Cohen is a shill. Always has been. He's also terrible at operations. He nose dived APL in the '08/'09 debacle, then layered on hedges at the worst possible time and was forced to divest crown jewel assets, then quietly handed the day to day stuff over to Eugene DuBay and disappeared back to ATLS. Rinse repeat. No doubt he is good and raising capital and finding ways to get his hands on other peoples money (Atlas Growth, the private drilling partnerships etc).
There is no doubt whatsoever that Cohen is trying to salvage ATLS. He needs to get ARP unit price up high enough to divest the units and retire the debt or to keep paying distributions and let ATLS deleverage with that cash. That leaves him holding a stub with AGP, Lighthorse, Arc Logistics assets, none of which produce a significant amount of cash but might allow ATLS to stay solvent and Cohen to live another day. The whole Cohen empire (ATLS, ARP, REXI, RSO, RAS, and others) are meant solely as vehicles to pay large salaries to his family.
The Rangely deal was horribly timed and they used far too much debt in order to goose accretion from previous deals.
The Barnett Shale and San Juan assets are high quality gas assets and will generate cash flow. Removing Matt Jones was long overdue (lap dog, yes man) and putting Schumacher in charge is a huge improvement.
I personally don't think ARP will survive but admit it will be entertaining to listen to Cohen deny reality.
I wouldn't be so sure on 2018 oil prices being under $60 goskiing99.
It appears quite gloomy at present, but note that already US production is predicted to be under 9 million bpd by year end, from a peak of 9.6 million bpd. And the fragile non middle east OPEC members are also suffering.
Additionally, associated gas production is likely to taper off with reduced crude development. Mexico exports, LNG exports and chemical plants (crackers and polyethylene plants) will lift natural gas and ethane prices. Retirement of coal plants also will help firm gas prices, which currently look like a coiled spring, just waiting to pop in the next 12-18 months.
I am not calling a bottom on crude, as it would be foolish to attempt such a thing, however, it is worth noting that LOE and SG&A for most producers make production below $20-$25 pointless. Oil companies margins are being squeezed and investment is being reduced. The sector cannot withstand much lower without investment being reduced completely by those that are either unhedged or those that are overleveraged. That reduction in investment will become evident in a few years, the same way the overinvestment from several years ago is being felt today. As an example, even world class and low cost operator EOG is focusing on just completing their inventory of drilled but uncompleted wells (DUCs). We may not be at the bottom for crude, but we are getting close.
Linn's survival will hinge on how much debt they can retire and how much recovery they get in crude pricing..
I did look at it. The solid hedges run out soon. They even alluded to potentially cutting again on the conference call.
The market isn't viewing it as sustainable with a 20%+ yield.
MCEP isn't in terrible shape, but they do need to delever the balance sheet. Cutting would allow them to make some progress and when prices recover, they can reinstate.
I think it would be prudent for MCEP to go ahead and cut the distribution to zero.
MCEP could devote that cash to delivering and gain valuable breathing room on the revolver when it gets reset.
I suspect that Linn will be directing as much discretionary capital as possible towards purchasing of notes at a discount.
The 2021's are well under 50 cents on the dollar. The 2019's are trading at 50 cents on the dollar.
The upcoming redetermination will be critical for Linn. Management projected $1 billion in capacity post redetermination. If that holds, look for Linn to pull down a large portion of that and use it to buy back notes. It is one of the few knobs Linn has to turn and if executed, and to what extent they repurchase, could result in significant interest expense reduction.
They may also end up letting production slip into modest decline, diverting some of the $530 million towards note repurchases.
I am still not convinced Linn will go bankrupt, but it will take skillful management of cash and the balance sheet and a nice uptick in commodity prices in 2017 for them survive.
Of course the market is efficient with random and usually brief spells of irrational exuberance and pessimism. The equity is priced at $3.00 unit, a full $.08 less than the distribution that sandforbrains predicted after the Berry merger. Of course sandforbrains was a degenerate math challenged huckster.
And it is worth pointing out that the market is now pricing Linn's notes in the high 40's (yes, a greater than 50% discount to par). Linn's mismanagement of hedges post the Hedgeye fiasco and subsequent SEC inquiry has been nothing short of laughable and reflective of the fact that perhaps, the hockey kid got the best of Ellis and Rockov, even if he got the facts wrong. Of course, Kinder took care of business as he always has. A driven micromanager that loves what he does and puts his heart and soul into it. Ellis is no Kinder.
