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.
Some Oil Companies Have Already Gone Under
The initial drop in oil prices in the winter and spring of 2015 has already brought with it a string of oil-related bankruptcies. In March, Quicksilver Resources, a billion-dollar shale operation filed for Chapter 11 bankruptcy protection after missing a bond payment. Also that month, BPZ Resources shuttered its operations as well as Dune Energy, and they were subsequently followed by Sabine Energy, WBH Energy and American Eagle Energy. Not only do these bankruptcies hurt the shareholders in those companies, but they also ripple through to the financial sector who issued loans and credit to these companies, the land owners who leased their property to drillers, as well as those workers who have now become unemployed. (For more, see also: Falling Oil Prices Could Bankrupt These Countries.)
Oil Companies Next at Risk for Bankruptcy
The renewed bear market in oil is likely to take more casualties in the coming weeks and months. Investment bank Goldman Sachs Group Inc (GS) issued a report earlier this year ranking the relative financial strength of oil companies exposed to low oil prices. The findings are reproduced in the table below from their report:
Group 1 and 2 companies have strong balance sheets, in the sense that they have enough cash or liquidity on hand to service their debts and weather a prolonged period of low profitability. Groups 3 and 4 include companies with weak balance sheets who are at risk of going under. Group 3 companies are those who may be acquired at a bargain by larger oil companies as they begin to struggle, and are at less risk of outright bankruptcy. Group 4 companies, on the other hand, are at great risk.
Let's take a quick look at the stock performance of these companies most at risk since this report was issued in January:
1. Approach Resources (AREX) has seen its stock price tumble more than 33% year-to-date.
2. Exco Resources (XCO) shares are down 74%.
3. Goodrich Petroleum (GDP) is down over 80%.
4. Halcon Resources (HK) has lost 50% of its market capitalization.
5. Magnum Hunter's (MHR) stock price is down almost 70% since Jan. 1.
6. Midstates Petroleum (MPO) has lost 65% of its value.
7. Rex Energy (REXX) is down nearly 56%.
8. Sabine Oil & Gas has gone bankrupt.
9. SandRidge Energy (SD) trades more than 70% lower than at the beginning of the year.
10. Swift Energy (SFY) is down more than 80% year-to-date.
There is a high probability that these nine American oil companies left standing will be the next to fall.
The Bottom Line
Low oil prices have plagued petroleum companies now for half a year, and with the global economy on shaky ground, the demand for oil may stay lower than expected. As a result, there are likely to be more bankruptcies in the energy sector by those companies with weak balance sheets who are no longer able to profitably produce oil in today's market. At the same time, now might be a great opportunity to find oil companies who may weather this downturn and see their stock prices recover in the future. For those companies, now might be a unique opportunity to invest.
Read more: http://www.investopedia.com/articles/investing/072815/oil-companies-near-bankruptcy.asp#ixzz3hHuiVpS8
Follow us: @Investopedia on Twitter
Looking for a stock that might be in a good position to beat earnings at its next report? Consider Linn Energy, LLC (LINE), a firm in the Oil – U.S. Export & Production space, which could be a great candidate for another beat.
This company has seen a nice streak of beating earnings estimates, especially when looking at the previous two reports. In fact, in these reports, LINE has beaten estimates by over 100% in both cases, suggesting it has a nice short-term history of crushing expectations.
Earnings in Focus
Linn Energy, LLC Watchlist
Why Linn Energy (LINE) is Poised to Beat Earnings Estimates Again - Tale of the Tape Zacks 4 hrs ago
3 Reasons Value Stock Investors Will Love Linn Energy (LINE) - Tale of the Tape Zacks 1 day 4 hrs ago
Two quarters ago, LINE was expected to earn 3 cents per share, while it actually produced earnings of 99 cents per share, a significant beat. Meanwhile, for the most recent quarter, the company looked to incur a loss of 18 cents per share, when it actually saw earnings of 13 cents per share instead, representing a positive surprise of over 100%.
Thanks in part to this history, recent estimates have been moving higher for Linn Energy. In fact, the Earnings ESP for LINE is positive, which is a great sign of a coming beat.
After all, the Zacks Earnings ESP compares the most accurate estimate to the broad consensus, looking to find stocks that have seen big revisions as of late, suggesting that analysts have recently become more bullish on the company’s earnings prospects. This is the case for LINE, as the firm currently has a Zacks Earnings ESP of 133.33%, so another beat could be around the corner.
