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Linn Energy, LLC Message Board

  • harehau harehau Aug 12, 2013 1:33 PM Flag

    maintenance capital

    They are projecting around half a billion in annual maintenance capital based on next quarter's projections. Assuming 850mmcfe/d, and they said Berry had an attractive 15% decline rate, use that decline for LINE, need to replace 130mmcf/d. Assume 50% gas, 50% oil, it would cost $5k per mcf/d and $90k per bo/d, $1.3 billion to replace the production if purchased. $1.3 billion vs $500 million in maintenance capex. Rough numbers but the maint capex number may be understated as some are claiming. The additional "growth" capex does seem to almost wipe out the cash distribution. As opposed to infrastructure MLPs where the maint capex is more definable and smaller, the calculation for e and p MLPs is much more of a black box. As someone said on this board, trying to grow an e and p MLP becomes very challenging, probably the expectation when one reaches critical mass is that the yield is the entire return. Not sure where the SEC comes down on this. But absent that concern, there is still the concern growing the dist. The need Berry but not sure they have the currency anymore.

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    • I'm not knowledgeable about oil and gas costs, but your numbers don't seem right to me. For example, VNR's maintenance capex was 24.7% of DCF before capex, $29,418 / ($29,418 + $89,834) for the six months ended Q2, LINE was at 42.3%, $222,210 / ($222,210 + $302,653). VNR, of course, does not classify any capex as growth.

      You can take that to mean VNR was more efficient or that LINE had some bad luck. But it's difficult to accuse LINE of understating their charge based on a comparison with one of the most conservative companies in the space. For one thing, as VNR points out, they do not target replacing production, but cash flow. Depending on the market, a little bit of oil makes up for a lot of gas.

      • 1 Reply to ruby.thedyke
      • Those were rough numbers but believe total capex for LINE was $550 million for the first half compared to the $222 main million number. If I did my math right spent another $330 million for growth? That almost wipes out all of DCF. Seems the problem and there may not be one is calculating maint cap, seems can be subjective. Sounds like VNR is operating imo the way a e and p MLP should, spending cash flow, and if they do right, they replace more than they produce and create value. Who knows, maybe LINE can pull it off. When you are drilling $10 million Hogshooter wells or whatever they were, and it doesn't work, the cash is not going to be there.

    • Actually MLPs are not supposed to grow, and Linn is no exception, although it claims that it is. The requirement that 90 percent of distributable cash flow go to the unitholders makes growith impossible for any company except in very unusual circumstances. The growth premium that Linn had was unwarranted. Yes, they could grow from an abnormally low financial crisis price of $10 a unit in 2009 to $30, but beyond that decline rates and the cost of financing acquisitions make growth almost impossible over any length of time. I think $42 was pretty crazy.

      No growth is fine with me, and I bought some Linn today and also during the holiday week. MLPs are normally income vehicles, not growth. They are not ponzi schemes, but all are on an acquisition treadmill. Ellis screwed up badly with the two gassy BP acquisitions. He has a chance to make up for it if the oily BRY merger does go through. Linn will still be on the MLP treadmill but they will have a chance to maintain their distribution, not forever, but for as long as older income investors need it to.

      • 3 Replies to diodia2000
      • diodia your statement below is incorrect for mlps.

        "The requirement that 90 percent of distributable cash flow go to the unitholders makes growith impossible for any company except in very unusual circumstances"

        It is reits that must distribute cash flow

        The actual rule for mlp's is

        "Internal Revenue Code Section 7704.The rules state that at least 90 percent of an MLP’s income must come from qualified sources, such as natural resources...."

      • diodia2000 wrote

        I'm into MLPs primarily for stable cash flow but I expect the distributions to grow at least slowly. The growth is icing on the cake.

        Let's assume LINN borrows $1M dollars and buy some assets to be amortized in 10 years. The revenues from the assets must cover the $1M debt plus some income rate, say 10% , to cover expenses and distributions to unit holders. If the numbers don't work they don't do the deal. This is a simple problem of capital allocation with a minimum internal rate of return (IRR). I assume that managements of every MLP have a minimum IRR before they invest in a deal.

        There are two ways that MLPs can grow. Find more assets that meet the minimum IRR requirements or increase the minimum IRR for future acquisitions. The IRR that LINN can get depends on supply and demand ... in this case how many companies want to sell their assets versus how many MLPs (or whatever) that want to take the proven reserves and develop them. IMHO, the supply is good because of the NG and tight oil plays.. If the exploration and production companies feel that they can get a higher IRR from exploration and development than producing wells in run off mode, then they might sell the producing wells to invest in exploration and development. I'm betting that the NG and tight oil plays will grow in the next feel years and companies like LINN can grow with them. I'm into the MLPs because I feel the distributions are more stable than the exploration and development companies even though the growth may be much less.

        What did I miss?


        Sentiment: Buy

      • There is no 90% requirement, that's a tax classification threshold for REIT's and RIC's. But of course, if an MLP management stopped making cash distributions they'd be hung, so it's pretty much the same thing (and the partnership agreement may include some language about it).

        Anyway, yeah, the purpose of MLP's is to maintain and steadily increase cash flow to keep up with inflation, at least, not to grow the unit price. In a perfect world the market price would be the distribution capitalized by an appropriate yield factor, and it would change only marginally over time. Needless to say, there's nothing perfect about the market! Witness today's activity here.

    • I agree with your assertion on currency. At a 12% cost of equity they will have a difficult
      time finding sufficiently accretive deals...I recommend they simultaneously reduce the disty to 20 cents a
      month and also raise the conversion ratio to 1.4 times a share of LNCO.

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