When at the current stock price you are paying a 22%+ distribution, it's not probably appropriate to put out more units to pay down debt. What does make sense, and they will likely do if they can in the coming months, is to use the unit buyback and reduce their distribution commitments moving forward. And, while I doubt they cut the distribution in 2015 or 2016, if they did cut it even 50%, it would still not be a good idea to issue units paying a 11%+ distribution to pay down debt owing 6.5% IMO. Of course, I don't agree with your suggestion that they are heading toward bankruptcy and apparently none of the analysts do either as they are all reiterating their "Buy" recommendations, albeit at PTs in the $20's and not $30's. This will pass, perhaps like a kidney stone, but it will pass in the next year or so.
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.
The December dividend was not in doubt. The board approves dividends quarterly to be paid in equal monthly installments. So, you knew when they announced the October dividend that they were also committed to the November and December dividends at the same rate. Knowing this has saved me some angst because I know I only have to worry about the first dividend of each quarter. No reason to worry every month about it. GLTA
A little analysis or data might be helpful. From my perspective, based on the hedging situation, I think they have the distribution covered for the next 2+ years without doing anything. And, the price of oil will rise much quicker than that because too many countries need a higher price. Give it a couple of months and something will change the dynamics.
Rather than worry about the stock price in the coming days or weeks or months, I am satisfied with the $6.52 in assured distributions thru 2016 due to their hedging strategy, the prospects that acquisitions will be made and the expectation that price fears will dissipate over time. Not planning to buy more after my recent purchases in the $25.40 to $26 range anyway. So, if it goes to the low $20's, I congratulate any and all who were able to take advantage of those prices.
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 actually find some things Cramer shares as informative and useful, like how the hedge funds got stuck when the ABBV deal fell through causing them to liquidate billions in a few hours. At the same time, I also have learned that he holds an emotional opinion on individual stocks where he lost money. LINE is one example of where he bought high and sold low, so he simply will not support it even if it pays a huge, safe dividend and goes to $100. As for me, I disagree with is concern re: cash flow and therefore am averaging down and enjoying the dividends and what should be a quick rise back to $30 once everyone understands that the only place to invest in energy is with a well-hedged company that pays a huge dividend.
I would expect them to have a very solid report with 100% oil and gas hedged still. The next report should be even better as they begin to realize some of the cost reductions from the swaps. The key will be what they say about 2015 and the impact of declining oil prices on the distribution moving forward. And, they may say nothing other than they are in the planning cycle for 2015 since there is still another quarter to go before year-end (which may scare some people who think no comment is negative). IMO, the declining oil prices will set us back in increasing the distribution until they are able to make additional accretive acquisitions. And, there may be some sweet opportunities at very good prices with lower oil prices. But, I am satisfied with a safe $2.90 annually until that occurs.
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.
I am not generally a conspiracy theorist, however, I find it somewhat more than coincidental that the Saudi's (America's ally) is leading a charge to lower oil that just happens to hurt Russia, Iran and Venezuela more than anyone else at a time when the west wants concessions out of Russia and Iran. It may just be that this is all politics and we will get a resolution to the oil price when Russia and Iran submit to terms of the liking to the west.
I agree that Russia is a component, though I do not agree with your take on the availability of oil in the U.S. But, I think think Russia is secondary to Iran. The Saudis hate Iran and don't want Iran to get nuclear weapons any more than the U.S. does. IMO, Iran's nuclear program is the main target of the Saudis and it just so happens it works out well for the U.S. vis-a-vis Russia as well. Come the next OPEC meeting, I suspect the proposition will be that if Iran shutters it's nuclear program the Saudis will cut production. By then, production investments will be dramatically reduced in high cost areas and global demand for oil may be increasing due to the lower prices as well as the projected global economic improvement starting mid-2015 (if it actually happens).
As for the distribution, if the $400M number being bantered about by the analysts as the cost reduction available to LINE with the asset swaps is in the ballpark, I don't believe LINE will need to cut the distribution in 2015 or 2016. However, they will perhaps need to supplement the $400M cost reduction from the swaps with a few additional cuts and perhaps even an accretive acquisition or two as well as a unit buyback. At these prices, they could implement their $250M buyback and reduce the distribution commitment about $60M. My understanding is their debt covenants permit them a $500M buyback which would cut distributions $120M. Lot's of possible ways to protect the distribution near-term.
