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Linn Energy, LLC (LINE) Message Board

garrh 25 posts  |  Last Activity: Apr 15, 2015 3:18 PM Member since: Oct 2, 2012
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  • Reply to

    11s by week end? Oil retreat to 50?

    by bigjohnson499 Apr 15, 2015 3:11 PM
    garrh@sbcglobal.net garrh Apr 15, 2015 3:18 PM Flag

    Why don't you find something else to do? You are getting boring.

    Sentiment: Hold

  • garrh@sbcglobal.net by garrh Apr 2, 2015 8:57 AM Flag

    Last week Linn Energy (NASDAQ:LINE) (NASDAQ:LNCO), made its second private equity deal in the last few months. This time, in a deal with its original founding investor, Quantum Energy Partners, Linn will create a joint venture entity named AcqCo, short for "Acquisition Co." AcqCo will receive initial funding of $1 billion by Quantum Energy Partners, which will acquire oil and gas properties with the help of Linn Energy. Linn will get an initial working interest of between 15% and 50%, depending upon how much Linn contributes.

    AcqCo provides a degree of acquisition flexibility that no other upstream MLP has, but this deal does come with a price tag. From comments I've read on articles on Seeking Alpha, there seems to be a handful of questions remaining about this deal. This article will attempt to address some of that uncertainty and put some perspective on this deal. Instead of quoting the press release verbatim, this article will focus on and summarize the key concepts.

    Many pieces

    Source: Linn Energy Investor Relations Notes: (1) Subject to final documentation (2) Board of Directors of AcqCo will comprise of five (3) Working Interest (4) General and Administrative expenses.

    This chart explains the basics of the new joint venture. So let's start with the basics, and put some questions in the 'parking lot' as we go along (I'll answer those 'parking lot' questions later).

    First of all, AcqCo will start off being 100% owned by Quantum. If AcqCo and Linn make an acquisition, Linn could fund as little as 15% of the deal or as much as 50% of the deal and achieve a corresponding working interest.

    This gives Linn a good deal of additional flexibility. In the past, Linn would simply have to acquire on its own for 100% of the working interest. Going forward, Linn can make big acquisitions but will now be able to 'digest' those acquisitions piecemeal as appropriate, which I believe is a big advantage.

    One question investors may have is whether these new acquisitions will be initiated by Linn or Quantum and AcqCo. Let's put that question in the 'parking lot' and continue on with the deal specifics.

    Once the property is acquired, Linn will have the same managerial control on the acquired property as it would on all properties it owns. In other words, Linn will be the operator. In exchange for management services, AcqCo will reimburse Linn for all general and administrative costs, and will take distributable cash flow profit according to its working interest.

    That more-or-less sums up the basic tenets of the deal. So, how does Quantum benefit from this? Why bother putting out a billion dollars just to get part of the working interest on assets? Why pay out G&A expenses? Why wouldn't Quantum just acquire the property themselves and drill on it?

    Well, in order to manage the acquired properties, Quantum would have to hire technically capable employees and management to do so. Unfortunately for Quantum, most talented employees and managers are already out working for someone else. That's where Linn Energy comes in. The basic deal is quite generous to Linn, in my opinion, and that only shows how highly this private equity firm values Linn Energy's management and employees. Quantum could have picked a wide array of companies to work with, including other upstream MLPs. Instead, Linn Energy got the nod. I think that says a lot about Linn.

    Now back to the 'parking lot'. Who will initiate the acquisitions? Will it be Linn's choice, or Quantum Energy's decision? From the press release, I really don't know, but the press release verbiage does give a hint:

    Subject to final documentation, Quantum has agreed to initially commit up to $1 billion of equity capital to fund acquisitions and development of oil and natural gas assets. LINN will have the ability to participate in all acquisition opportunities with a direct working interest ranging from 15 percent to 50 percent.

    This seems to suggest that Quantum will the one initiating the acquisitions, and that Linn will have the "ability to participate" by investing and building up working interest. We might get some further color on that question during the first quarter earnings results call. Personally, I hope that Linn Energy will be the decider and initiator, as they are the ones with the managerial expertise and the acquisition experience.

    Of drop-downs and return hurdles

    Notice a few other things on the above chart. Specifically, the potential for further drop downs to Linn. In other words, AcqCo (and Quantum, which owns 100% of AcqCo) will have the option to dispose of assets and drop those assets down to Linn at anytime. Who will initiate the drop downs? Linn or Quantum? That question can be answered quickly, so let's not even bother with the 'parking lot' on this one. Take a look at the following verbiage.

    Upon the sale of any assets within AcqCo, LINN will be given right of first offer to acquire those assets.

    That pretty much answers this question. AcqCo will make the decision to dispose of its assets, which is not too surprising, and Linn will have the right of first refusal.

    Here is another part of the official press release I would like to quote, because it isn't reflected in the above chart.

    Additionally, after certain investor return hurdles are met, LINN will have the ability to earn a promoted interest in AcqCo.

    Basically, this line means that, after Quantum hits a 'certain' rate of return, Linn will have the opportunity to acquire a greater working interest in AcqCo and the properties, which AcqCo owns. This kind of language echoes the deal between Linn Energy and DrillCo by which Linn would earn a greater interest in the property after DrillCo hit a return rate of 15% or greater. I think that this part of the AcqCo deal really reflects what Quantum wants out of this: A chance to acquire mature oil and gas producing properties and get a guaranteed return out of it. Partnering with the management and employees of Linn Energy is, in my opinion, a really good way of doing so.

    The one question remaining from this portion of the deal is "What is the 'return rate' Quantum is looking for before Linn gets a chance to increase its ownership stake?" Unfortunately, we still don't know that. Nevertheless, this deal will afford Linn a good amount of additional flexibility in future acquisitions. The joint venture will also allow Linn to separate financing from the timing of acquisitions, giving Linn more funding flexibility.

