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Linn Energy, LLC Message Board

  • rrb1981 rrb1981 Mar 6, 2014 2:43 PM Flag

    Risk/Reward

    I just picked up a large amount of LNCO (due to the curious discount).

    The market has once again mispriced the Linn entities. The sell off from the 4th Q announcement shows just how little the market understands Linn post Berry.

    Yes, Linn is projecting a slightly higher than 1.0x annual coverage ratio with Berry, but many people forget Linn was struggling to achieve 1.0x before Berry (NGL pricing, midstream bottlenecks in Permian and of course the debacle known as the Hogshooter). This foolishness I have seen people spewing about Berry not being accretive is laughable.

    All of those issues are either resolved or are no longer driving factors. Plus the 1.0x coverage is a base case, not counting any pending divestiture of Wolfcamp acreage/production.
    The scale back on capital spending will have the net benefit of reducing overall company decline rate, which if anyone had noticed, was becoming difficult to manage (not untenable, but difficult for an E&P MLP). The inclusion of Berry allows Linn to be more capital efficient (simply put, Berry's PUD inventory has much higher IRRs due to being more oily) and that allows Linn to achieve comparable returns while spending less money. Also note that it appears the Hogshooter (that funny word again) thankfully isn't a material part of the companies drilling budget anymore. So, no more betting the company on an unproven play.

    Instead, they will be milking California's ultra low decline, high margin steam flood oil properties as well as the Permian legacy production.

    The pending/possible divestiture of Wolfcamp acreage and production should reduce Linn's decline rate by removing high decline production and by replacing it with very low (read mature) decline production, which is a double win.

    What appears to be lost of a lot of investors is that Berry had very little impact on the 4Q. They will begin to see the impact in the 1st Q, and likely more so in the 2nd Q as things get digested.

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