Talk about closing the barn door after all the investors have left.
That’s what Citi Research oil and gas analyst Faisel Khan did Friday when he downgraded Linn Energy (LINE) and its sister firm LinnCo (LNCO) to Sell. The stocks are trading at 38 cents and 17 cents respectively on Friday. The company announced last week it is exploring “strategic alternatives related to its capital structure,” considered code language for likely bankruptcy.
“What is this, stomping on the grave?” tweeted Kevin Kaiser, energy analyst with Hedgeye Risk Management, a research boutique (Kaiser was recently profiled in Barron’s).
So what did Khan and team add in their report? Some more details about how the path to a bankruptcy filing might go. They write:
We believe the company will likely file for Chapter 11 after the next round of borrowing base redetermination and/or post a covenant breach. Linn’s borrowing base will likely be cut in the spring redetermination due to significantly lower commodity prices than the last redetermination completed in Oct. In addition, hedging gains through Oct 2016 will be excluded from the borrowing base calculation. The next borrowing base redetermination is scheduled for April.
They note Linn’s hedges, protecting cash flows against the steep declines in oil, are starting to roll off. Cash flows could turn negative next year.
They warn recoveries in bankruptcy for unsecured bondholders are likely to be low:
Based on current transactions we see in the market and including $1.9 Bil in hedges as well as cash on the balance sheet, we believe that the recovery factor on Linn’s unsecured credit will be low. This is reflected in the company’s bond prices that are trading at pennies to a dollar.
Finally, a rare sighting in a research report — a table at the end lists “expected share price return: -100%.”
It's to bad you can't post anything anymore on this board without starting a #$%$ contest!
Yes, something has to give. Here's another article, Saudi stocks dive, cost to insure debt spikes
There's mounting evidence of the financial pressure on Saudi Arabia, outside of the currency world.
The kingdom's stock market opened up to much fanfare last summer to financial institutions that had at least $5 billion of assets under management.
But Saudi Arabia's benchmark Tadawul index has plunged 18% so far in 2016 and 34% over the past year.
"Investors are shying away from the market," said Michael Daoud, vice president of Africa/Middle East equities at Auerbach Grayson, a broker dealer focused on emerging and frontier markets.
saudi stock market
Related: Why you should worry about cheap oil
Investors are also growing nervous about the health of Saudi Arabia's balance sheet. The kingdom recently disclosed a budget deficit of nearly $100 billion in 2015 and Standard & Poor's downgraded its credit rating in late October.
That explains why the cost to insure five years of Saudi debt has surged 26% over the past month, according to FactSet Research.
"This trend will no doubt continue given the country's current precarious fiscal situation which shows no signs of reverting, given oil's decade low levels," Simon Colvin, research analyst at Markit wrote in a recent report.
Saudi Arabia has been forced to slash spending by 14% to improve its fiscal situation. That included cutting expensive perks it provides to citizens, resulting in a 50% hike in gas prices. All of this is raising concerns about the threat of social unrest that could further destabilize the situation in the Middle East.
"Low oil prices could make it impossible for the Saudis to keep their own country stable, much less the rest of the region," says Brad McMillan, chief investment officer at Commonwealth Financial Network.
I'm not voting blindly. I know exactly what Trump stands for. Voting for more of the Obama, Hillary politics is what is insane.
We all have our own opinions. I'm a republican, and the thought of Trump in office scares the hell out of me. But if he is the candidate i will vote for him. Obama, Hillary era has got to go.
The fallout -- OPEC is winning
We know that U.S. oil production is falling, to the tune of about half a million barrels per day since the June peak. But OPEC is filling the gap in supply, adding an estimated 0.9 million barrels per day in 2015 and another 0.2 million barrels per day in 2016. Ending sanctions on Iran could add to that supply, so OPEC is basically keeping the world oversupplied to keep pressure on U.S. shale and other marginal oil producers.
For some companies that creates market conditions that help drive earnings growth and higher volumes. But with OPEC hurting marginal producers while spurring demand growth for product that will likely rise in price in the future, the cartel is winning the long game against U.S. oil companies -- and that'll continue for as long as it wants to keep prices low and take more market share.
You should just ignore this guy. He can't even put a post out without calling someone an idiot or moron. Pretty childish.