We have had several analysts lower their price targets on LINE to the $22 to $28 range and one remain at $33. It's encouraging to me that given these guys would usually be talking with management and better understand the situation that they continue to be comfortable enough to maintain buy ratings and PTs more than 50% higher than the current price.
Just read on Yahoo that the analyst at GS has a $26 PT on LINE and doesn't expect a distribution cut with the assumption that oil will go back up later in 2015. He does have a neutral rating though. Would be nice to see.
Not one of your better analysts. I just put in AH order for 15,000 shares at $99.00. Got about a third of them so far. The logic stated is that Apple is out of surprises. Who needs surprises when you have all that they have going on. You just have to be able to do the math and investors will go nuts over their strong margins.
I own LINE and LNCO and I am not concerned at the moment due to hedging. And, it's hard to get too concerned about longer term because if LINE can't make money on capital non-intensive drilling, then, who can? But, as we get into 2016 when the oil hedges are running thin and the NG hedges only have another year or so, we had better have a lot of accretive acquisitions to fill the hedge gap, or prices had better be higher to support renewed hedges at better than today's prices.
Let me give it a try. I bought more LINE today at $26 and LNCO at $25.42. I now hold more than 215K units in various accounts. Why? LINE is valued on a variety of factors. The oil and gas in the ground, as you say, has a life of many years. So, the value of that combined asset does not materially change due to short-term fluctuations in commodity prices. Also, as an MLP, investors are most interested in cash flow. With the majority of production hedged for quite awhile and the deals being made to reduce costs, cash flow should continue to improve (and maybe we will get lucky with a cold winter and higher NG prices). Finally, the business model is to make accretive acquisitions over time to increase cash flow. Interest rates are likely to remain low for quite some time, even if they rise some, and there is a very large pool of potential deals. In the meantime, so what if the stock trades at $27 or $25 or whatever for a while. From my perspective, I am happy to collect my monthly distributions operating under the belief that the paper return will be there one day as well.
The bottom is likely not reached until the Iranians agree to a nuclear arms deal and the Russians get out of the Ukraine. Until then, America and the Saudi are going to make certain oil prices fall and the media is going to feed the frenzy of fear.
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.
Some interesting commentary, if I can assume he has his facts straight. First, he says only about 7% of LINE's cash flow is at risk in 2015 due to an effective hedging program. Second, he stated that most investors don't realize that the LINE board approved a $250 million unit buyback last quarter that, if implemented, could purchase about 11 million units that would reduce future annual distributions by $32 million and increase the coverage ratio 3%. Finally, he said the distribution is secure and points to the 2008 crisis to illustrate just how effective LINE's hedging has been during times of crisis, and that a 20% drop is not a crisis.
I enjoy your perspective and share many of your concerns about the potential for the government to exert more rather than less control over a profitable company, like VALE, and a lack of comfort with where the stock price may settle in the current environment. But, the cup half full look at VALE goes like this.
Rousseff must change her ways. She isn't unaware that her policies, if continued, will drive Brazil into an economic abyss. As such, I think she will make some adjustments that could be very favorable to the overall mood toward investing in Brazil. Immediately, she can make appointments of key people who the market will like for the open finance and energy roles. If she doesn't, she will be dead before she starts her second term. That said, VALE on its own should be bottoming out as a stock here. They are about to embark on a major increase in production at lower costs in the coming quarters; a planned 50% increase by 2018 at costs as low as $15. The VALEMAX ships and forgiveness of the 9% Brazilian tax that Brazil was struggling to collect anyway will also have near-term benefits to the P&L. Even at the current price, this will increase cash flow and earnings substantially as expenses are lower with a weakened Real and capital investments wane. If higher cost producers do exit en masse, then, VALE will be highly levered to take advantage of any increase in prices with lower costs and much higher volumes. Being a cup half full kinda guy, I will remain patient with my shares at a $13.50 cost basis and only add should the price drop as you suggest it might. GLTA