    Putting it all together

    Linn's deal with Quantum Energy Partners is neither a 'poison pill' nor a 'deal with the devil' in which Linn is giving up a significant portion of its equity or cash flow in which to procure some short-term funding. Instead, this deal is all about adding more options by which Linn can acquire. Not only that, the terms of this deal say a lot about Linn's management in general. It seems that the flow of upstream MLP acquisitions has more or less halted, either because sellers are not willing to lower their asset prices according to the drop in WTI, or buyers don't have the available liquidity at the moment. Whatever the case is, I believe this joint venture with Quantum gives Linn another tool in its box.

    Read more on alternative investing »

    Sentiment: Hold

  • Reply to

    What happened to this board?

    by sandra888us Apr 1, 2015 2:53 PM
    garrh@sbcglobal.net garrh Apr 1, 2015 3:37 PM Flag

    Good question.

    Sentiment: Hold

  • garrh@sbcglobal.net by garrh Apr 1, 2015 8:53 AM Flag

    Breitburn Energy slashed its distribution for the second time, by another 50%. This has incited fears that other upstream MLPs, like Linn Energy, will follow suit.
    However, there are critical differences in the respective financing deals recently struck by Breitburn and Linn. Linn has more financial flexibility than Breitburn, and is less exposed to oil.
    Linn's 2015 capital budget and distribution will be funded with internal cash flow. Therefore, despite what the market thinks, I don't think Linn will follow Breitburn and cut distributions again.
    This article was sent to 23,022 people who get email alerts on LINE.
    Get email alerts on LINE »
    As the saying goes, fool me once, shame on you. Fool me twice, shame on me. This is the likely feeling permeating through the market now that upstream Master Limited Partnership Breitburn Energy Partners (NASDAQ:BBEP) cut its distribution for the second time in just the last six months. Not surprisingly, Breitburn fell hard on the news -- an almost 8% decline in early trading on Mach 30. More surprising was that close peer Linn Energy (NASDAQ:LINE) fell in tandem with Breitburn.

    I own a piece of Linn through its financial holding subsidiary, LinnCo (NASDAQ:LNCO). I've owned LinnCo for two years now. There are two reasons I own LinnCo rather than Linn units. The first is that LinnCo owners don't have to deal with a K-1 statement come tax time. The second is that LinnCo trades at a measurable discount to Linn, and as a result, offers a two percentage point greater yield.

    It's certainly understandable why Breitburn sold off on the news, and with two distribution cuts, there's little reason for income investors to keep holding it. Judging by Linn's steep decline on the same day, it's clear that the market is afraid of a second distribution cut from Linn (and LinnCo) now. But there are some clear differences in Breitburn's and Linn's respective financial positions that, in my belief, make this fear irrational. This is why I'm sticking with Linn Energy.

    Breitburn's Bloated Balance Sheet

    Breitburn announced a much-needed $1 billion cash injection from EIG Global Energy Partners. This will help Breitburn pay down its credit facility, which was pushed to the limit due to its spending spree in recent years. Breitburn has made several acquisitions in the past few years, the highest-profile of which was its merger with QR Energy for $1.6 billion last year, which then made Breitburn the largest MLP that produces mostly oil. Of course, this turned out to be a disastrous move, as it bloated Breitburn's balance sheet at the exact wrong time. It's likely management planned to help pay for its acquisitions by tapping the capital markets. Unfortunately, the markets quickly dried up to oil and gas companies when commodities crashed.

    At $50 crude oil, Breitburn needs as much cash as it can get. The financing involves Breitburn selling $350 million of convertible preferred units at a price of $7.50, and also offering $650 million of senior secured notes, due May 2020, which carry a 9.25% interest rate. As you can surmise, these terms are less than ideal, which is why Breitburn fell 10% on a day in which the markets roared higher. But the deal with EIG will greatly help Breitburn stay afloat. But it comes with a steep cost. Along with the announcement, Breitburn said it will cut its distribution again, by 50%, to $0.50 per unit annualized. This is a far cry from the $2.07 annualized distribution Breitburn had been paying before the oil collapse.

    By contrast, Linn Energy has sought similar financing, but under different terms. Its most recent move was a $1 billion cash injection of its own, from private equity firm Quantum Energy. The critical difference is that this deal only utilizes equity capital. This arrangement will not further expand Linn's liabilities. The reason why Linn was able to secure a better deal than Breitburn is because it was in better financial position to begin with, and had more flexibility on its existing credit facility.

    To be sure, Linn has a bloated balance sheet of its own. But its balance sheet has not been burdened by its recent strategic moves like Breitburn's has been. I believe Linn will not have to cut its distribution again, barring another major commodity downturn. Linn cut its 2015 spending plans by 29%. As a result, its 2015 capital budget of $520 million, along with its $417 million in distributions, should be covered by underlying cash flow. It's important to remember Linn is less oil-weighted than Breitburn. 54% of Linn's 2015 production will come from natural gas, which is hedged 100%. And, even its 33% oil production is hedged approximately 70%.

    Don't Overreact To Breitburn's Second Cut; Linn's Distribution Likely Intact

    Because of this, I foresee Linn's $1.25 per unit distribution (and LinnCo's $1.25 per share dividend) holding up, assuming oil prices can find a bottom here. Breitburn simply went "all-in" on oil at the exact wrong time, and it now has to pay the price for that. To be sure, Linn made a significant bet of its own, but didn't go "all-in." Linn's financial condition is poor right now, but its recent deal with Quantum won't burden its balance sheet further.

