Although I do believe that the Exxon swap was reasonable for Linn, and I'm sure Exxon got what they wanted as well, there is an element of Linn's strategic situation that troubles me a bit. Any time a company (or individual) Needs to sell something and all of the potential buyers know it, the price at which they are going to sell it suffers...That's just common sense. On the other hand, when a company (or individual) Needs to buy something, and all of the potential sellers know it, you can bet that the price at which they are going to buy it is going up. Clearly, Linn has widely publicized it's intentions to sell and to but certain properties....and I think this has been a significant flaw in its execution of strategy. The strategy is fine, go for more oil, lower decline rates, easier drilling/recovery options, etc., but telling everyone what you HAVE TO DO, is not a great way to get the best price for what you're selling or buying.
All this stuff considered, and I do think it's materially pretty important, I still believe Linn is on the right path and will be stronger operationally and financially a year from now than it is today. How it gets through the current turbulence in oil and NG prices will attest to the effectiveness of it's hedging strategy. We'll see in 3Q reports I reckon. The next six months will reveal how the more efficient capital expenditure goals are being met.
I've reviewed Linn's presentation on the Exxon deal (on the Linn website) and it looks pretty good to me. Linn swaps 19 MMBoe proved reserves for 27 MMBoe proved reserves with total potential of 67 MMBoe. The number of acres swapped is not really relevant without considering the oil under them...unless one is n the cattle business.
On top of the brokerage ratings, which are of course great to see, this period of weak oil prices is where Linn's hedging strategy should be paying big dividends (no pun intended). This oil price situation is precisely why Linn so actively and effectively hedges. Of course, if Oil goes below $90 and get into the mid-$80's for an extended period of time (say, 6-9 months) it will be touch to escape unscathed in 2H2015 and 2016. But in the interim, I expect the hedges to do their job.
I might also add my own wee speculation that Linn might bump the distribution a tad in December so it can record at least an increase this calendar year. Again, just wee speculation....maybe a 15% probability...and perhaps no more than 4-5%. I'm sure Linn will want to be very comfortable that it can cover any increase by a solid 10% or more before doing anything.
On the surface, Linn's swapping production of 4.7 MBoe/d for 3.4 MBoe/d and claiming it's accretive to cash flow after distribution defies logic. I suppose the gain is in reduced maintenance Cap Ex???.
I believe Linn is almost fully hedged on oil for the balance of 2014. Production guidance is 72,520-75,480 Bbs/d for Q3 and 72,740-75,710 Bbs/d for Q4. Hedges (puts, swaps, collars) cover about 70,000 Bbs/d according the Linn's Supplement to Q2 financial report.
If my understanding of Linn hedges is correct, just as hedges protect on the downside, they limit upside...at least with swaps. The puts (about half the NG hedge positions) will allow Linn to enjoy some NG upside above about $5.12 as I recall.
It looks like Linn is hedged on oil the balance of 2014 at $92.46 for up to about 70,000 barrels/day and on Nat Gas at $5.14 this year and $5.12 for 2015.
These hedges should help protect oil and gas revenues this quarter and for the balance of the year if it hits or exceeds its production volumes. NGL's are not hedged so there's clear exposure in this area.
I'm assuming that Linn will make it through the third quarter (only a couple of weeks to go) and the fourth quarter in good shape because of the hedges.
Stronger dollar, falling oil demand, softening oil prices, rising interest rates all pose serious headwinds.
Appreciate comments and insights from the more knowledgeable contributors.
Correct me if I'm wrong, but 13 million new shares on top of the 71.74 million outstanding is HUGE dilution. What am I missing? This adds about 18% more unit to 84.74 million. Quick math suggests a price drop of about 15% from the recent $23.40 range to $19.81. Can this be right??
ronharv -- Enjoyed the post, especially the remarks about wife's comments. Reminded my of one of my favorite lines..."I made a killing in the stock market last week...Unfortunately, it was a suicide."
What was I saying the other day about financial, analytic, journalistic, and reportorial integrity going out the window? The term "ploy" could just as easily have been "organizational strategy" or "restructuring strategy" or something like that. Slimy journalism gets away with the most subtle but dangerous spinning or stories to serve destructive agendas. Perhaps it's always been thus, but it's nevertheless sickening.
From H-eye website:
In light of what we know about their inform attacks on MLPs, their idiotic self-serving tweets, their vilification of those with contrary views, etc., the following blurb will make you puke:
"Hedgeye is a bold, trusted, no-excuses provider of actionable investment research and a premier online financial media company. Our all-star research team is unafraid of rocking the boat and is committed to delivering the highest caliber investment ideas through rigorous quantitative, bottom-up and macro analysis with an emphasis on timing.
Hedgeye TV is online financial media for smart investors where we showcase our analysts' leading market and economic insights and ideas. We are committed to unwavering transparency, accountability and trust."
As I understand, Hedgeye does not take positions on stocks. They simply write a ton of twits (to arouse, inflame, excite, toot their horn, pump theire stuff, inflate their egos, or whatever) and issue "reports" that set up the rationales for short positions and sell their reports/newsletters/daily e-mails to subscribers who pay varying sums for subscriptions. To the extent that subscribers need information to support decisions and to the extend they're getting it from Hedgeye, seems sort of like the blind leading the blind. I'm sure Hedgeye gets it right from time to time, but as a close observer of the stuff they pulled on Linn Energy last year, I have very little respect for their integrity or the quality of their research.
Unfortunately, journalistic, reportorial, and financial analytical quality and integrity seem to be lost in much of the stuff that now sails around the internet disguised as financial information and advice.
I'll need to think about this and it's implications for LINE/LNCO for a bit. While thinking on it, we know that this certainly will give the Kinder and El Paso shares/units a boost tomorrow:
"Shareholders in three separately listed companies – Kinder Morgan Energy Partners, Kinder Morgan Management and El Paso Pipeline Partners – will be handed a mix of cash and Kinder Morgan shares for their stakes, at premiums to Friday’s closing share prices of between 12 per cent and 16.5 per cent."
And the straightforward commitments to future dividends and growth amazed me. Big Kinder Kahunas:
“... adding that the combined group would be able to raise dividends, cut its cost of capital and use its shares as an acquisition currency. He promised to raise Kinder Morgan’s dividend by 16 per cent next year and by 10 per cent per annum for the rest of the decade."
I have a good load of LNCO (several thousand shares-- swapped LNE for LNCO to pick up about 3-4% more income a while back). The dividends are great, but I, too, chafe under the bizarre daily ups and downs in share/unit price. I don't know what's going on, but can easily visualize some trading floors pushing and pulling on the price to generate outsized annual returns. And who knows what all of the high-speed programmed trading does to stocks with modest market caps. I fully expected that we'd get a boost in distribution to $3.08-$3.15 early this year, but now I don't see this for several more months. It's okay as it signals that Linn isn't going to stretch to increase the distribution, making it more secure. Security is good.
I also have a few Jan 15 and Jan 16 calls that are under water, but believe they'll be okay in due course.
I regret that this post doesn't offer any helpful, investable facts, insights, or advice. Mainly just sharing some personal perspectives. One should discount this sort of thing 100% and base your decisions on good facts and analysis. While misery might love company, it'll sure get you in trouble in the stock market.
Best of luck.
Instead of struggling to "wish" LINE up to the $34-35 range and sweating every ?&^%$# cent of the way and every stupid junk article, we'd all have been a lot better off loading up on Facebook back in the $20's.