I agree. Linn is still heavily leveraged. It was heavily leveraged at $90/bbl.
Linn looks like it will survive, they will likely continue making acquisitions, however, they will need to make the bulk of those transactions with equity. It will take time, but they can deleverage themselves by making 100% equity financed deals, even if they are only modestly accretive.
I see little reason for EVEP to cut the distribution if they are approaching a 1.0x coverage. Monetization of UEO should push them over a 1.0x coverage ratio. The proceeds of UEO can be redeployed into producing properties.
I think a cut of that size is probably too pessimistic. ARP's oil exposure is less than LINE or BBEP.
Also, I suspect a cut will come after the ATLS/APL/TRGP/NGLS deal is completed. That way they can come back and "revise" their projections.
I would like to see a farm-out type arrangement similar to Linn's with Blackstone. When ARP came public, I was under the mistaken belief that they would treat the cash flow that was received from managing the private drilling partnerships as "growth capital" rather than as part of the base distributable cash flow. It appears that they have relied on that capital to pay distributions. While it would seem that cash is fungible, my belief is that DCF ought to come from production and that all maintenance capital ought to come from that production. Any cash received from the private drilling programs should be classified as growth capital.
A reduction in private drilling program capital raises therefore would have little impact on baseline distributions, but would clearly impact growth.
The Cohens may not like that their new "GP" will be hobbled. The IDR stream will be severely hindered if ARP has to cut...but it may be the prudent thing to do..
The Blackstone deal isn't significant. In essence, it is $15 million a year in drilling capital to Linn, which is nice, but really isn't material relative to say the 2014 budget of $1.5 billion (1%). The deal is $500 million over 5 years so one must adjust for time value as well.By the time GSO's 85% Working Interest reduces to 5%, the wells will have declined heavily.
However, it will allow Linn to generate a lot of PUD reserves that otherwise would not have been developed as surrounding acreage will get proven up. That in theory can help with their reserve based credit facility.
The cut had long been predicted by the street, sorry Ellis, your efforts to deny it were ineffective. Now, Linn must go out and execute, something they have, shall we say, struggled with over the last 24 months.
"sell the hedges".. That is essentially what Continental Resources did late last year, and, well, it didn't turn out well. Poor Harold Hamm, things haven't gone too well for him the last 12 months between what amounts to one of the most expensive divorces in US history, the falling price in CLR's share price, which nearly halved his fortune and then totally botching the cash out of their crude hedges. I doubt anyone will shed any tears for him as he is worth billions.
Of course, on the other hand, Linn would be monetizing their hedges at a much better position (i.e. nearer the bottom than CLR did) with crude near $53, thereby negating much of the risk. It seems likely that crude will drop into the $40's but seems very unlikely that it will drop into the $30's. Linn could very well monetize their crude hedges and hope that 2015 brings higher prices but then again, that would be a huge deviation from Linn's modus operandi, which is to mitigate risk and produce stable, steady cash flow. The last time Linn strayed off the beaten course, they got shellacked by the Hogshooter and Granite Wash fiascos. If crude drops into the $40's it might however present an opportunity to monetize the '15 crude hedges at what is likely the nadir. I would not be happy seeing monetization of hedges beyond '15 or gas hedges.
The Blackstone carry is interesting, giving Linn a nice 15% working interest. It remains to be seen how much will actually be invested and what returns they will achieve, with the caveat being that Blackstone must achieve 15% IRR before the bulk of their working interest reverts back to Linn.
The step-up to 95% on the back-end is not going to do anything for them in the near term, but will give Linn a nice shot in the arm when it does happen. Remember, by the time Blackstone's working interest reverts back to Linn, the wells will be well into the flat part of the decline curve. Nevertheless, it opens the door for future farm-outs which, barring a meaningful uptick in crude pricing, will allow Linn to grow in a capital efficient manner.
What you say is true regarding the Utica acreage, however, the divestiture of UEO will likely present no difficulty and should allow them to redeploy those proceeds at a lower multiple of cash flow into PDP properties.
I hold little hope in them monetizing more Utica or Eagle Ford other than perhaps small chunks, but would be delightfully pleased if they do.
No doubt EVEP management has not delivered on the much anticipated Utica divestiture. The irony is that when EVEP was trading as high as it did, they had a very low yield and could have simply issued units to purchase existing production.
I would add that, while they have failed to produce any earth shattering transactions, they find themselves in fairly good shape, with cash to deploy in a market that might produce some nice PDP assets if prices stay low. I have no doubts that Enervest is eyeing KWK's Barnett operations when KWK finally goes under.
I would expect EVEP to purchase gas assets at current prices as most producers are not likely interested in selling crude production at current prices.
Well, EVEP has fared much better than most of the other E&P MLPs. The monetization of CGS and the potential monetization of UEO in '15 should allow them to purchase assets, potentially at low commodity prices which may provide some upside in the future. The buying by Walker seems like he supports EVEP long-term. I doubt he throws that kind of money into EVEP if he felt like it was overvalued or was going to "crash and burn".
They have very low exposure to oil relative to many of the other E&P MLPs. Of course, now natural gas is crashing, but EVEP has decent natural gas hedges.
I think EVEP has a very good chance of weathering the storm without having to cut the distribution. That being said, I wouldn't look for anything more than the nominal quarterly increase. At current prices, it's a nice 15% yield.
Yes, but it is good news that producers are responding so prudently and soquickly. The quicker that rigs are dropped, the quicker that natural decline can start taking over and supply/demand can be restored. It will take 12-18 months.
Last weeks decline in oil rigs was quite frankly, much lower than I had expected. This weeks was larger. I'd look for, on average, 15 to 20 rigs to be dropped every week over the next 3 or 4 months.