    At the same time, with Breitburn's cut, I can easily foresee the market selling off upstream oil and gas MLPs indiscriminately, as happened to Linn on the day of Breitburn's announcement. That's why I'm not planning to add to my position unless LinnCo falls back to its 52-week low, under $9 per share. This provides a better margin of safety for investors from further downside risk, now that Breitburn has cut its distribution yet again. But I don't believe Linn investors should panic due to Breitburn's second cut.

    Sentiment: Hold

  • garrh@sbcglobal.net garrh Mar 31, 2015 3:54 PM Flag

    So sorry for your loss.

    Sentiment: Hold

  • garrh@sbcglobal.net garrh Mar 26, 2015 3:16 PM Flag

    Me to. Maybe natural gas prices are down and expected to go lower

    Sentiment: Hold

  • garrh@sbcglobal.net by garrh Mar 24, 2015 1:43 PM Flag

    Strategic advantages expected for LINN:
    Creates a "drop-down" entity in which assets can be purchased and harvested on an ongoing basis;
    Allows participation in acquisitions outside of the conventional MLP asset profile;
    Enhances ability to capture acquisition opportunities during distressed market conditions;
    Provides potentially more accretion to cash flow per unit as a result of the promote structure;
    Creates a long-term partnership with a private capital provider which is scalable and repeatable; and
    Provides LINN with the dynamic ability to acquire and finance acquisitions at the most advantageous times.

    Sentiment: Hold

  • garrh@sbcglobal.net by garrh Mar 16, 2015 4:46 PM Flag

    It's not exactly an easy decision to buy an oil and gas producer right now considering the price of oil, but it may be even more challenging to invest in an oil producing master limited partnership when you consider the debt levels of these producers. Still, when companies like Linn Energy (NASDAQ: LINE ) and BreitBurn Energy Partners (NASDAQ: BBEP ) sport distribution yields of 10.8% and 15.8%, respectively, it's going to make you turn your head enough to cross your mind.

    We asked two of our energy analysts which of these two high-yielding energy stocks would be their first purchase today. Here's what they had to say.

    Tyler Crowe: I'll admit that, at first glance, the better-than-15% yield for Breitburn looks much more tempting than only getting a more-than-10% yield on Linn, and the debt obligations for Linn look a little more insurmountable than its upstream counterpart. But there are two reasons why I'm willing to side with Linn over Breitburn: it's derivative profile, and the creativity of Linn's management to weather the storm.

    Today's oil market looks quite rough. Even as rig counts and overall drilling activity slows in the U.S., production declines have not kept pace, and overflowing storage terminals suggest that the downturn in prices might take a little while to correct itself. Luckily for Linn, it built a pretty substantial commodity derivative profile to hedge against any major declines in oil and gas prices, and has a pretty balanced portfolio between oil and natural gas.

    Source: Linn Energy investor presentation.

    While it would be ideal if all of its production was hedged for the next year or two, having this much of its production selling at a higher fixed price is enough to prevent investors from jumping off a cliff. The real reason to get excited, though, is Linn's long-term plans to develop its assets through some new, creative agreements.

    Its recent $500 million DrillCo agreement with Blackstone Group's (NYSE: BX ) GSO Capital Partners will give GSO a fixed rate of return on some of Linn's properties in exchange for fronting the money to develop the property itself. These sorts of creative deals that management is pursuing will help it manage through the bad times as it significantly lowers its operational risks. It will also help maintain an adequate distribution coverage, which is exactly what you would want in a high-yielding investment.

    Matt DiLallo: Let me start by saying I still like Linn Energy a lot. I bought my first helping of Linn's units not that long after it went public almost a decade ago, and have no plans to sell any of the units I've accumulated over the years. That being said, there are three things that BreitBurn Energy Partners has over Linn at the moment that, in my opinion, make it a better buy in the near term.

    1) Better coverage ratio: Both Linn and BreitBurn dramatically cut their capex and distribution for 2015. However, BreitBurn's guidance for its distribution coverage ratio is 1.35 times, while Linn's is just 1.18 times at the midpoint of its guidance. By having such a robust coverage ratio, BreitBurn expects to generate $80 million in excess cash flow, while Linn is guiding to be roughly cash flow neutral in 2015. While both are moving targets due to commodity prices and service costs, BreitBurn's distribution is on a bit stronger foundation than Linn's.

    2) Upside to oil prices: BreitBurn produces a lot more oil than Linn does, as oil is 56% of BreitBurn's production, while 58% of Linn's production is natural gas, and just 28% is oil. While BreitBurn's oil-weighted business really weighed on its units when the price of oil plunged, that weight will be lifted should oil prices rally in the future.

    3) Relief rally when it bolsters its balance sheet: The last reason why BreitBurn looks to be a better buy now is because its units are being weighed down by the company's debt concerns. The company doesn't have much room on its credit facility, and there are worries that the facility's borrowing capacity could be reduced below the company's current borrowing rate when it's redetermined in April. However, the company is looking at both the public and private markets to raise capital, and once it's able to relieve this pressure by bolstering its balance sheet, it could lead to a relief rally as investors' fears abate.

    Add it up, and I see a bit more upside in the near term at BreitBurn if things get better quickly. That said, longer term, my money is still on Linn. Less
    Sentiment: Hold

    Sentiment: Hold

  • garrh@sbcglobal.net by garrh Mar 16, 2015 10:59 AM Flag

    LONDON (Reuters) - U.S. oil output could start to take a hit by late 2015 due to low prices, OPEC said on Monday, suggesting the exporter group will have to wait beyond its next meeting in June to see if its strategy to defend market share will dent the shale oil boom.

    The halving of oil prices since June 2014 has prompted spending cuts by oil companies and a drop in U.S. drilling, raising expectations of slowing output in countries outside the Organization of the Petroleum Exporting Countries (OPEC).

