so I am fine with them doing what MLPs are supposed to do.
Good question though.
I think you missed the point.
E&P MLPs are becoming a dime a dozen. Not much distinguishes the smaller ones from one another. Linn has size, and it did have the allure of high exposure per unit to the GW.
It seems like a new E&P MLP IPO's about every 3 or 4 months.
The list, probably not complete, is: LINE, BBEP, EROC, DMLP(royalty MLP), LGCY, PSE, VNR, LRE, QRE, MEMP, EVEP, CEP(nearly dead) and I think there are 1 or 2 more in the queue to be IPO'd.
Linn, in my opinion, screwed up what could have been a very unique situation where an MLP could grow organically, for years, without having to issue equity. Every time you issue equity, even if it is accretive, it makes it harder to grow production on a per unit basis.
Linn had 10 yrs worth of organic growth, that it dilluted away. Oh, they made accretive acquisitions alright. They will manage to maintain, and even boost the distribution, but at the expense of future growth.
Buying 100% PDP dry gas reserves that are marginally accretive isn't conducive to long term per unit growth.
I have run the numbers, again, it is 100% PDP. With Linn's cost of capital, and being very generous with assumed margins, Linn is essentially buying assets that will be accretive for a few years. Of course, in a few years, Linn can go out and buy another round of assets, hope they can garner enough accretion to cover the short fall. Rinse and Repeat.