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Linn Energy, LLC Message Board

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  • rrb1981 rrb1981 Jan 25, 2013 7:17 PM Flag

    Howard Weill Analysis (synopsis)

    How interesting that many of the comments I made regarding the balance sheet were echoed by Howard Weill boutique...targeting 3.0-3.5x debt/ebitda ratio...I guess that metric does matter :-)

    Also interesting that they note the overall company decline rate is now 20%..this is no doubt heavily influenced by the Granite Wash drilling, where decline rates are high. Not a deal breaker, they just have to have the discipline to set their maintenance capex level appropriately and not base the distributions off of peak (flush) production rates..which no doubt they are prudent enough to understand.

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    • I noticed that too, rrb (which is why I included that part of the report. The report itself is sixteen pages long, including a bunch of graphs and spreadsheets.)

      The 20% decline rate is actually quite low compared to E&Ps that operate primarily in one basin such as Eagle Ford or Bakken.

      Some interesting data per your prior observations:

      Accretion per $100M Purchase Price by acquisition, and accretion per unit:
      Jonah Field: .05, .26
      Salt Creek: -.01 (but improving to 0.09 by 2016); -.01, 0.18 by 2016
      Hugoton: .03, .09
      East Texas: .05, .04
      Granite Wash: .06; .16

      • 1 Reply to rlp2451
      • Chesapeake did a very interesting study a few years ago on overall US decline rates including shale gas fields.

        The high decline rates are an issue for companies that either have no base production that is long lived (in the flat part of the curve) or companies that are continuously drilling at a rate above the previous year. The faster you run the harder it is to go faster the next year.

        In the case of Linn, the decline rate of 20% would drop back to ~10% within a year or two if they ceased drilling in the Granite Wash so aggressively. I'm not advocating they stop drilling, the returns are such that it offers them the absolute best returns, it just comes with the added need to managed the drilling budget, decline and cash flow.

        One of the best example is the Haynesville, where wells can come online at 17,000 to 20,000 mcf/d before declining 85% in year one. A company producing 100,000 mcf/d of stable (~7% decline) gas could drill 1 Haynesville well and push their decline rate to ~20% on a blended basis, yet the next year, with the well heavily declined down to say 3000 mcf/d, the rate would drop back towards the 7% range assuming no other wells were drilled.

        One company that has done a superb job of managing decline is Range Resources. They have kept their foot on the accelerator for years, but typically have not operated with a budget that runs too far out of cash flow. They also seem to manage to grow production year after year with low F&D costs, low operating costs. I am really suprised that companies like Range or Southwestern or even Chesapeake have not brouht a E&P MLP public. Aside from Pioneer, there really aren't any E&P MLPs that have a public c-corp sponsor. I would have thought we would see more sponsored E&P MLPs where the c-corp divests their high PDP down to the MLP and redeploys the cash into exploration. Will be interesting to see if Quicksilver follows through with their proposed E&P MLP which might fit into that model of being a conduit for drop downs of high PDP properties.

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