    But in a monthly report, OPEC left its forecast for non-OPEC supply this year unchanged and said output of U.S. "tight" oil, also known as shale, might only start to be curbed towards the end of the year.

    "Tight crude producers are aware that typical oil wells in shale plays decline 60 percent annually, and that losses can only be recouped by drilling new wells," OPEC said.

    "As drilling subsides due to high costs and a potentially sustained low oil price, a drop in production can be expected to follow, possibly by late 2015."

    Oil's collapse from $115 a barrel in 2014 gained impetus after OPEC refused to cut output at a November meeting, seeking to slow higher-cost production in the United States and elsewhere that had been eroding its market share.

    OPEC holds its next meeting in June and comments from officials so far suggest it will not adjust policy as it waits for the strategy to take effect.

    For now, OPEC forecast no further rise in demand for its crude in 2015, trimming the forecast slightly to 29.19 million bpd, and left unchanged its estimate of global growth in oil demand this year.

    In last month's report, OPEC had sharply increased the 2015 forecast of demand for its oil due to a lower outlook for non-OPEC supply.

    OPEC's report confirmed other estimates suggesting its production declined in February and projected a slightly smaller global supply surplus in 2015, without output cuts by OPEC or other producers.

    With OPEC pumping 30.02 million bpd in February, according to secondary sources cited in the report, OPEC indicates there will be a supply surplus of 830,000 bpd in 2015 and 2 million bpd in the first half - less than in January.
    Saudi Arabia, which led OPEC's no-cut strategy, reported a small, 40,000-bpd dip in February output to 9.64 million bpd.

    Sentiment: Hold

  • Reply to

    You can't delete the truth norris!

    by rjmcbear Mar 11, 2015 2:12 PM
    garrh@sbcglobal.net garrh Mar 11, 2015 3:45 PM Flag

    I was wondering why some of my posts were magically disappearing.

    Sentiment: Hold

  • garrh@sbcglobal.net by garrh Mar 11, 2015 1:32 PM Flag

    Linn Energy has been really reliant on the public markets to fund its growth since the company went public in 2006. In a little less than a decade, the company used those markets to issue debt and equity to cover the more than $15 billion in acquisitions it has completed. This turned the company from a small E&P to one of the largest independent oil and gas companies in the country.

    However, one thing Linn has found over the years is that the public markets can be quite fickle. That's pretty evident from the fact that its units are currently more than 60% off their 52-week high, which makes it tough for Linn to issue new equity to fund acquisitions in what could be one of the best buyers' markets in years.

    Meanwhile, its bonds have also fallen in value over the past few months, which could make it more expensive for the company to issue more debt. That's why the company is beginning to turn away from the public markets and look to private capital, which tends to be a bit less fickle, to fund growth.

    Funding for the drill bit
    Linn Energy announced earlier this year that it was pursuing an agreement with GSO Capital Partners that would provide it with a five-year, $500 million funding commitment. The company calls this venture DrillCo, and it will enable it to develop new wells without spending its own money. It's an agreement with a lot of potential.

    Under the proposed terms of the agreement, Linn Energy would initially get a 15% working interest in the wells it drills by simply contributing the drilling inventory. Then, once GSO Capital has earned 115% of its initial investment, Linn Energy's working interest in the wells flips to 95%.

    So, say for example Linn Energy uses $50 million per year. At a 15% working interest, it's akin to bolstering its current drilling program by about 1.5% without spending that extra cash.

    That might not sound like a lot initially, but it if works, Linn could potentially add additional private capital partners, or grow its relationship with GSO so that it could bolster its drilling program significantly without spending any additional cash Linn would need to get from the public markets. Then, of course, it gets to keep 95% of the production and cash flow of these wells once the private capital investors are paid back via the cash flow generated from the wells.

    Adding a shopping partner or two
    The other private capital funding mechanism the company is pursing is an acquisition funding vehicle that, unsurprisingly, has been dubbed AcquisitionCo. In commenting on this vehicle, Linn CFO Kolja Rockov said on the company's fourth-quarter conference call:

    We see AcquisitionCo as a vehicle to make significant acquisitions in a structure outside of Linn, with the ability to drop assets down to Linn over time. Linn offers a very talented and scalable work force, with unique expertise in the evaluation, acquisition, integration, and development of assets that we could bring to bear for such a transformative opportunity. We have received significant interest from potential private capital partners regarding AcquisitionCo.

    CEO Mark Ellis elaborated on the structure a bit later in the call by saying that under the structure, Linn would acquire an asset, but take a smaller personage of the asset at first, with AcquisitionCo investors taking the larger initial share. Linn would then operate the asset, which it would slowly acquire full control of over time. He called it "building a dropdown in reverse."

    The key, however, is that Linn could take advantage of compelling acquisition opportunities without staying within the limits of the capital markets, which are known to be rather unpredictable. Instead, Linn will be relying on private capital investors, who tend to be a bit more predictable and longer-term-focused, which is a much better fit for the company's long-term-focused business model.

    Investor takeaway
    Gone are the days when Linn Energy simply issues debt and equity to fund its growth. Instead, the company is turning its focus on getting money from private investors. That's not to say it's done with the debt and equity market -- it'll still use those, but not nearly as much as in the past. It's a new course that hopefully will lead to much more stability for investors in the future.

    Sentiment: Hold

  • Reply to

    the bottom

    by jdurkac Mar 9, 2015 12:00 PM
    garrh@sbcglobal.net garrh Mar 9, 2015 2:29 PM Flag

    Wow! This guy is really smoking some serious weed.