This is particularly true when you consider that LINE has a great Zacks Rank #1 (Strong buy) which can be a harbinger of outperformance and a signal for a strong earnings profile. And when you add this solid Zacks Rank to a positive Earnings ESP, a positive earnings surprise happens nearly 70% of the time, so it seems pretty likely that LINE could see another beat at its next report, especially if recent trends are any guide.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Is your goal to make all of us that lost money in this stock feel worse? What is the point of your posts? I don't get it.
Just keep talking to yourself. It doesn't seem anyone is listening. You are a very strange person.
Houston-based Linn Energy LLC (Nasdaq: LINE) announced on July 6 that it has finalized partnerships for future developments and has sold assets in Texas.
According to a statement from the company, Linn Energy signed a definitive agreement to sell its remaining assets in Howard County, Texas, for $281 million to an undisclosed buyer.
The property, located northeast of Midland, Texas, in the Permian Basin, includes approximately 6,400 acres for horizontal drilling and 133 gross wells, the statement said.
HOME OF THE DAY
Escape From the City on 50 Acres SPONSOR LISTING
Escape From the City on 50 Acres
See All Homes of the Day
The sale became effective on May 1 and is expected to close in the third quarter. RBC Richardson Barr acted as financial adviser to Linn for this transaction.
In two other statements released on July 6, Linn announced that it has finalized alliances that were announced earlier this year after the company, like many in the energy industry, slashed its 2015 budget in half.
According to a statement, Linn signed a definitive agreement with Houston-based Quantum Energy Partners in which Quantum agreed to commit up to $1 billion of equity to fund acquisitions and development of oil and gas assets.
Linn will manage the assets in exchange for reimbursement of general and administrative expenses.
The company also announced that its agreement with GSO Capital Partners LP, the credit platform of New York-based Blackstone Group LP (NYSE: BX), to fund development projects has been finalized. GSO has agreed to commit $500 million over five years.
New York-based Jefferies LLC acted as financial adviser to Linn in both of these agreements. Los Angeles-based Latham & Watkins provided legal advice to Linn in the agreement with Quantum, while Houston-based Vinson & Elkins provided legal advice to Quantum.
Linn Energy (NASDAQ: LINE) has been incredibly volatile in 2015. The company's units have been up more than 35% at various points in the year, but right now, units are up just under 3%. Here are three things Linn could do to push its unit price back to those heights and beyond.
1. Start using DrillCo
One of Linn Energy's strategies has been to seek out private capital to fund growth. So far this year, it has successfully netted $1.5 billion in private capital. One piece of that private capital is the company's $500 million DrillCo venture, which provides the company with capital to drill wells without spending money from its own balance sheet.
So far, Linn has yet to use any of this money as it is searching for the right opportunity to invest the capital. One opportunity it could pursue is to use DrillCo to drill wells on the company's remaining 6,600-acre position in the Midland Basin. When asked on the company's first-quarter conference call about using this acreage position for DrillCo, CFO Kolja Rockov said that while it was continuing trade dialog, the company also has "a number of different development opportunities now that we can pursue the value on that," with DrillCo being one option.
Putting DrillCo to work either drilling on its Midland Basin acreage, or at some other spot, could provide a boost for the unit price since this is no-cost growth for Linn Energy.
2. Make a deal using AcquisitionCo
Linn's other private capital funding vehicle is its AcquisitionCo venture, which provides it with up to $1 billion in equity capital for acquisition funding. It is a vehicle that, with leverage and Linn's contribution, provides the company with a war chest of upwards of $2.5 billion for acquisitions.
Using this vehicle to make a deal could drive Linn's unit price higher as it provides relatively low-cost growth with lots of upside. Rockov noted on the first-quarter conference call that the company plans to use AcquisitionCo to acquire assets that might not be a perfect fit for Linn Energy's low production decline business model. Instead, the company will use AcquisitionCo to acquire a company earlier in its life cycle, then as the decline rate of the acquired assets moderates, Linn can drop those down into its own portfolio, meaning built-in growth for the company.
3. Using its buying power to acquire a rival
The intention behind AcquisitionCo is to buy assets or companies that don't currently fit within a low-decline MLP business model, such as an asset based on horizontally drilled shale wells. That leaves all other acquisition opportunities open to Linn to buy for its own account. The company has said that its preference is to use equity to make acquisitions in this environment, and one really compelling opportunity would be to acquire smaller upstream MLPs in a unit-for-unit exchange. That would fit with recent trends as the upstream MLP sector has seen a lot of consolidation in recent months, with three notable deals over just the past few months.