So who are we to believe, the author of this quote, or the author of snopes.
OPEC is fighting for its life as oil export revenues are halved, forcing painful spending cuts and increased borrowing, which, if continued, could destabilize governments and lead to civil strife.
We think OPEC made a fatal mistake dismissing the shale revolution which boosted US oil production by 4 mmbd, or more than the current production of Kuwait and UAE combined.
OPEC is fighting against advancing technology and time is not on its side. Shale technology is the future, OPEC is the past. The oil shock is a wake-up call for OPEC to diversify its economies, live within its means and embrace technology. We believe technology, cost control and consolidation will make surviving companies more resilient to low oil prices.”
And get ready for oil industry consolidation:
“The next and most logical step is industry consolidation, which will take cost saving measures to a new level no company can achieve individually. Industry consolidation will reduce costs sharply and create companies that are more resilient to low oil prices.”
Once the indisputable ruler of oil markets, the OPEC cartel is under great pressure to revise its current policy as low oil prices are starting to hurt oil exporters’ economies and threaten to split the Organisation apart.
The past year was not good for OPEC. The global oil glut slashed oil prices by more than 50%, and brought into question the traditional role of the Organisation as a key global market mover. However, the downward trend had already begun took place in the beginning of the decade when the US shale revolution, helped by the $100+ oil prices, started to affect global oil markets.
Change oil production since 2011
Global Risk Insights
The past five years have completely changed oil market flows. With US production increasing and oil imports rapidly declining, many oil exporters such as Nigeria, Libya, Algeria, and Angola were completely locked out of the American market. Others, like Saudi Arabia, are fighting hard to retain their global market share by continuing to pump vast quantities of oil.
How successful has this strategy been since it was introduced in October 2014? In terms of market share, the cartel succeeded in retaining traditional markets, but at a heavy price for its revenues.
According to J.P. Morgan, Saudi Arabia alone loses around $90 billion a year with oil prices staying at $60 per barrel, and with Goldman Sachs predicting the oil prices to stick at $50 per barrel by 2020, it will be hard for Riyadh to maintain its influence and cohesion within the Organisation.
Global Risk Insights
Source: Business Insider
Global Risk Insights
Another goal – to suffocate the US shale industry with low prices – brought mixed results, and in the long term it will probably fail. The US producers were forced to cut capital spending and significantly lower their breakeven prices.
Nonetheless, US producers are still succeeding in keeping their heads above the water, even with the prices as low as $40 per barrel of the WTI traded oil. In addition, the sudden drop in prices helped the industry toconsolidate, both in terms of productivity and cost efficiency, and although some of the production will inevitably become unsustainable, the core areas can continue to pump oil at a profit with prices as low as $30 per barrel.
The Saudis took a gamble, but it seems that the calculation was misleading. The final result could be not only a loss in revenues, but also a major split between the rich Gulf States, and the less fortunate ones – the African and Latin American states, Iran, Iraq, and Libya – and consequently the end of OPEC as we know it today.
With the cartel losing its ability to influence the global price of oil, the Organisation might soon dissolve, since many member countries will not be able to provide basic services at today’s prices. These countries desperately need oil revenues to keep them moving and to preserve their economic and political stability.
Oil countries WSJ
Global Risk Insights
In the current climate it is hard to foresee oil prices bouncing back to previous levels. Considering that the markets are still oversupplied with around 3 million barrels per day, and that Iran’s production is expected to beef up the glut by another 400-600,000 barrels per day, the period of low prices may continue for several more years.
There is no easy solution for today’s situation. The OPEC leaders are correct to point out that the cartel is not the one to act alone. However, in current circumstances, due to weak balance sheets and extreme reliance on oil exports, the OPEC members will bear the greatest economic and social brunt of the falling prices. S
audi Arabia, as the most influential member of the club, needs to understand this and act accordingly if it wants to preserve its regional and global role.
It looks like Line isn't following the price of oil anymore. I hate to say it, but that just about sums it up. Without the distribution, nobody is going to invest.
LINN Energy LLC (NASDAQ:LINE) and LinnCo LLC (NASDAQ:LNCO) recently surprised investors by suspending their respective distribution and dividend payments. It was a tough decision for the company to make, but one it felt was the right one in the current environment. Here's what LINN's management team had to say on its second-quarter conference call about that suspension, as well as other moves it's making to weather the current storm in the oil market.