    Sentiment: Hold

  • garrh@sbcglobal.net by garrh Feb 27, 2015 10:36 AM Flag

    One of the most impactful lessons I've learned as an investor is that numbers don't always tell the full story, especially at first glance. Take, for example, the long-term chart for LINN Energy . Investors who bought the company near its IPO in 2006 and held on through mid-February would be down more than 40%, as we see on this chart:

    LINE Chart

    LINE data by YCharts.

    One look at that chart would probably make anyone give up buy-and-hold investing, as those who've held long-term, like me, would seem to have lost a bundle. However, there's just one problem with that chart, and that's the fact that it doesn't take into account the rather robust distributions that the company has been paying out for nearly a decade. When we add those into the equation, it tells a much better story.

    Looking at the total picture
    A much fuller picture of LINN Energy's story over the past few years involves taking a look at its total return, which includes distributions. When we do that, we see the company has actually generated a nice positive return for long-term investors.

    LINE Chart

    LINE data by YCharts.

    In fact, the company is not just in the black, but its total return is about 30% since going public in 2006. While that is about a third of the total return of the market over that time, LINN Energy had been handily outperforming the market until the oil price plunge over the past few months decimated its unit price. In fact, its total return had been more than 225%, or more than double the market's gain, before the oil-induced slide.

    Making money on the margins
    Unfortunately, as a commodity-focused company, LINN Energy's units will rise and fall with the price of oil and natural gas. However, what's worth noting is that since LINN Energy has been public, oil and gas prices have been less than ideal. We see this in the following chart.

    LINE Chart

    LINE data by YCharts.

    As that chart notes, the price of oil is down about 16% over the past decade despite the crazy volatility in between. Meanwhile, the price of natural gas has cratered, as it's down almost 70% since LINN Energy started out. And yet, despite that wild commodity price environment, the company has eked out a positive return for its investors.

    The reason LINN Energy can make money in this environment is that it's profits aren't entirely driven by commodity prices. Instead, its money is made on the margin it earns from the price at which it buys oil and gas assets and the price at which it sells the commodities those assets produce.

    For example, in late 2013 the company spent $525 million to buy oil and gas assets in the Permian Basin. That asset contained proved reserves of 30 million barrels of oil equivalent along with the potential for another 24 million barrels of oil equivalent from future water floods. This means that the company paid less than $10 per BOE for those reserves. Meanwhile, the company noted that it costs $15 per BOE to produce the oil and gas from this asset. So, development drilling aside, this acquisition, and others like it, will generate a lot of cash flow for the company in the years ahead even at lower commodity prices. Meanwhile, if the price of oil heads higher, so will LINN's margins.

    Investor takeaway
    Investors in LINN Energy need to focus on the fact that the company makes a lot of money producing oil and gas because its goal is to buy cheap oil and gas assets. This has worked out well over its history, as the company has produced gobs of cash flow, which it sent back to investors, enabling them to enjoy a positive long-term return. And while that return might be down from where it was, it should grow over the years because the company makes money on the margin it earns from oil and gas acquisitions and not just from where the price of oil is today.

    Sentiment: Hold

  • garrh@sbcglobal.net by garrh Feb 27, 2015 10:35 AM Flag

    One of the most impactful lessons I've learned as an investor is that numbers don't always tell the full story, especially at first glance. Take, for example, the long-term chart for LINN Energy . Investors who bought the company near its IPO in 2006 and held on through mid-February would be down more than 40%, as we see on this chart:

    LINE Chart

    LINE data by YCharts.

    One look at that chart would probably make anyone give up buy-and-hold investing, as those who've held long-term, like me, would seem to have lost a bundle. However, there's just one problem with that chart, and that's the fact that it doesn't take into account the rather robust distributions that the company has been paying out for nearly a decade. When we add those into the equation, it tells a much better story.

    Looking at the total picture
    A much fuller picture of LINN Energy's story over the past few years involves taking a look at its total return, which includes distributions. When we do that, we see the company has actually generated a nice positive return for long-term investors.

    LINE Chart

    LINE data by YCharts.

    In fact, the company is not just in the black, but its total return is about 30% since going public in 2006. While that is about a third of the total return of the market over that time, LINN Energy had been handily outperforming the market until the oil price plunge over the past few months decimated its unit price. In fact, its total return had been more than 225%, or more than double the market's gain, before the oil-induced slide.

    Making money on the margins
    Unfortunately, as a commodity-focused company, LINN Energy's units will rise and fall with the price of oil and natural gas. However, what's worth noting is that since LINN Energy has been public, oil and gas prices have been less than ideal. We see this in the following chart.

    LINE Chart

    LINE data by YCharts.

    As that chart notes, the price of oil is down about 16% over the past decade despite the crazy volatility in between. Meanwhile, the price of natural gas has cratered, as it's down almost 70% since LINN Energy started out. And yet, despite that wild commodity price environment, the company has eked out a positive return for its investors.

    The reason LINN Energy can make money in this environment is that it's profits aren't entirely driven by commodity prices. Instead, its money is made on the margin it earns from the price at which it buys oil and gas assets and the price at which it sells the commodities those assets produce.

    For example, in late 2013 the company spent $525 million to buy oil and gas assets in the Permian Basin. That asset contained proved reserves of 30 million barrels of oil equivalent along with the potential for another 24 million barrels of oil equivalent from future water floods. This means that the company paid less than $10 per BOE for those reserves. Meanwhile, the company noted that it costs $15 per BOE to produce the oil and gas from this asset. So, development drilling aside, this acquisition, and others like it, will generate a lot of cash flow for the company in the years ahead even at lower commodity prices. Meanwhile, if the price of oil heads higher, so will LINN's margins.

    Investor takeaway
    Investors in LINN Energy need to focus on the fact that the company makes a lot of money producing oil and gas because its goal is to buy cheap oil and gas assets. This has worked out well over its history, as the company has produced gobs of cash flow, which it sent back to investors, enabling them to enjoy a positive long-term return. And while that return might be down from where it was, it should grow over the years because the company makes money on the margin it earns from oil and gas acquisitions and not just from where the price of oil is today.