One MLP that looks like a perfect fit for Linn is Legacy Reserves (NASDAQ: LGCY). The upstream MLP is already operating as many of the basins as Linn, as Legacy has core areas in the Rocky Mountains, Permian Basin, and the Mid-Continent. In addition to that, Legacy Reserves has a relatively strong balance sheet, which means an acquisition wouldn't negatively impact Linn's credit metrics.
Another reason Legacy Reserves looks like a compelling fit is because the company has a solid position in the Permian Basin, which Legacy has noted would be best developed in a DrillCo. In fact, the company said it has the potential to spend $500 on initial projects over the next few years, which just happens to be what Linn has available on its own DrillCo. Acquiring a company like Legacy Reserves would make a lot of sense for Linn Energy, as it could improve its balance sheet and its opportunity set, which could also boost the company's unit price.
Linn Energy's unit prices have been quite volatile over the past year. However, by using its private capital or making an acquisition, Linn Energy could excite investors, which would push the unit price higher.
Read more: http://www.investopedia.com/stock-analysis/061115/3-things-could-push-linn-energy-higher-line-lgcy.aspx#ixzz3crRpR3nM
Follow us: @Investopedia on Twitter
Linn Energy LLC (NASDAQ: LINE ) and its financial holding entity LinnCo (NASDAQ: LNCO ) have taken it on the chin over the past year. Obviously, the primary culprit was the rout in the oil market. The price of crude oil fell from about $100 per barrel at its 2014 peak to roughly $45 per barrel at its 2015 low. As a upstream exploration and production company, Linn was hit extremely hard.
Things got even worse a couple weeks ago when Linn stock fell double-digits after the company announced a major secondary unit offering. Linn sold 16 million units at an average price of $11.79 per unit. This is well below where Linn was trading just a few months ago. In fact, Linn shares exchanged hands at $30 this time last year.
Still, Linn had good cause to conduct this offering now. Here's why Linn's transaction made sense, and why better days might lie ahead for the embattled oil and gas producer.
Getting some relief
Linn took on significant debt as a result of its $4.3 billion acquisition of Berry Petroleum, $1.8 billion of which was the assumption of Berry's debt. With oil and gas prices getting slammed and a debt-heavy capital structure, Linn needs some flexibility. Linn could use any relief on its existing Berry credit facility it can get, because it's essentially maxed out.
Linn's Berry credit facility has a borrowing base of $1.4 billion, but as of the end of last year, there was less than $1 million of available borrowing capacity. That's exactly what it's getting with its secondary offering. The transaction will raise approximately $181 million in net proceeds to repay debt under the company's existing credit facility, which was primarily incurred to repurchase Linn and Berry's senior notes.
On the surface, it seems questionable for Linn to offer units that yield 10% to retire less-costly debt. It doesn't appear to make sense to incur a near-term cash burn when the company needs as much cash as possible during the oil and gas downturn. But other considerations might be in play. For instance, reducing debt could improve Linn's position with creditors. Linn did have approximately $10.4 billion in debt at the end of last quarter after all.
Meanwhile, things appear to be improving
The unit offering aside, Linn's situation does seem to be improving. The company's oil and gas production grew 2% last quarter, even though it cut capital spending by a whopping 65%. This implies Linn's shifting focus toward higher-quality assets with lower rates of decline is working as management had hoped.. Linn also saved a significant amount of cash by slashing its distribution by 57%. Linn has taken an ax to its spending as a result of the oil crash, including its reductions in distributions and its capital budget. Fortunately, these spending reductions appear to put Linn on firmer footing. The company expects to fund its 2015 distributions and oil and gas capital spending entirely from internally generated cash flow.
In addition, Linn has strong hedging policies in place to help insulate it against further deterioration. Linn entered into additional oil swaps earlier this year, which mean the company is now hedged 80% of its 2015 oil production at an average price of $91 per barrel. Moreover, Linn is fully hedged on its natural gas production at an average price of $5.12 per MMBtu..
Separately, the price of oil has recovered significantly from last quarter. West Texas Intermediate is back to nearly $60 per barrel, meaning the current quarter's results could improve from the preceding three-month period.
The Foolish takeaway
The bottom line for investors is that while markets typically punish companies for selling new units, reducing debt is a good strategy for Linn Energy. Excessive debt can force a company into dire straits, which was a real concern for exploration and production companies when the price of oil collapsed. Selling new units is costly as well, but the company can always cut its distribution again if conditions deteriorate further. Meanwhile, Linn got some much-needed debt relief, as its current Berry credit facility is maxed out. And, if the oil market stabilizes, Linn's operations could continue to improve from here.
