The mistake you are making is the same the guy on SA made in his comparison of depreciation of wells to depreciation of trucks. -- you assume that depreciation of oil and gas wells is the same thing as proportionate reduction of oil in the ground. People like you are always baffled that valuations of oil companies ignore the P/Es and focus on productioin and reserves. All the depreciation of gas wells in the Eagleford in the 90s became irrelevant when they figured out how to drill the shale oil formation underneath.
Imagine a department store depreciating its building and equipment, and then it digs a hole in the parking lot and discoveries a huge chunk of merchandise just lying in the ground and as good as new and immediately sellable. Oil companies are different, and I have seen so many shorts get killed using valuations based on P/Es.
I am a very cautious and timid investor and today's gain in Linn had nothing to do with recklessness and wishful thinking. I have to say that I do not think that the merged company is worth $40 but since I have not really dug into Berry yet, maybe some one can throw out some numbers and convince me.
Linn will go up more tomorrow, probably to $30 and probably on good volume.
Next step should be analysts weighing in. I foresee a lot of positive comments and some nice price targets. Today the analysts are on the phone to LINE and to BRY about the merger etc and preparing their updated projections and prices. The next step after that will be the q3 report. So I think LINE will move higher. I bought more at $26.18 and 26.03. Dear shorts, please reshort! Your added buying interest is very helpful. Ruellia
The Orcutt Diatomite, for which ROYT through PCEC will be requesting 96 additional steam injection permits in 2 months, provides more than 20% of ROYT's production, and at least half of productioin growth.
In 2011 the Orcutt (Santa Maria) basin provided 80% of ROYT's total production and the Los Angelos basin only 20%. The Orcutt Diatomite, which are the wells which require steam injection, were providing 20% of ROYT's total Trust production. The Diatomite part of the Orcutt was clearly the growth area with only 25% of reserves as proved developed.
The September 2013 presentation gives us basin totals for June, 2013. The Orcutt basin total daily production has risen by 25%, from 2,766 to 3,243 Boe/d. A very large percentage of this is the Diatomite, i.e. steam injection, and not from the Conventional wells. The Los Angeles basin total has risen 40% from 692 to 1,063 Boe/d. But the reserves of the Los Angeles basin are shown as going down from 6,828 too 5,500 MBoe, whereas the reserves of the Orcutt have gone up from 27,300 to 28,200 MBoe.
So the Diatomite (steam injection) is at least 20% of production and also the key to maintaining long reserve life.
I will post the 2011 numbers from the Prospectus and the June 2013 numbers from the September 2013 presentation in my next post.
Big volume days that close near the highs and show little volatility in the afternoon typically have follow-through, in this case up, on the following day. Short squeezes have a characteristic geyser shape and today is the opposite of that. Not that shorts were not squeezed but there was real buying today. So just based on the chart I think we get to $30 tomorrow. The logical place for it to dip to would be $27.50 if the market plunges or some such, but bad news in the Middle East will actually help Linn.
So I predict up tomorrow, just based on the chart.
I hope so. I bought a bunch more at $24.30 after the WFC projections for Linn q3 and the rise in NGL prices, all things I had been fretting about. Many thanks to Ruby, Venturabay, and all the people that posted numbers and analysis. You put money in my pocket.
Here are not two but four different valuation scenarios for Linn. As of this morning, we have eliminated the first three, but these three were influencing potential buyers and holding down the share price for the last two months:
1. No Berry merger, revenue falls, and SEC problems
I always thought the SEC part was bunk, as the issues were non-GAAP, but that was how you could get to Linn at $18 to $20
2. No Berry merger and bad news:
NGLs keep going down, pipeline curtailments continue, production continues to decline, Linn cuts distribution: Line $22 to 25
3. No Berry merger and some or a lot of good news:
NGLs go up in price, pipeline curtailments ease, production rises. Maybe Linn strikes it big in Wolfcamp and Bone Springs. Maybe chaos in the Middle East. Line $25 to $27
4. Berry Merger and good news:
NGLs go up in price, pipeline curtailments ease, production rises. Berry merger exposes Linn to oil prices, reduces costs, reduces Linn's debt leverage. Line $28 to $32
Now the bulls can tell me how to get higher than $32. Maybe the Monterey formation turns out to be spectacular, and the Bone Springs well is huge, and there is a full scale war in the Middle East. I can certainly imagine things that would take the new merged company higher.