    Sentiment: Hold

  • Reply to

    We have 11. $10 tomorrow

    by goskiing99 Feb 26, 2015 3:05 PM
    garrh@sbcglobal.net garrh Feb 26, 2015 3:55 PM Flag

    Aren't you getting tired yet?

    Sentiment: Hold

  • garrh@sbcglobal.net by garrh Feb 23, 2015 9:36 AM Flag

    Linn Energy (NASDAQ:LINE) finished the year with a 1.02 times distribution coverage ratio and adjusted downward its expectations from just two months ago. Capital spending in 2015 has been ratcheted down for a second time and crude oil price assumptions have been pulled down as well. Finally, Linn retracted its 1.2 times DCF guidance, which was based on $65 WTI. As an investor, I'm glad Linn readjusted so quickly. This article will look at management's new expectations. This article will also provide some thoughts on Linn's future hedging strategy, as well as some of the further costs savings Linn expects to achieve.

    Whistling in the graveyard no more...

    Occidental Petroleum (NYSE:OXY) CEO Steve Chazen is one of my favorite people in the oil industry these days, especially because of his tendency to portray the 'big picture' situation minus the complicated jargon. In Oxy's latest conference call Chazen quipped that many domestic oil companies were making higher WTI assumptions than what was the reality, and were therefore 'whistling in the graveyard' and 'in denial' of reality.

    When Linn Energy gave its initial guidance, it projected $65 WTI for the year. To be fair to Linn, WTI was, in fact, around $65 when the company gave its full-year guidance for 2015. Thankfully, Linn changed its assumptions just a couple months later, when it became obvious that WTI was showing no sign of coming anywhere near $65 per barrel. Linn Energy is not one of those companies whistling in the graveyard, it just got caught a little offsides.

    Management adjusted its 2015 capital spending from $720 million to $540 million. Let's put this into a bigger picture. Last year Linn allocated $1.55 billion to capital expenditure. The previous 2015 capex allocation of $720 million was less than half of the capex budget in 2014. The new guidance of just $540 million represents a 66% reduction in capex year over year. In my opinion, this capex cut puts Linn Energy in the company of names such as ConocoPhillips (NYSE:COP) and EOG Resources (NYSE:EOG), both of whom cut extensively in the spirit of leaving reserves in the ground for a better day.

    A couple other things about the capex cut: Linn reduced 'growth' capex to zero. Previously, $640 million was for maintenance capex and the remaining $80 million was growth capex. Now, Linn is spending only $540 million on drilling and all of that is maintenance capex. Yes, production is expected to decline in 2015, but only modestly so. This is because Linn expects a 10-to-15 percent drilling cost reduction, which should allow the company to drill more wells for less money and keep production close to even.

    Control what you can control

    To put Linn's substantial capex savings into perspective let's look at the gains already made last year. Remember, Linn's 20% cost savings in 2015 is in addition to the substantial savings Linn achieved last year. In another article written a few months ago, I estimated that Linn saved approximately $186 million in maintenance capex (not including the latest reduction in drilling cost).

    Some of this $186 million in savings was due to G&A synergies from the Berry Petroleum acquisition. Some savings was due to the disposition of the high-decline Granite Wash acreage. While such savings and capital discipline is easy to overlook in the commodity price environment, management should get some credit for doubling down on drilling costs in 2014. These savings will generate distributable cash flow for years to come.

    Going forward

    Courtesy of Linn Energy Investor Relations

    An upstream MLP is only as good as its hedges. Nearly all of Linn's natural gas production is hedged until 2017. Oil, however, is a different story. About 75% of production is hedged this year, 60% of next year's production is hedged, but only 25% of production in 2017 is hedged.

    Notice in the chart above that hedged prices are in the low $90s and high $80s. This is because Linn hedged much of its production before the crude oil price collapse. Linn has added no hedges since then. However, CFO Kolja Rockov mentioned that Linn's greatest priority was only to ensure the current dividend. Therefore, the company is not against adding hedges at today's oil prices. However, Linn has yet to do so and Rockov didn't specify when the company might begin adding hedges at today's crude oil price.

    Going forward into 2015, Linn removed its DCF coverage guidance of 1.2 times for the year, but claimed that, with WTI where it is, the company should be able to meet its distribution obligations, even though, according to the company's own 'tornado chart,' DCF coverage would be 0.95 times with WTI at $50. With the cost reductions and further capex cut to $540 million, I am confident that Linn will be able to meet its dividend obligations in 2015, and probably 2016 as well.

    Conclusion

    As I mentioned in other articles, shares of Linn are down so much because the company is highly levered at a time when WTI has halved. I believe there will be equivalent upside if WTI returns to $80. Such a price recovery will have to come within the next two years, however, because Linn's oil hedges drop off in 2017 and any further loss of revenue would result in another distribution cut. For this reason I continue to remain cautious about Linn, although I am still a shareholder. If WTI recovers substantially between now and the end of 2016, Linn Energy will be a stock you'll want to have.

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    Sentiment: Hold

  • Reply to

    LINN very risky

    by billionare_tk Feb 20, 2015 11:38 PM
    garrh@sbcglobal.net garrh Feb 21, 2015 10:30 AM Flag

    Linn Energy (NASDAQ:LINE) (NASDAQ:LNCO) has had a volatile 2015. The stock has seen large moves related to oil prices. Furthermore, the company was forced to lower its distribution for the first time in its history in January. While well off its YTD lows, Linn Energy is still down over 50% from its mid-2014 levels. At current prices, Linn Energy yields right around 10%.

