It seems to me that they need to come up with about $350M ($70 oil) to $450M ($60 oil) in 2015 in cash flow to fully cover the distribution v. their Q414 guidance for cash flow. Perhaps $100M to $200M of this comes from getting past the transition costs from high-decline to low-decline assets to be experienced in Q4 and simply completing the outstanding asset deals. They mentioned this on the call, but did not give an amount, so I am assuming $25M to $50M of the Q4 cash problem is associated with these items. If it is, then, they still need about $150M to $350M at those oil prices to have a 1X distribution coverage. Much, if not all, of this should come from further reductions in maintenance cap-ex. The remainder must come from among unit buybacks that reduce distribution requirements, accretive acquisitions or asset trades, operating at sub-1X distribution for a few quarters, or cutting the distribution. Personally, I think LINE will not cut distributions so long as oil stays at $60 or above for the next couple of years. They will likely run several quarters below a coverage of 1X while they get costs out of the system and possibly buyback units. If they do cut distributions though, every 10% cut produces about $100 million in savings, so a 20% cut would go a long ways and still provide a return of more than 10% at the current stock price. Finally, if OPEC would simply enforce their 30M barrels per day quota, the problem would still be resolved by OPEC as they are running closer to 32 million barrels today.
I have not looked to see it, but if there is that kind of volume, I would bet it is related to ETF's rebalancing to accommodate the loss of KMP.
It seems a lot of MLP's were up big today. Could it be due to ETF's reallocating KMI dollars to other MLP's with the vote approved for KMP to consolidate? Personally, I think so, but perhaps there was some catalyst someone else is aware of. Yet, LNCO moved up big too (not an MLP), so who knows.
I agree that the current price has a lot more to do with speculation (manipulation) than fundamentals of supply and demand. Yet, the manipulators do not usually give up on a successful theme so easily. It will require OPEC, or some other force, to convince everyone that supply could fall short of demand in order for this train to reverse its course. But, the Saudis are probably slow to agree to reduce supply since the Venezuelans and Iranians and others never live up to their promises on production. So, I highly doubt this situation is reversed any time soon, though oil may find its level in the $80's in 2015, as is predicted by most everyone who doesn't have an axe to grind. And, in the $80's, LINE is fine in 2015 and 2016.
Clearly, at $50 oil, it's ugly for LINE and a lot of other shareholders. It's about $100M to $150M hit per $10 drop. Yet, even at $50 oil, in 2015, LINE should be able to pay a distribution that would be 10%+ at these prices. Yet, even XOM and CVX would truly struggle at such prices.
So, why are futures in the majors going up as oil goes down? Clearly, the expectation is that low priced oil is a temporary situation. Doesn't mean it can't go lower, but it won't last.
As for the Saudis, I think they are more tired of their OPEC friends cheating on their quotas than trying to force U.S. oil production declines. The fact is we have a 1 to 1.5 million barrels of oil per day oversupply and OPEC is running 1 million per day over their quotas. Slap the cheaters and get them to comply and oil returns to $100+ sooner than later. Perhaps that is what Saudi is doing. They are forcing their partners to comply by letting them know if they don't that they will be forced to live with unacceptable oil prices to meet their social welfare needs until they do. And, Iran, Iraq, Venezuela as well as Russia and others can't afford to live with these prices for long and neither can investors in deep-water drilling and shale oil afford to do so. So, while I don't like it for my LINE investment near-term, I will sit and wait for the worm to turn because the situation is not going to last for long IMO.
It's a bit of a chicken or the egg, but this was in OPEC's original planning when they established the 30M barrel per day quota. The fact remains we have a 1 to 1.5M barrels per day oversupply and if OPEC simply stuck to their quota, we wouldn't be in this mess. And, if they press, America will be forced to develop even more efficient production technologies that will lower our costs and increase their issue. It's not an easy problem, but I would rather have $100+ oil and produce a bit less than sub-$80 oil and produce a bit more.
We do seem to trade with oil, but I think the issues are 1) if the OPEC meeting fails to reduce production, then, prices will decline for awhile, and 2) if oil is going to decline more, what is management going to say at the next call?
Frankly, OPEC created this problem. They are producing 31M barrels per day on a goal of 30M and it's said that they now need to reduce to 29.5M in order to get oil prices returning to $100+. Obviously, their age old problem has been getting certain members to adhere to quotas, so they over produce. Yet, perhaps the Saudis have effectively negotiated some compliance by showing the Venezuelans and other what it will cost them to evade their quotas. As for the next call, I doubt there is an issue with the distribution if oil remains above $70.
I show LINE losing $40M to $125M in 2015 at $80 oil due to reduction hedge reductions, if they don't sell the remaining assets on the block and less if they do. With $70 oil, the hit could be $145M to $250M. In addition, it appears they have another $200M to cover based on their Q4 guidance, but this is exaggerated since it includes transitional costs associated with switching from high-decline to low-decline assets. The entire goal of making the recent trades was to stabilize and increase the distribution through lower maintenance cap-ex on lower-decline assets. And, at least one analyst estimated their trades should reduce maintenance cap-ex $300M or more .