Feel free to provide your own valuation scenario. This invitation extends to the doomsayers too.
All the price targets are $33 to $36, except BOA/Merill at $30. If anyone has updates on these or others, please post. But to me $33 to $36 makes a lot of sense. My thinking was about $35 with BRY as previously posted.
upgraded Linn from Neutral to Buy with $36 price target and upgraded LinnCo to Buy with $37 price target, saying market concerns are overdone.
Barclays Capital Thursday, July 18th
cut price target for Linn from $42 to $36
Credit Suisse, Tuesday, July 16th
neutral with $40.00 price target
BMR August 13, 2013
we currently review Linn as a higher risk/reward stock. "Buy" rating and $36 price target
Baird August 8, 2013
cut target price to $34 from $48; rating outperform
Then apparently they cut it again to $29 and now have raised it to $34
Price target lowered to $30 from $41.
We do not believe LINN’s DCF is materially distorted
LINN, LinnCo downgraded to Market Perform at Wells Fargo
Wells Fargo downgraded both LINN Energy (LINE) and LinnCo (LNCO) citing increased uncertainty around the timing of the Berry Petroleum (BRY) merger following the informal SEC inquiry. The firm lowered its price target range for LINE by $7 to $33-$37 and its price target range for LinnCo by $7 to $35-$39.
As far as I can tell, PCEC can steam inject the already-permitted wells indefinitely, so I cannot see how Santa Barbara restrictions would effect our ROYT distribution, other than that I was surprised at how much the depletion rate for the Los Angeles basin was, which our currently permitted 96 Orcutt steam injection wells have been more than compensating for. The Los Angeles basin is a smaller part of ROYT production but the depletion reported is quite rapid. Of course, you never know with reported depletion.
I assume all this causes some people to take another look at valuation. There is a very impressive chart of production growth at ROYT in the September presentation, and as far as I can see this is due to the Orcutt steam injection. So now this is in question. Although the article on Santa Maria said that its steam injection wells would still be profitable even with the 10,000 metric tons restricction.
Plus I imagine that there are different ways of calculating "additional" and even the metric tons.
I would love to have some one weigh in on the legal basis for County Supervisors regulating wells on the basis of air quality. Maybe counties regulate incinerators, trash burning, fumes, etc so they used this ability to keep stuff out of the air to set a limit on carbon emissions.
I would be interested in hearing others comment on Santa Barbara's actions with regard to Santa Maria Energy and the potential for problems with the upcoming permits for PCEC and any potential ramifications for ROYT. Was this raising fears which were feeding into the selling?
Please do short. Short a lot, so much that you will have to cover by the close. Go ahead, mortgage the trailer and just do it.
Just looking at the chart, with no regard to the fundamentals, LINE went up 12.77% today on heavy volume, never backed off except near the open, and closed near the highs. Just based on that it should make it to $30 tomorrow.
Anyone reading my posts (there appear to be some investors in ROYT this afternoon for a change!), be aware that I have made no statements about income, revenue, or distributions. All the numbers I have provided have been production and reserve numbers. It is easy for people to get confused about this. You have to extrapolate the income, revenue & distribution numbers yourself based on the Trust's treatment of Developed vs. Remaining Properties, and the fact that they do not break out production along those lines.
I continue to be very long ROYT, although wishing that I knew more.
Production and Reserve numbers from December 2011 and June 2013
Underlying Properties as of 12/31/2011
according to reserve report in Prospectus
-- Average Net Daily Production for
the Month Ended 12/31/2011 (Boe/d)
--Proved Developed Reserves Percentage
--Total Proved reserves (MBoe)
--R/P Ratio as of 12/31/11
SANTA MARIA BASIN.........................(Boe/d)..%ProDev (MBoe) %oil....R/P
Orcutt, Conventional 2004 – Present.... 2,093.. 100%.. 11,737..100%....15.4
Orcutt, Diatomite....2005 – Present...... 673....25%.. 15,563..100%....63.3
Total.................................................. 2,766....57%.. 27,300..100%....27.0
LOS ANGELOS BASIN
West Pico 1993 – Present..................628....65%....3,808.. 82%....16.6
Sawtelle 1993 – April 2012................ 37.. 100%....1,346.. 92%....99.7
East Coyote 1999 – April 2012............27.. 100%....1,674..100%.. 169.9
Los Angeles Basin Total.................. 692....80%....6,828.. 88%....27.0
TOTAL........................................ 3,458....62%.. 34,128.. 98%....27.0
Basin Totals for June 2013......................Proved Reserves June 2013
SANTA MARIA BASIN...................... (Boe/d)..%ProDev (MBoe)..%oil...
