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Linn Energy, LLC (LINE) Message Board

  • jrad52 jrad52 May 5, 2013 3:45 PM Flag

    Nothing to do with Barrons, but

    I have no skin in this game. I owned LNCO from its IPO until a week or so ago when the premium to LINE increased to $ 4.50 which made no sense. So I don’t really care if LINE soars or tanks on Monday or thereafter.

    My only point is that all of the production MLPs have sucked wind for the last 2 years. They all talk about how oily they are, or how oily they are becoming, but they are still big in nat gas and NGLs and have done terribly. I ran a 2-year comparison chart of LINE, BBEP, EVEP, PSE, and VNR and all show negative returns over the 2 year period. I think Yahoo does not include distributions in its charts, so the chart understates the actual return. But even including distributions would show returns for all of them less than the distributions they pay.

    Same thing for a 1-year chart, except BBEP (which I own, but probably not for long) is slightly positive for the 1 year period.

    I assume this is because of bad nat gas pricing for the past 2 years, and bad NGL pricing for the past year. And they have been buying oil properties recently, just as oil prices are dropping.

    I only follow LINE and BBEP and both of them have been buying properties regularly in the past few years, without any apparent benefit to the bottom line DCF. I suspect, but have not checked, that this is true of all of them. So they are running hard just to stay in place. This can’t be due to the “put accounting” issue that the hedge funds complain about with LINE; the problem is across the board, although the put accounting may disguise the problem at LINE.

    I suspect the problem is that they are all chasing the same fields and are overpaying for fields with short lives, doing whatever they can to maintain or slightly increase the current distribution. But I don’t know enough about oil and gas properties to be sure of anything, except that these have not been the MLPs to own in recent years. And unless you think that energy prices are going to rise a whole lot in the next year.

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    • A similar discussion is occurring on the IV board. This is from MattZ, who is very good at analysis:

      The savings grace for any MLP is high cash flow and at least some real growth. Nearly all MLPs are highly leveraged, but there are big differences when it comes down to being able to pay that debt back in a low-growth scenario.

      In a low-growth scenario all the costs previously hidden by expansionary policies come home to roost in the form of asset write-downs, sales at a loss, good will, impairments, and so forth. It's leverage in reverse, so to speak, because even though many of those losses are non-cash items, the DEBT related to those items remains on the books and becomes a big drag on the assets that remain. Costs go up faster than volumes go up (and in some cases volumes also turn the corner and now you have rising costs and falling volumes).

      The E&P space is turning the corner on these metrics right now. All the backloaded costs from earlier expansions are coming to the front-burner. Take EVEP for example. Major impairments declared in 2012. Major depreciation declared, high lease costs, and so on. They are good at spreading around the pain but it doesn't take a college graduate to add the numbers all up. Even though the top-line revenue increased dramatically, the costs associated with that revenue increased even MORE dramatically.

      This isn't to say that these companies are headed to bankruptcy or anything like that. But it doesn't necessarily mean that they are good investments, particularly not when they are bleeding away their cash paying a high distribution when by all rights they should be cutting the distribution and paying down debt. Natural Gas prices have to increase fairly dramatically for them to be good investments.

    • Great points, all. I said much the same thing on the VNR board not long ago. If it weren't for the high yields, these companies wouldn't be followed at all. My process will be to eventually extract myself from all E&P MLPS that I own, and move into the GPs that have more potential to increase their dividends (on the backs of their MLPs) and minimize the tax issues that I've had to deal with, (and will have to until I move into something else.)

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