Based on this, it would seem any concern about the current level of distribution is either non-existent or as much as $150M at $70 oil. Obviously, if oil falls further, then, the issue expands. To cover the $150M problem at $70 oil and lack of execution of the pending asset sale, they could 1) operate at a .85X coverage ratio for a few quarters (as they did in 2013), 2) buyback units up to the amount of $500M allowed by their debt covenants, 3) make accretive acquisitions, 4) sell the remaining assets that they are trying to sell, 5) sell other assets that would not impact cash flow (mentioned on the call), etc., etc., etc.
My point is that I don't see the cause for panic....especially at these prices. Even if they covered the entire "potential" $150M problem at $70 oil with distribution cuts (which is the last thing they would do), it's a 15% haircut on a $2.90 distribution and the stock still is trading at a yield of more than 10%. So, chill out, go fishing, or buy more, but don't let the apparent panic cause you to give up on what appears to be irrational stock price behavior.
After reviewing the transcript and supplemental presentation, I am left scratching my head as to what is causing the $50M cash shortfall in Q4 (net of the $45M noted to be attributable to the deals). NG volume is planned to be up 20%+ over Q3 and should produce more than sufficient margin to cover the modestly higher expenses shown (presumably associated with the higher volume). No real changes in oil or NGL production. So, despite hedges, is the $50M all in price? It would be helpful to understand this in trying to assess just how big of a nut they have to crack going into 2015. I don't doubt they can come up with a few hundred million, but it's entirely unclear to me where they are starting from to try to assess how much they may need to come up with.
That said, I don think they suggested a couple of things on the call of note. First, I agree with another poster that they seem to have suggested that they wouldn't change the distribution due to short-term commodity price fluctuations (albeit they can't go long-term with less than 1X coverage, they could stomach a few quarters). Second, they mentioned buybacks and they do seem to have the flexibility from their lenders to buyback up to $500M in stock which would reduce the distribution commitments moving forward.
Without giving guidance, they could have made some remark about the relevance or irrelevance of the q4 cash shortfall with regards to 2015. It would seem the reductions in maintenance cap-x should offset this as well as lost hedging on oil, but no one can tell from what they have offered and they aren't talking.
I agree that they have pursued what seems to be a very sound strategy and seemingly delivered on that strategy, but then the time comes to report and they act like they have no idea what will come of it. There really aren't that many moving parts. They should know what they have to work with (production, costs, hedges, etc.) and the only variable should be the price of oil. It shouldn't be that hard to give investors some clarity on where they stand without getting into giving guidance for 2015. Yet, they act like they have no clue.
It's easy to understand why the stock dropped today. Management sounded like they had no clue what to expect from the strategy that they articulated and executed to near perfection in 2014. And, if they have no idea, how could shareholders? I didn't expect them to give 2015 guidance, but their apparent lack of confidence in the current state of the business and lack of a firm grasp on where they stand financially as a result of the recent transactions was, well, pathetic.
Why is the stock down? Simple. If you have a strategy, you believe in that strategy (for the right reasons, like you understand the financial impact of it), and you execute that strategy, then, you ought to be able to give investors some comfort about the future. But what did management do? They basically said that they need to see how things play out before they know if everything they did this year made any difference. It was embarrassing!!!!
It was a great quarter from an operations standpoint, but when it comes to conference calls......it's amateur night. They just do not understand how to run a call. Whether they are getting bad counsel from counsel, or bad advice from the IR firm, or management is simply doing it on their own, I don't know. But, in a tough environment, they would have to blow the cover off the ball financially to overcome their incompetence in communicating why all the great things they have done are going to benefit unit holders.
I have seen estimates that they will save about $150 million quarterly on maintenance cap-X when the trades are consummated, so if these savings don't start kicking in until Q115, then, they still have $400M in cushion (if the $600M yearly saving is right) to accommodate any oil price impact on unhedged production. Plus, there are still potential accretive acquisitions to be made. But, I do hope they explain on the call because it was a very solid report with this one lingering question inserted.
Cramer aside, it was an excellent quarter with regards to execution. Their forecast for Q4 cash raises questions that I hope will be addressed on the call. Since they didn't do all this asset trading to end up with lower net cash available for distribution coverage, I presume Q4 is an aberration, even though they only attribute half of the shortfall to the deals.
This management team has no history of making new announcements of anything on quarterly conference calls. If they had increased hedges, they would have announced it separately. The best you can hope for tomorrow is that they deliver a good cash flow quarter and give good next quarter guidance. That will not make anyone happy since the only thing anyone cares about is what is going to happen when hedges start declining, but it is what it is. If they say anything about 2015, I would be shocked.
It should be safe through 2016. But, beyond that, they need one of two things to happen. They either need oil prices to recover or they need to be able to make accretive acquisitions to overcome a future with low oil prices. Of course, a third option would be that they get acquired.
It would seem reduced expenses associated with the recent trade could offset the loss of oil hedges in 2015 and 2016 and securing the distribution. If so, then, the question is whether accretive acquisitions can be made in the current environment to offset any impact of lower oil prices beyond 2016 and NG beyond 2017. If accretive deals can't be made, then, we are all left praying commodity prices recover in the next couple of years.
My expectations are for a potentially muddy presentation of results due to all the deals, but a solid underlying performance with no comments on projections beyond next quarter which will leave everyone wanting for some comfort on management's views on 2015 and 2016 distribution coverage. I would hope to here management's view though on whether lower oil prices have a positive, negative or neutral impact on the environment for making near-term accretive acquisitions.