I think that's a case of the horse and the barn door. I know Zacks considers recent price history in generating its assessments, and that has been pretty dismal here.
As recently as November, they were recommending CVRR as a buy (#2 rank on their 5-rank scale). I could see a big change of heart on producers, but whatever damage will be done to refiners via the crude glut is pretty well priced in here already (at least IMHO).
It would not have been a good deal if oil was $100/barrel- Blackstone would basically be taking highly valuable assets from LINN at a cheap price. At $50-60/barrel, it's reasonable for both parties. Below that, to me it looks very good for LINN. They get a small amount of cash flow at someone else's expense and risk.
As an MLP, cash flow is an urgent need. Their debt load makes large-scale open market borrowing disadvantageous, so getting someone else to foot capex spending is brilliant: Even if you give up the "best" initial production of those wells, it costs you nothing other than a decline in your reserves, which right now aren't worth a whole lot on the open market anyway.
Bankruptcy is just not a realistic possibility any time soon. LINN's hedge book will keep them afloat for the next two years even if oil goes to zero (which it obviously won't). The worst case in that time frame is further dividend reductions, and even that is not especially likely (but certainly possible).
The final price at which oil bottoms is not the real issue here (despite the widespread panic at the moment). The threat for LINN (and the U.S. industry in general) is the length of time that oil stays cheap. If oil is still at $50/barrel in 2017, then things start to get really ugly for the company then. Investing here is basically a bet on how long OPEC can hold out. Despite their brave face, I doubt it will be that long.
What you are saying *might* be true if Blackstone had taken a direct equity interest in Linn (since they often buy out companies in financial distress; Hilton being a very large and notable exception). The structure of the arrangement between Blackstone and Linn is fundamentally not of that nature, though.
Blackstone obviously has capital to burn and see an opportunity to lock in solid returns long-term by investing in Linn's operations (they are effectively buying a majority interest in Linn's wells that they capitalize). They obviously think oil will rebound to an acceptable level at some point within their window of interest here(which could still be years).
Linn is getting access to funds for capex spending essentially for free. They only get a very small portion of the proceeds until Blackstone's money is paid back (plus a healthy profit), but that small slice that goes to Linn is pure free cash flow with no costs attached. The funding mechanism also keeps them away from the capital markets, which would not treat them kindly presently. The best part is, Blackstone is effectively assuming all of the risk. All Linn is giving up, really, is oil in the ground (since Blackstone is taking it from them and selling it), but at the moment, that's not a particularly marketable asset regardless.
Given the circumstances the company has found itself in, I was far from fearful of that deal. I personally though it was bold, unorthodox, and wise. They are making the best of a bad situation.
If I thought it had a high likelihood of working, I'd be all in on LMT- that tech would be a license to print money in bottomless quantities. Lots of smart people have been trying to crack that puzzle for the better part of seventy years now.
Still, they are some of the best engineers on the planet, and a company that size would not let them make that kind of announcement if it didn't seem like they were truly on to something. It'll be very interesting to see how it goes.
When oil gets above $75 and looks to stay there. Not soon, at any rate, but a year or two is not an unreasonable hope IMHO.
My understanding is that they have authorization to do so whenever they wish, at least up to a certain fixed dollar amount. Hard to believe they would not be utilizing that mechanism now. So I'd say a buyback is pretty likely.
All the gains from fuel efficiency and renewal energy in the U.S. will be swept away by growing demand in China and India. As China develops a true middle class, their appetite for oil will be absolutely insatiable. So I don't see this as a 1980s-1990s type long-term drop in oil prices. Also, OPEC will eventually cut output, once they feel America's industry has been brought to heel. We'll be back in the $80-100 dollar range in 2 to 3 years. That's where the Gulf states need long-term prices.
They only thing that really changes that calculus will be Lockheed Martin's fusion system, if if actually works (giant "if"). A functioning prototype of that will mean cheap oil indefinitely (since everyone would immediately pump like mad to cash out what would then be a depreciating asset). Otherwise, this is just a temporary drop.
Sorry what I was saying here wasn't what everyone wanted to hear, but the dividend cut is now behind us, and even though it was even steeper than I expected (I was figuring on a $1.50 payout) , the stock price is still rallying in the face of declining oil prices. So it looks like my thesis was correct.
Now that we know the company is actively dealing with the difficulties raised by low oil prices, and we know what future payouts will look like (at least until oil recovers, which it eventually will), we can make decisions on a more rational basis.
