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Linn Energy, LLC (LINE) Message Board

bettertobelucky10 8 posts  |  Last Activity: Nov 5, 2014 10:24 AM Member since: Aug 27, 2013
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  • bettertobelucky10 by bettertobelucky10 Nov 5, 2014 10:24 AM Flag

    This may have already been mentioned on the board, but did you guys notice that the 2014 guidance for "Discretionary reductions for a portion of oil and natural gas development costs" (ie maintenance) went from $802MM in the initial annual guidance to $824MM in the latest release, despite lowering decline from 25% to 15% during the year? I know they talked about future maintenance in the Q&A for the call, but I still wasn't clear. It appears that they did not change it much for Q4, which means going forward this number will be significantly less and coverage much higher than what was reflected in Q4. I'm not sure why they fumbled around this topic, but it needs to be stressed. As well, as the reduction in interest expense going forward.

    I sure hope they disclose 2015 guidance before the Q4 earnings call. It really is necessary.

  • bettertobelucky10 by bettertobelucky10 Oct 31, 2014 1:02 PM Flag

    I think we can all agree there is no chance that coverage is less than 1.0x for Q3. With 100% of production hedged and the benefit of closing transactions during Q3 (adding additional cash flow from effective to close dates), Linn will have healthy coverage. With 100% hedged through year end, Q4 should also be above 1.0x.

    Oil prices may drop further in the near-term, but even $80 oil is enough to curb US production. I've worked in the industry for about 10 years and am familiar with "true" well economics (not the bs that is published in IR presentations). Actual D&C costs are always higher than published and EUR's are typically less. The truth is that many of the wells drilled over the past few years will not payout or achieve returns greater than the cost of capital UNLESS oil prices rebound. Non-industry people think that oil companies are drowning in profits, but the harsh reality is that higher oil prices are necessary for adequate returns (returns of 10% or more to cover interest expense).

    Also, the increase in oil production of recent times is largely "flush" production (the initial production from new wells that come online and decline at extremely high rates). The amount of capital necessary to keep this production flat (let alone grow it) will be very high (higher than anyone realizes). A significant curb in investments will result in lower than expected supply in oil inventories.

  • bettertobelucky10 by bettertobelucky10 Oct 30, 2014 8:16 PM Flag

    After averaging over $100/bbl in April 2012, oil prices declined to $78-79 in late June 2012 (in less than two months). By the end of July (the following month), prices were back over $90 and into the mid $90s by August. Do a quick search online for June 2012 oil prices and you will be surprised at what you find. Here are some excerpts:
    - "Signs of a slowdown in manufacturing in China, Europe and the United States delivered the oil market another blow "
    - "You have a lot of U.S. crude that's coming on line at a much faster rate than anyone anticipated"
    - "According to established news outlets, domestic oil production has risen 12% since 2008, far outpacing the growth in demand"
    - "Saudi Arabia has upped oil production to a near-record 9.9m barrels/day. Instead of curtailing production as it has done so in the past"
    - "While supply is indeed up a bit because OPEC has chosen to pump more crude oil and thus reduce the world's effective spare capacity, the main driver behind lower oil prices is declining demand. "

    All too familiar, right?

  • bettertobelucky10 by bettertobelucky10 Oct 29, 2014 11:45 AM Flag

    Given the current market sentiment on oil prices, maybe Linn should hedge the remaining 2015 and 2016 unhedged oil volumes at the current futures prices (~$81/bbl). That would make their weighted average prices around $89 and $86 for 2015 and 2016, respectively. This compares to a weighted average of $92 for the second half of 2014. I'd prefer the comfort of 100% hedged volumes for 2 years vs risking a further decline in oil prices. Also, these prices should lock in the coverage above 1.00x for two years (hopefully enough time to allow prices to rebound).

  • Reply to

    2015 Distribution Coverage

    by bettertobelucky10 Oct 9, 2014 6:38 PM
    bettertobelucky10 bettertobelucky10 Oct 9, 2014 7:38 PM Flag

    I agree with you and thegreatone. I think this cycle will not last long and presents an excellent buying opportunity, but it never hurts to consider worst case scenario. The current market is nonsensical. I'm just thankful that most of Linn's planned transactions for this year are completed already. I wonder if Linn will take advantage of this instability and make another acquisition this year (Freeport California, BP San Juan, Anadarko Salt Creek). One thing is for sure, M&A will be busy in Q4/Q1 for the energy sector - lots of money still on sidelines, look at EnerVest's new fund.

  • Reply to

    2015 Distribution Coverage

    by bettertobelucky10 Oct 9, 2014 6:38 PM
    bettertobelucky10 bettertobelucky10 Oct 9, 2014 7:17 PM Flag

    Yes, I think smart long term investors care. The entire energy sector is down significantly. In an extended low oil price environment, many companies will run out of cash and not be able to service debt within the next you know what those shares will trade for if that happens? My comment is about survival, the ability of Linn to weather the storm. And given their hedges and shallow decline, Linn is far better off than most.

  • bettertobelucky10 by bettertobelucky10 Oct 9, 2014 6:38 PM Flag

    Raymond James estimated 2015 coverage of 1.17x on Oct. 6. It's tough to calculate with all the moving parts, but my estimate was slightly lower (I'm guessing the maintenance capital will be less efficient going forward without the extremely efficient Granite Wash inventory). I'm not sure what commodity prices Raymond James used for the unhedged portion of Linn's 2015 oil production, but I am assuming it was higher than today's price.

    If you assume Linn will produce around the same oil volumes as Q2 (~74.5 Mbbls/d) and that only 44 Mbbls/d are hedged in 2015, that leaves a delta of about 30 Mbbls/d that are exposed to market prices (~11 MMbbls total over the entire year). Every $1 drop in oil prices equates to about $11MM less in distributable cash flow for the unhedged oil (excluding benefit of lower severance taxes). Assuming Raymond James used an oil price around $90/bbl, then you could conclude that an $80 oil price would result in a reduction to distributable cash flow of $110MM and a coverage of 1.06x.

    Yes, that's a lot of assumptions, but knowing that Linn could potentially still support a coverage over 1.0x in an $80 world for 2015 is comforting (and a 0.94x coverage in a $70 world). In 2016, the hedged oil volumes are slightly less (but about the same). That means this puppy should be good until 2017 (unless sub 70 prices are sustained, in which case everyone is packing up and going home).

  • bettertobelucky10 by bettertobelucky10 Oct 7, 2014 10:47 AM Flag

    I've seen mixed opinions on the Granite Wash sale. Doesn't anyone remember that these assets were mostly purchased in mid 2007 as a small part of the $2B Dominion acquisition? There was nothing but barely economic verticals on the acreage back then. In other words, these assets were purchased for very little and were just sold for $2B (yes a lot of capital was spent there since 2007, but a lot of cash was generated as well). In my mind, this sale was an example of huge value creation and shows that, within the millions of acres that Linn currently holds with production from old verticals, there will one day be the next big thing. The total return on this acquisition must be huge (I wish Linn would disclose that number).

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