    LINE Chart

    LINE data by YCharts

    Q4 2014 overview

    On February 19, 2015, Linn Energy posted its Q4 2014 results. For the quarter, the company saw production increase to 1,358 MMcfe/d, up 9% from 1,245 MMcfe/d last quarter and 53% from 889 MMcfe/d last year. Oil, natural gas, and NGL sales came in at $766 million, down 18% from $937 million last quarter, but up 31% compared to $585 million last year.

    Looking at distributable cash flow, or DCF, Linn Energy posted a ~$93 million shortfall of net cash for Q4 2014, compared to an excess of net cash of $88 million last quarter, and an excess of net cash of $32 million last year. This decline came almost entirely from lower energy prices, especially for oil and NGLs. Average oil prices fell 30% in Q4 to $65.63 per BBL while NGLs fell 15% to $27.41 per BBL.

    With quarterly distributions totaling $241 million, this shortfall resulted in Linn Energy posting a very weak 0.61x coverage ratio. For the full year 2014, Linn Energy posted a 1.02x coverage ratio.

    2015 outlook: Reducing debt while securing the distribution

    In 2014, Linn Energy made numerous portfolio moves in order to lower its capital needs and improve its coverage ratio. These moves were down prior to the oil price collapse. In hindsight, it seems Linn Energy came out ahead in these trades, with the company trading away mostly high-cost, shale oil assets for lower decline natural gas.

    As a result, Linn Energy enters 2015 with quite a bit of flexibility as to where it can go. Large acquisitions seem out of the question given that the company plainly stated in its release and conference call that it was looking to lower debt and leverage. However, Linn Energy may be open to another trade. Furthermore, smallish acquisitions could be on the table if they do not require Linn Energy to issue debt.

    As for its capital spending plan, Linn Energy announced a further reduction to $520 million, 29% lower than its original guidance of $730 million, and 65% lower compared to 2014 spending. Linn Energy is now expecting only a "modest" decline in production in 2015 and an average 15% base decline rate. In addition, the company is planning to spend $80 million on plant, pipeline and other projects during the year.

    As a result of this reduction in capex, Linn Energy expects to fund its entire capital budget and distributions of $417 million via internally generated cash flow.

    What is AcquisitionCo?

    In addition, we remain excited about the potential to form another private capital partnership but focused on acquisition funding. We anticipate a number of attractive assets may come to market in the current environment and we want to position the Company to take advantage of such opportunities.

    ...

    We see acquisitionCo as a vehicle to make significant acquisitions in a structure outside of LINN with the ability to drop assets down to LINN over time. LINN offers a very talented and scalable workforce with unique expertise in the evaluation, acquisition, integration and development of assets that we could bring to bear for such a transformative opportunity. We've received significant interest from potential private capital partners, regarding acquisitionCo and hope to have further updates for you soon.

    Linn Energy mentioned "AcquisitionCo" at various times in its press release and conference call. It appears the company is in talks with a private capital partner to form this unit. From what I can gather, this unit would buy properties with the private capital (Linn Energy would fund only a tiny percent), Linn Energy would then operate these assets, then over time Linn Energy could bring these assets into its portfolio when the decline rate drops to a manageable level. This is an interesting concept, but more details are needed.

    Is there any upside?

    Generally speaking, upstream MLPs such as Linn Energy typically trade based on yield. However, this correlation was broken in Q4 2014 due to the collapse in oil prices.

    Linn Energy was the first of these MLPs to lower its distribution, from $2.90 per unit to $1.25 per unit, a 57% cut. The stock is now yielding 10%, above its historical average of 8%.

    If energy prices were to stabilize, say $60 per BBL oil for one full quarter, I believe Linn Energy could be re-priced to an 8% yield. This would represent a $15.62 per unit price target and 23% upside from the current price of ~$12.75 per unit.

    What is the downside?

    There are a few weak spots if Linn Energy's results. For example, the $500 million ("DrillCo") agreement with Blackstone (NYSE:BX) owned GSO Capital Partners has not yet been finalized. It is unclear when the venture will start. Given the time it takes for new production to come online, this is likely a second half of 2015 story.

    Furthermore, Linn Energy did not provide an update to its distribution coverage ratio in its releases. From the prior estimate, it appeared Linn Energy's initial projections for oil prices of $60 per bbl and natural gas at $3.50 per MMBtu were too optimistic. It is unclear if the new distribution could survive an extended period of time of oil below $50 per BBL. From the previous estimates, I think Linn Energy's coverage ratio would hover around 1.00x at current prices. This may have been the catalyst for the additional cut in capex.

    Conclusion

    Overall, Linn Energy posted poor Q4 2014 results. Given where the stock price was, this news was already more than priced in. The company made some surprise moves, cutting its capex budget even more and hinting at the other private capital partnership. However, more information needs to be released.

    With a 10% yield, Linn Energy remains a speculative stock worth considering for income. However, I would keep any position small given the outsized risks associated with oil prices. Linn Energy is a stock that can rise or fall 20% at the drop of a hat. High-risk, high-reward.

    Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

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    This article was sent to 23,022 pe

    Sentiment: Hold

  • Reply to

    A friend of mine said LINN

    by just_woodman Feb 19, 2015 6:13 PM
    garrh@sbcglobal.net garrh Feb 20, 2015 9:33 AM Flag

    Through 2014, the Linn Energy LLC (NASDAQ:LINE)/LinnCo LLC (NASDAQ:LNCO) management team implemented a series of asset swaps, with a goal of reducing the company's ongoing energy production decline rate. Now, following the 2014 Q4 drop in energy prices, those moves by Linn will allow the company to conservatively operate through 2015 and be ready to reward investors when energy prices move higher. The following notes come from my notes and impressions formed during the Linn Energy fourth quarter earnings conference call.