Tell me, just how much have you lost with Line.
Seeing Saudi Arabia beat its head against the wall has been so fun that now Iraq’s petro-military apparatus has decided it, too, wishes to flood the world’s oil market with fresh supply and bring U.S. shale producers to their knees.
To put this in terms Iraqis may grasp: Please do. Texans will meet you in the street with yellow roses.
Short of giving away a city to Islamic State (as it did last weekend), Iraq could hardly do anything less in its own interest. It will cost Iraq money it doesn’t have — and can’t easily borrow. So the gambit to boost production by 800,000 barrels a day won’t last, and won’t matter. Ultimately, the drama will highlight why the price of oil is likely to stay near where it is for now, and drift lower over time.
Here’s why: U.S oil production is edging back into the money. With Brent crude LCON5, +4.47% around $65 a barrel and West Texas Intermediate CLN5, +4.28% at $60, world prices are high enough to make most U.S. production profitable, according to recent analyses by both Rystad Energy and Goldman Sachs.
And this may be conservative: Oil’s collapse last fall was fueled partly by data from North Dakota’s state government suggesting the average break-even point for Bakken shale is in the low $40s.
Rumble seat: 2015 Corvette Z06 convertible(3:44)
The 2015 Corvette Z06 convertible could become a future collectible for car enthusiasts, WSJ’s Dan Neil says. Photo: Mike Finkelstein
That’s why the drop in U.S. rig counts has stalled. Last week’s Baker Hughes statistics showed only three fewer rigs than the week before, after a 60% one-year drop, with three net new land-based rigs. U.S. production is still higher than a year ago, and a game-changing 80% higher than in 2008. Moreover, the cost of shale production is still dropping.
For all the that the Saudis have “won” because Brent has gained about $10 a barrel since January, it’s still as much as $20 cheaper than it was in November 2014 when the Saudi plan became clear. The U.S. production drop hasn’t occurred, and investment is stabilizing. Some win.
At the same time, no OPEC producer has done much to undo their chief cost disadvantage — political instability and lack of individual freedom. It may sound abstract, but buying-off oppressed populations is expensive.
Since Arab states boosted social spending after the 2010 Arab Spring, the effective break-even on oil that props up regimes is extremely high. It costs only a few dollars a barrel to get the stuff out of the ground, but last year Goldman Sachs estimated Iran’s total break-even cost at $133 per barrel. Russia’s is $107, Iraq’s is $101. And so on.
OPEC’s endgame — push oil to $40, freeze U.S. supply, and wait for oil to hit $90 or $100 again — can’t work. There’s no place on that spectrum where OPEC covers its overhead — and it would have to cut capital spending, making OPEC less competitive and relevant, while making local politics even more volatile and unstable. Ask Iraq how smart that seems in Ramadi just now.
This is good news for oil stocks with U.S. exposure. A crude-price consensus would spark deal-making, as companies like Exxon Mobil XOM, -0.13% or Chevron CHV, -0.42% snap up rumored targets such as Anadarko Petroleum APC, -0.29% and Chesapeake Energy CHK, +0.21% And $60 crude still spurs U.S. producers to become more efficient, hastening the day when U.S. crude costs $50 or $55 on average to produce.
Crude around $60 is also good environmentally. Pump prices around the national average of $2.77 give people $50 to $100 of incentive a month to buy more-efficient cars — and there’s evidence that prices of many eco-friendly cars are falling. Yet speculative fossil-fuel ventures such as the offshore Alaskan drilling the Interior Department approved May 12 are likely to stay uneconomical.
A “goldilocks” price for oil is low enough to nurture consumer spending on everything else, and high enough for oil producers and shareholders to make money. It’s also low enough to make Nissan Motor NSANY, -0.95% 7201, +0.12% keep pushing down the cost of electric-powered Leafs, as Hyundai Motor 005380, +1.28% is doing with Sonata hybrids. Ideally, natural gas also stays cheap enough to sustain pressure for tax incentives for wind and solar electricity that, along with regulation, slash coal use.
Oil cheap enough to apply pressure on everyone to be more efficient and to force policymakers to keep thinking green, while high enough to make the effort worthwhile, is the goldilocks price. That’s close to where oil is now. Which has little to do with the Saudis, and nothing to do with Iraq.