Very few buyers want to jump in with the distribution cut (which, while not a certainty, is both highly likely and wise from a long-term perspective) still ahead of us, on the assumption that when it comes, there will be further damage. At this point, I personally think it's priced in already, and they may as well get it over with as soon as possible so that we can start moving forward.
MLPs do have some scope to vary distributions- if cash flow decreases, distributions can, too. Also, as far as I know, LNCO is under no obligation to pay any dividend at all- as a C-corp, they could stop passing the LINE distribution along and use all of the money to buy back LNCO shares if they wanted to (although this is *extremely* unlikely- the dividend and distribution will more likely change in lock step).
Yes, it probably will. A moderate cut would be a wise move at this point (if the savings are put towards balance-sheet repair), and is priced into the stock anyway. If the dividend drops to $2.25 annually, that's still 20% yield, and frees up $200 million per year. A payout of $1.50 lowers the distribution expense by almost half a billion annually. With the hedges currently in place, that range should be easily sustainable through 2017, hopefully by which time oil prices will have recovered somewhat.
They would "save" money in the sense that their coverage ratio would increase for any given cash payout amount (i.e., the absolute amount of cash paid out per month goes down for a given monthly or quarterly payment). That means they could still cover the full cost of the distribution (a 100%+ coverage ratio) even with a lower level of income, all else being equal.
MLPs are required to pay out their profits directly to unitholders- but what is declared "profit" is quite flexible, since other expenses (capex, acquisitions, etc.) are variable.
This is just snap back from the ridiculous down leg last week. Other than the news about the two property transactions closing on the expected terms (something that was a pure positive, but also not terribly unlikely), nothing has materially changed for the company since we were at 25 or at 8 and change. If people bought at the bottom, they are up close to half now and have reason to celebrate. That hardly means it's going to be all roses going forward- the euphoria of the past 2 days likely will not last.
They really need to get the damned dividend cut over with while the price is crushed. Unless the oil market turns around much faster than it looks like it will, then the cut will have to come sooner or later, so it might as well be sooner. No sense building in another big down leg later.
The giant plunge here has been basically caused by three things:
-Fear of the consequences of low oil prices. Some of those fears, at least in the near term, have not been rational ones.
-Short sellers making an easy buck and riding momentum,
-**A demand by the market for some balance-sheet discipline.**
The last of these, in my opinion, is the most important by far. As an MLP (or at least a shell corp around an MLP) we're all supposed to be fractional owners who get a slice of the business when it's profitable. Well, as a part owner, I'd be perfectly happy to take less money now if it strengthens the core business longer-term. That's just how it goes in the world of commodities, and I don't want management to leave us hung out there by a high debt load and high distribution expenses if oil stays cheap a long time. Deal with it now, and if the worst case doesn't come to pass, pay me more later.
Yeah, we're up 15%... and approaching the level we were at last Friday. That's hardly reason to break out confetti. At the moment, this is just volatility (the closing of the two property transactions at the original price obviously helps). There's no guarantee we've seen the bottom of this downdraft yet.
It will certainly not go bankrupt in 2015 or 2016. If there is a long-term, structural oversupply of oil that depresses prices for many years (similar to what happened in the 1980s-1990s), the company will face hard sledding (although even in that case, there are options, especially if the dividend is reduced sooner rather than later). Of course, in that scenario Venezuela, Nigeria, and Russia all go bankrupt, too, with Iran hot on their heels... so it's pretty unlikely.
At present, LNCO stock isn't worth enough to be much of a currency. They'd have to dilute like crazy to get much value.
The company should just take the hit on a substantial dividend reduction while the price is already depressed and use the savings to buy back stock and pay down debt. At least that way things will be on a somewhat stronger footing if oil stays low through the period they have hedged.
At risk of feeding a troll: LNCO is just a vessel to hold LINE units, converting a MLP distribution into a conventional C-corp dividend. It has no other substantial assets besides LINE shares. So if LINE goes, LNCO is toast. That said, the risk of bankruptcy in the next two years is minimal. The company's hedges provide enough guaranteed income to keep them afloat.
The risks are that the dividend will be reduced (almost certain) or eliminated (less likely but easily possible, at least for a short period), that the assets LINE holds will fall in value and make transactions regarding them less favorable, and that the company will also have reduced access to capital markets based on the reduced perceived value of these holdings. If oil only stays depressed for a year or two, these can all be easily weathered. The company only has real long-term problems in the event of a structural oversupply of oil that drags on for several years (IMHO).