    2015 Spending Plan Only From Forecast Cash Flow

    Over the last few years, Linn Energy has been an acquisition-driven upstream MLP. It was often hard to keep up with the actual bottom line, distributable cash flow results as the company piled on debt and equity issuance to fund the asset buying binge. To illustrate, at the end of 2011 Linn's long-term debt was right at $4 billion and number of units outstanding was 177 million. By the end of 2014, long-term debt and the outstanding credit facility balance was up to $9.8 billion and there were over 330 million common units outstanding.

    Possibly of further concern was the perception that a significant portion of Linn's maintenance and growth capex spending was funded by debt. To a great extent, it was difficult to tell how the company was using capital raised in the debt and equity markets. What was not difficult to see was that distributions were not growing, with the last increase announced for the 2012 second quarter.

    For 2015, Linn initially announced a capital spending budget of $730 million, about half of the $1.5 billion budgeted and spent in 2014. Now, with the Q4 earnings, that 2015 capex budget has been reduced to $520 million, 65% below what Linn spent in 2014. Capex is the money spent on drilling or reworking wells to increase production. A portion of capex spending goes to replace the decline rate of the owned production assets. Spending above the sustaining level of capex would be growth capex.

    For 2015, Linn's $520 million of capex spending will come entirely out of internal cash flow. The $200 million budget reduction from the previously announced plan eliminates the need for Linn to go to the capital markets to help fund its capex plans. I view it as a refreshing change, and important for investors, that Linn has shifted gears to manage its business to live within its cash flow.

    Asset Swaps Pay Off

    Linn can afford to reduce its 2015 capital budget by two-thirds because of the asset purchases, sales, and swaps the company completed in 2014. The result has been a reduction in the production annual decline rate to 15%, down from the mid-20's at the start of 2014. The capex plans for 2015 include little or no drilling of new wells. To maintain production levels, Linn will focus its capex resources on high return workovers and re-completions of existing wells. Based on the current budget, Linn expects a modest production decline in 2015.

    However, the budget does not account for any lease operating expense reductions, which Linn is working to reduce by 5% in 2015. The company also has a target of 10% to 15% reduction in capital costs, which are also not included in the budget projections.

    Where To From Here?

    During the conference call, management discussed that they were focused on reducing the amount of leverage carried by the company, but that there are no easy answers. Borrowing base and lines of credit will be reviewed in the Spring for all of the upstream MLPs, and Linn and its peers need to get through those reviews to find out if their line of credit limits will remain intact or be reduced. While Linn carries a higher amount of leverage than most of the upstream MLPs, the company does have 100% of forecast natural gas production hedged through 2017. (Linn is primarily a gas and NGLs producer.) For oil production, 70% of 2015 is hedged and 60% for next year. Borrowing base reviews focus on the sustainability of revenues that hedging protection provides.

    For an upstream MLP, the best path to reduce leverage is to increase production, EBITDA and cash flow from growing revenues by increasing production. Higher crude oil prices would also help. Later in the year, we should get more details on the "DrillCo" agreement Linn announced right at the start of 2015. Here is an outline of the agreement from my article published at that time:

    "The other news from Linn was an announcement that it has signed a non-binding letter of intent with private capital investor GSO Capital Partners LP, the credit arm of The Blackstone Group LP (NYSE:BX) to fund oil and natural gas development. Funds managed by GSO and its affiliates have agreed to invest $500 million to fund drilling programs on drill sites owned and provided by LINN. GSO will pay 100% of the costs of drilling in exchange for 85% of the profits until it has reached a 15% internal rate of return. After the IRR target is reached, GSO will continue to earn 5% of the profits and Linn's share increases from 15% to 95%.

    This new "DrillCo" arrangement lets Linn develop wells using outside money, and then when the target IRR return for GSO is reached, Linn will be left with the majority ownership of low decline wells that fit the MLP high cash flow model."

    If Linn can take advantage of off balance sheet funding sources to pay for growth or acquisition projects, 2015 could end up as a turn-around year for the largest upstream MLP.

    Earn 10% While Waiting for the Turn-Around

    Linn reduced its distribution to start the year, and the new budget plan should ensure investors will continue to earn the new rate. Based on the current unit price of $12.60, LINE yields about 10%. LNCO is a little cheaper and yields 0.4% more. Unless crude quickly recovers into the $80/bbl range, I expect that it will take several quarters or longer before we see meaningful improvements in Linn's distributable cash flow. The current high yield makes waiting patiently a little easier.

    Also, in the current price market, the unit values jump up and down with the price of crude on a daily basis. In reality, a $2.00 change in crude today will most likely reverse tomorrow and will have little effect on what happens with Linn or any other upstream MLP through the rest of the year. I am using the unit price drops on the day's crude declines as opportunities to add to my holdings.

    Learn more about Alternative Investing on Seeking Alpha’s New Insight Center

    Sentiment: Hold

  • Reply to

    Just picked up 50,000 shares at $13 per share.

    by bill_jenkins87 Feb 13, 2015 10:58 AM
    garrh@sbcglobal.net garrh Feb 13, 2015 11:51 AM Flag

    I really doubt you have that kind of money to throw around. If you did you surely wouldn't be wasting your time on this message board.

    Sentiment: Hold

  • Reply to

    am I missing something

    by rocketman2407 Feb 12, 2015 4:15 PM
    garrh@sbcglobal.net garrh Feb 12, 2015 4:49 PM Flag

    No news, just the same old #$%$. It's going to take quite awhile for this to normalize. I'm not selling for a loss, so i'm holding on until this settles itself out. I'm confident Line will make it through this.

    Sentiment: Hold

LINE
13.56-0.05(-0.33%)Apr 24 4:00 PMEDT