Abandoning the use of puts and staying hedged out 5 yrs has cost them dearly. Nevertheless Ellis and Rockov continue to beat the drum, pretending they are brilliant operators when they are really nothing more than asset aggregators stringing disparate producing properties together at inflated prices and failing to protect the downside and margins. They are not value creators, but rather playing business with OPM. And of course, one cannot forget that Linn simply could never recover from the great hedges that protected them during the last crash. Try as they may, they were simply not able to plug the holes in DCF as those hedges ran off and were replaced with much lower hedges, evaporating massive amounts of DCF. The reckless behavior of Ellis and Rockov is amazing continuing to grow the distribution when their margins continued to compress year over year. Even more reckless than Harold Hamm blowing out his hedges (trying to call a bottom) and leaving CLR unprotected and leaving hundreds of millions on the table. The gunslinger mentality of Ellis has cost unit holders dearly.
I think you are being a bit premature taking credit for the $1.5 billion that MAY be invested by GSO and Quantum.
Remember, on the DrillCo, Linn gets a carry and a back-end step up on the working interest provided certain return hurdles are met. This is not a major source of cash flow for Linn, but does allow them to prove up acreage and they get full ownership of any PUDs generated. No monies have been invested as of the last Q report.
The AcquisitionCo with Quantum is similarly not a major source of cash flow. They do get a promote, but let's be serious, this is also not a meaningful source of cash assuming the whole $1 billion is invested.
Actually, Perry did a decent good job while Governor of Texas. For those that really look at his record, he managed the state finances capably through the downturn and the economy has expanded at a nice clip and contrary to popular belief, is not tied so heavily to energy as many would believe. His legal issues are nothing more than political chicanery brought about by the only liberal bastion in the state (Austin). I suspect the 2nd indictment will no doubt be tossed, as the first one was. Unfortunately for Perry, his campaign is simply going to run out of money and he will likely drop out of the race. The GOP race will likely narrow quickly with major donors deciding who will and won't be advancing.
Texas was fortunate that after Perry left office, they elected Abbott over the dim-witted Wendy Davis, whose knack for making tacky, crude and callous comments conjures up memories of Clayton Williams campaign of 1990 vs Richards. In my opinion, Wendy Davis's campaign was so poorly run that she has likely ended her chances of holding major public office in the State of Texas for some time and raising funds from donors will be quite a chore after she so ineptly wasted them making personal attacks on her opponent rather than discussing her ideals. One does not simply attack a man because of his physical disabilities and get away with it, not even liberals.
I don't think you will have to wait until 2017 to know if Linn will survive.
Watch the pricing action on their notes as well as the strip.
Linn's survival will be largely dependent on commodity prices, but also prudent management of cash flow. At present, it appears retiring notes at 50% of par provides an excellent return with essentially no execution risk. Linn's management of their revolver as well as maximizing capital efficiency are crucial. Every dollar they can take from their cap ex and redirect towards debt reduction buys them time.
It is very likely that we may see some rationalization of their portfolio in an effort to further reduce G&A. The South Texas assets are not a meaningful portion of Linn's reserves and production and certainly not receiving meaningful cap ex and are prime candidates to be divested and likely will find eager buyers in the well developed South Texas basin. Additionally, the Michigan Antrim Shale gas assets are also candidates for divestiture if they can receive a price enticing enough to part with the low decline gas assets.
Overall, I expect Linn to continue to find ways to high grade their drilling inventory, meaning do more with less. Reducing the maintenance capital budget while keeping production flat and buying time by continuing to reduce debt at 50% of par. They also seem interested in proving up the Ruston area in an attempt to monetize it. Similar to what we saw in the Wolfcamp. Extract more value by de-risking the play. It remains to be seen how much capital this will take, but is likely one of the best wild cards the company has in terms of showing meaningful value creation.
If Linn does everything right, and that is a big if, considering they have Ellis and Rockov leading the circus, they might survive...with strong cooperation from the commodity markets in 2016-2017.
Management abandoned long term hedging, let the balance sheet get bloated, lost focus on what an MLP should do, tried to be a hybrid driller/operator, tried to buy their way out of trouble. It is staggering to see the collapse, but we can't say it is surprising. Ellis was a gunslinger that never really bought into the idea of purchasing mature stable assets and operating them and Rockov was an egotistical quant that thought he was smarter than everyone else. Rocov's reckless margin call should have served as a clue to investors at how reckless he was.
The market is mostly efficient, but not always, especially when information is changing so quickly (vis a vis, crude pricing, yuan devaluation).
Linn's May 2019 6.5% notes are trading at 51 cents on the dollar. The September 2021 6.5%'s are trading at 43 cents on the dollar.
Linn actually has a real chance of surviving especially if crude recovers into the $60's or $70's within a year or two.
I've said it before and will repeat it, Linn is spending $500+ million to keep production flat (actually grow it by ~1% annually) versus letting it go into decline at ~15%. I will be surprised if they do not cut cap ex again and devote more of that cash flow to note repurchases. At current prices they get the dual benefit of meaningful interest expense reduction coupled with debt reduction and likely achieve a much higher rate of return.