1. Here's why we suspended the distribution
LINN Energy CEO Mark Ellis led off the call by say that "after careful consideration" the company has decided to "suspend the payment of LINN'S distribution and LinnCo's dividend at the end of the third quarter 2015 and reserve approximately $450 million in cash from annualized distributions." It's a decision it believes to be in the best long-term interest of all company stakeholders.
Later on during the call, CFO Kolja Rockov gave a bit more color on the suspension:
So if you look at where have we been, just earlier this week we're trading at a 23% yield. So obviously we're not getting much credit for paying the dividend. And when you look across the other side of the fence, you see an opportunity to repurchase your bonds at a very significant discount and earn a rate of return at yield to maturity of 18%, [equating to] a return on investment of over 50%. So we saw an opportunity to really add meaningful shareholder value, and I think it's what we've done.
In other words, because investors didn't think the dividend was safe, the company decided that it wasn't worth paying at the moment, as it wasn't getting credit by the market for the payout. Instead, it will use that cash to enhance the value of the company in other ways, including buying back its deeply discounted bonds.
2. We're taking advantage of the current market uncertainty
Rockov then provided even more detail on that bond repurchase:
[W]e repurchased approximately $599 million of senior notes in privately negotiated transactions for approximately $392 million, representing a discount to par of approximately 35%, a weighted average yield to maturity of 18% and return on investment of greater than 50%. Year-to-date, we have repurchased approximately $783 million of senior notes. We estimate the aggregate senior note repurchases to result in annualized interest cost savings of approximately $54 million. This significant repurchase of our outstanding senior notes demonstrates our proactive commitment to investing our cash resources in the most attractive risk-adjusted return opportunity. We expect this series of transactions, along with potential future repurchases, to add meaningful unitholder value for the long-term.
In other words, LINN is taking advantage of the currently uncertain market to invest its cash in the best opportunities it can find. In this case, the best opportunity it's seeing is to buy back its own bonds. The company would love to continue to buy back its bonds at a discount, because it believes these transactions will create a lot of value over the long term.
3. Our liquidity is just fine
One of the big worries with LINN, and the industry as a whole, is that its liquidity will dry up as banks and investors will refuse to give it money when it needs it the most. At the moment that's not a concern, since it has roughly $1.5 billion in liquidity. However, given where oil prices are right now, the company expects the borrowing capacity on its credit facility to drop later this year. According to CEO Mark Ellis, LINN's "estimate is that impact probably leaves us with a liquidity of around $1 billion" to end the year. However, the company believes this is more than enough money to operate the company, especially after suspending the distribution.
4. We're generating excess cash flow
The other reason it's comfortable with its liquidity is that it's generating a lot of free cash flow right now. "For the second quarter 2015, we had an excess of net cash ... of approximately $71 million, exceeding guidance by approximately $90 million," Rockov said. While he expects that excess to just be $14 million for the third quarter, for the full year he expects the company to generate more than $200 million in cash.
SOURCE: LINN ENERGY LLC.
5. The acquisition market has been really slow
One thing LINN Energy has been known for in the past is its growth-by-acquisition model. However, the company hasn't made any acquisitions this year. LINN would love to take advantage of the current environment and use its AcquisitionCo funding. But as Ellis lamented:
And on the acquisition front, it's just been very slow. There've not been a lot of transactions, but we stand ready. [We] have $1 billion of committed capital there, and we can prosecute that if those opportunities materialize. So we stand ready, but I can tell you that the first part of the year here has been very slow.
While it's not burning a hole in LINN's pockets, the company does have a billion-dollar war chest for acquisitions that it would love to put to work. The problem is that there just aren't a lot of compelling assets coming to market right now, as the whole industry is in a wait-and-see mode. But when an opportunity arises, LINN is ready to jump on it.
One thing LINN Energy's management team made clear is that it didn't suspend its distribution and LinnCo's dividend because it's in distress, as it has plenty of liquidity and is generating free cash flow. Instead, the move was made to take advantage of the market to buy back its bonds at a huge discount. Clearly, this is a company that expects to survive the downturn, despite what the market currently thinks about its chances.