Total June, 2013 Reserve life 24 yrs....3,243.... 67%.. 28,200..100%....
LOS ANGELES BASIN
LA Basin Total.. Reserve life 14 yrs....1,063.... 93%....5,500.. 86%....
TOTAL June, 2013 .......................4,306.... 71%.. 33,700.. 98%....
Total Proved Reserve Life (R/P)........21 yrs
Proved Developed Reserve Life (R/P)....15 yrs
What the September 2013 ROYT presentation says about steam injection and the 96 permits, which I fear will cause the Santa Barbara environmentalists to gnash their teeth, particularly the part about repeating the cycle every 30-50 days. I believe they will try to get the same deal as from Santa Maria Energy. From Presentation:
2013: In permitting process for 96-well expansion
Steam injection for 3-6 days
--A soak period of 2-3 days
--Return to production, well flows for 7-10 days, then is pumped for 7-14 days
--Normal production / injection cycle is about 30-50 days when the well is steamed again and the process repeated
1. Steam Injection
(5 days / 2,000-2,500 bbls Cold Water Equivalent)
--Injection pressurizes formation
--Release oil from diatoms
--Heat lowers oil viscosity
--Formation imbibes condensed steam
2. Soak (2-3 days)
--Allows steam to condense further
--Allows oil to flow
3. Production (20–40 days / 400–2000 bbls oil)
--Heated oil travels towards wellbore
--Hot water flashes to steam
--Steam provides gas lift
--Wells flow (IP 100 BOPD)
--Cooling reduces pressure and oil cut
--Wells stop flowing
--Put well on pump
I am a cautious nervous Nellie as you can see by my past fretting but I bought 6,000 shares at $24.30 after Venturabay and others posted the WFC projections for quarter 3 (bless them!), and 2000 more today under $26.20 and I had more shares from the holiday week plunge. I am a very cautious investor, but this is not the time to sell.
I think it is positive that Linn realized which areas of the Hogshooter they needed to give up on and that they sold the Panther. The Mayfield area sounds promising. I am also hopeful about the Wolfcamp and Bone Spring wells that could have an impact in the fourth quarter.
My big fears were NGL prices and the BRY merger. Now NGL prices are up, the BRY merger is on, and WFC says Linn's production will be up in the 3rd quarter. Linn has always been more upbeat about the 4th quarter than the 3rd. So it looks good from here.
If it is accretive, they are not paying too much. If I buy a rent house that can make me money on the rentals, I have a profitable purchase, which is what matters. There is such a thing as penny wise and pound foolish. You are going to pay more for a property that is 70% oil, has low driling costs, and a low decline of 17 years. This is so much better than the old philosphy of we don't care as long as it is cheap which landed us with the 2 BP acquisitions and all the problems. Kudos to Linn for selling the Panther for $220 million, 44% of what they are paying for a Permian Basin property. Pay up for the good properties that are accretive and allow you to raise the distribution, and forget the cheap ones that bring you lower revenue, lower production, and .89 x coverage of the distribution.
One thing Linn did right was to sell the Panther when they saw it wasn't up to snuff. They got $220 million for that, 44% of the cost of the new oily Permian Basin acquisition. They used debt instead of that cash for the new acquisition, but I like the fact that when something doesn't go as planned, like Panther & Hogshooter, they change course and go for something that should. Ellis's "agnosticism" about oil vs. gas has cost Linn dearly, but I think he is cured. The new acquisition--70% oil, accretive, low driling costs, 17 years--is just what Linn needs. Kudo to Ellis and the others. Ruellia
I doubt that the new report is very different from the old one in early July. I bet they maintained the $35 price target.
July 3, 2013
Stifel maintained its Buy rating on Linn but lowered its price target from $48 to $33
“If the BRY/LNCO deal falls through and the company NEVER makes additional accretive acquisitions (extremely doubtful in our opinion), we believe LINE units are worth approximately $22 using a discounted cash flow analysis. However, if the BRY/LNCO acquisition falls through but company maintains a conservative acquisition program through 2020, we estimate LINE units to be worth $32 to $35. If we assume the BRY deal is completed in 4Q13, we estimate LINE units intrinsic value to be $35-$40 based on a future discounted cash flow analysis and assuming a conservative future acquisition program.”