I also believe that once the redetermination is complete, Linn will likely pull down the revolver and use those proceeds to snap up as many notes as possible at ~50 cents on the dollar. In terms of real cash on cash return, it presents a very attractive option, again while also helping clean up the balance sheet, that management so recklessly cratered.
Equity holders might still have an opportunity for Linn to survive as a going concern, but it likely won't really be due to the actions of Ellis and Rockov but rather the commodity markets.
It depends on what you consider "recover".
Crude oil production is going to taper off within 2 months for many independent producers.
I don't think we will see $100, but a slow steady climb to $60 seems likely.
Management will use the revolver to buy back deeply discounted debt but likely only after the redetermination, that or they will only pull down what they feel will be available based on the upcoming price deck. Decreasing total debt and appreciably reducing interest expense is the only real #$%$ they have to turn and fortunately for them, it can be meaningful. They may also look to reduce cap ex to a point at which production goes into modest decline rather than 1-2% annual growth. That might free up another couple hundred million.
Make no mistake about it, Linn is in survival mode but with 3.5 years, they have plenty of time to modestly deleverage and wait for commodity prices to recover.
I think Linn is projecting a reduction in the revolver to around $1 billion. I think they may pull it down to close to nothing and go after major debt reduction ($2 billion of face value). That would mean material interest expense savings over the next 3 years. On the order of over $300 million over the next 3-3.5 years.
You will likely be very disappointed if you put any faith in Eddie Cohen.
His history of self-dealing, inept blunders and value destruction is well known in the MLP sector. Need I mention his penchant for always promising something big in the near future ("stay tuned") etc. It typically never materializes.
All this being said, many of these E&P MLPs and c-corp E&P's are entering zombie mode. They might not go under, but they will be devoting all cash towards deleveraging.
At current prices, ARP ought to eliminate the distribution and either purchase bonds at a huge discount, or simply let cash accumulate on the balance sheet. As I said before, this looks like Cohen simply milking ARP to the benefit of ATLS. He needs to shed debt at ATLS so that if ARP goes under, he can walk away still owning Lightfoot, Arc Logistics GP, AGP etc none of which are producing significant cash, but have prospects.
The market isn't giving them credit for the distribution. As I said before, many of their assets are quite good. Low decline assets such as the coal bed methane provide steady cash flow. Rangely was a huge mistake, but nothing can be done about it.
Cash should be used to increase the likelihood of survival.
And no Latin this time... :(
The E&P MLP model doesn't work. At least, not in times of high prices. I think you could make a very good case for starting one now, with crude at $43 and gas under $3.00/mcf.
Too much debt and too much desire to produce growth. I think, under the right circumstances, you could make it work. Heavy hedging, avoid NGL properties which are harder to hedge, target low decline, finance almost entirely with equity, strong coverage ratios.
I look at DMLP, a royalty MLP, which I have followed for 15 years (since it was Dorchester-Hugoton). No debt, floating distribution policy. Probably one of the best royalty managers in the business and it too is being pounded.
As for Linn, the elimination of the distribution is the smartest thing they have done in years. Buying back debt at 45 cents on the dollar is brilliant. They should pull the revolver down to whatever they think the banks will leave them after the next redetermination. They might be able to pull down $700 million and retire well over $1.5 billion in debt, meaning interest savings of $80+ million. I would also cease most development capital and let production slip into modest decline (perhaps instead of targeting 1-2% growth, they could accept 5-6% loss) and allocate that capital towards debt reduction. They have 3.5 years until the 2019's come due.
ARP needs to follow suit if they want to survive.
Someone is going to have a field day in the next couple of years buying quality E&P assets from overleveraged firms.
Cohen is a clown if he thinks ARP will benefit from this downturn. He is looking at an equity stub that has marginal value and has no real sponsor. At least MEMP has MRD.
The problem is that while assets such as the coal bed methane are quality assets with no NGL exposure, ARP financed too much with debt rather than equity.
These guys are toast. Cohen would peddle return trip tickets on the deck of the Titanic while it was sinking.
I don't argue that they put together a nice set of properties. The low decline nature of most of them should have made it easy to manage. However, they have historically had high expenses.
The only major positive that they have made is making Schumacher the President. Schumacher is an operations guy and can manage that side of the business. As for financing, Herz is nothing more than a Cohen lap dog.
It is just a matter of time before they will have to eliminate the distribution and devote that cash towards deleveraging. I am in full agreement that they should be purchasing bonds at a steep discount. That is what Linn is doing, and Linn is in survival mode.
It would have been far more prudent for ARP to have absorbed ATLS during the NGLS/TRGP transaction and left them with 1 entity instead of 2.