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Linn Energy, LLC Message Board

  • coochy.cooty coochy.cooty May 9, 2014 10:00 AM Flag

    Why misssing coverage for a quarter is (or can be) no big deal.

    Suppose you have a chain of burger restaurants in the midwest, call it McDoogles. You run into a quarter where weather has been brutal, and your McDoogles traffic plummets, sales drop 25%. Suppose you run an MLP with wells in that same area, and winter weather shuts in 25% of your production. Which company has really suffered the loss?

    Well, consider what they're selling. McDoogles ends up the end of the quarter with their freezers stuffed with McDoogles patties, and the MLP has oil and gas in the ground that wasn't lifted. The weather normalizes, and drive-in traffic reaches pre-winter levels, McDoogles burgers fly out the drive-in window, local heart attack deaths increase. The MLP's wells are re-opened and production goes back to guidance. No matter how much promotion McDoogles puts on, they never will sell enough additional burgers to make up for the bad quarter, people aren't going to start eating 25% more greasy poison. Of course, neither will they consume 25% more oil and gas, indeed, they may consume less gas without the heating demand.

    So, what's the difference? Simple, the oil and gas left in the ground wasn't lost, it was just not pumped. It will be, eventually, and it's entirely likely that the price will be higher in the future. Plus, the ability to sell oil and gas is not based on consumer demand for one quarter in one market, it's a constant national or regional market into which you can sell, within limits, anything you produce. But what happened to those unsold McDoogles patties in the freezer? They got eaten, yes, but the reason is the stores ordered 25% less patties in the following months until they were consumed. The McDoogles will NEVER get that gross margin back. The MLP will. Something to keep in mind this grim Q1.

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    • I was with you, CC, until, in reference to oil, you said, .". . . it's entirely likely that the price will be higher in the future." Unfortunately, the only real clue we have about future oil prices is the price of oil futures, which steadily decline to the low 80s toward the end of 2017. Beyond that, anything can happen, including continued dubious decisions by Linn's management, which seems to have a big credibility problem vis-a-vis the market. Meanwhile, what we really have are crossed-fingered hopes.

      • 3 Replies to ronharv
      • I in the camp that oil prices will be pushed down by the US as part of sanctions. The US did it back in the 80's with precious metals thereby denying the Soviet Union hard currency. They will do it again this time with oil denying Putin a larger income for oil.

        But in the end the US will be left as an island on its own as the world distances itself from us. The banking industry will be next as a new system for securely wiring funds will be outside the jurisdiction of the US corrupt government. ( SWIFT)

      • Again, it is impossible to have a reasonable expectation of choice of behavior when pondering an irrational person.
        Why would a rational person camp out here at LINE when or perhaps they believe “including continued dubious decisions by Linn's management”.
        Recent direct real world experience demonstrates selling covered calls is no ‘protection’ whether the events are systemic or poor management judgment. But a rational person would invest the time to understand the math and therefore the real function of manmade options and buy a put.
        Management can be faulted for not realizing the industry rush into NGLs could or likely would result in the same dynamic as occurred with natural gas. But then the collapse of ethane into a troublesome by-product rather than one of the most valuable molecules on the planet is a degree of malfunction only political disruption can deliver.
        Prices correct prices. Unless free ethane is not enough to overcome the fear of Obama’s completely political driven therefore irrational regulation. Irrational by definition is lawless. Rational people can have no basis to reason what comes next. So much talk of new processing capacity but mainly we get the much lower risk of existing plant expansion.
        The loyal individual investor base here at line seeks a stable business providing dependable income. We are not the fabled primarily Progressive 1% so we are risk adverse. Many of us can be scared off the ball because we are not properly diversified.
        The long term investment thesis to own LINE remains intact. Progressives, mostly labeled Democrats but in both parties like Grassley, will be rationally separated from the political power they do not have the integrity to wield. Picture Reid.

      • Well, the assumption is that oil and gas prices will at least keep up with inflation, all other things being equal. Beyond that, who knows?

    • coochy, miss wasn't bad, divvy's over this month, how low will it go, before the next bounce up?

    • a person can't eat seven burgers from McDoogles if he/she didn't eat any in last seven days.

      • 2 Replies to rohankrishna95
      • That is generally not the way it works. Most of the food customers do not go every day so they wouldn't need 7 to make up for it. When the normal customers cannot visit for a period of time, pent-up demand develops which causes a spike in volume above what would be normal. However, it still would not make up for all of the missed sales. The same would be true for the oil sitting around waiting to be used.

        I would also point out that the cows left unslaughtered would still be available for use just as the unpumped oil would still be available for future use.

        Sentiment: Buy

      • Did you mean, can? Personally I wouldn't eat one McDoogles burger if it was handed to me free. Why would I put several kinds of organic poisons (beef fat, singed meat, cheese, salt, chemicals) in my mouth?

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