The new info is they are now no longer looking at JV due to high interest from those looking to purchase for cash as well as those looking to swap assets (presumably mature, low decline, high PDP assets) for their existing high decline Wolfcamp production as well as the undeveloped acreage.
This is a big development.
It likely also, by default, means they are not likely to pursue developing them on their own, which I think we all know was their last option and highly undesireable.
So, in my book, that counts as a positive that interest is high.
I'd look for future developments in coming months or Q's. In the interim, they achieved a nearly 1.0x coverage ratio just 1 Q after purchasing Berry and with the drag of bad weather.
Patience is the operative word here. The market has evaporated all of the LLC premium it once had. You are being given the oppotunity to buy these assets at near private market transaction values. In my opinion, you are buying LNCO/LINE with far more upside than downside at these prices and with the benefit of a 10% distribution.
And couple that with the fact that they have no need to raise equity at these prices when they can divest undesireable high decline properties for more manageable (more predictable) mature legacy production with more gradual decline rates.
Patience buddy...patience. Kaiser gave us a great gift in buying at these prices, same thing for Kinder Morgan. These aren't homeruns, but nice buys that should give you good returns from the distributions and dividends regardless of what the market in general is doing.
Yes, we are well aware that the Permian assets could fetch $2 billion. Glad you have revised your valuation upwards from the pitiful $1 billion your were throwing around for a while.
Of course, you have to account for the production that is sold and the lost cash flow from that production so again $2 billion is nice, but 17,000 boepd produces a lot of free cash flow too...even after accounting for the very steep decline rates that require a great deal of that cash flow to be put back into maintenance capital.
The real hidden value is in divesting the undeveloped acreage. That converts an unproducing asset into a cash flow producing asset and is the real gem in the mix.
If Linn divests the 17,000 boepd of production in the Wolfcamp, they need to replace that production with a volume of mature legacy production that will generate comparable cash flow after maintenance capex. Of course, the kicker is lowering the companies overall decline rate and giving them a significant tailwind in terms of capital efficiency.
If you are so concerned about the well, call Linn or Diamondback IR and ask them if they will issue a press release detailing results. They are unlikely to accomodate your request, but it won't hurt to ask if you are so interested.
At the end of the day, it won't make much difference if the well is a monster or not other than it could impact the price they receive during the divestiture...remember, Linn is trying to jettison these properties for more stable, low decline production. If the well is a monster, it might entice potential buyers into upping the ante, if it is a dud, it might make that potential package less attractive...but again, IP rates are not indicative of overall IRRs. Don't confuse sizzle for substance. Long term decline and cumulative production are far more important as IP rates can be manipulated with choke size. 12 and 24 month cumulative rates are far more meaningful and give you a better idea of full payback (well economics).
It actually is very good news. Everyone has been so focused on the divestiture and pulling up other deals as comparisons and figuring out what the production is worth, what the undeveloped acreage is worth, how much accretion it would result in if they poured those proceeds into a purchase of mature, low decline production etc, that most people forgot to focus on the fact that Linn did say that they were also exploring JV opportunities as well as developing the acreage themselves. The last 2 options would have meant:
1) Getting a carried interest, having to wait for wells to be drilled, having to still manage the decline and having to be exposed to the execution risk
2) Developing it themselves involves continuing to manage high declines, high maintenance capex, managing execution (good wells, bad wells, building expected type curves etc).
The fact that they have enough interest that they are ruling out the JV is superb news. It means Linn can walk away from the execution risk and can lower overall decline rates, reducing maintenance capex, meaning they are less dependent on drilling results and more dependent on basic operation.
Honestly, I don't worry about the day to day fluctuations of VNR opinions. I think they are a well run E&P MLP. They've been pioneers in the monthly distribution, in merging with another MLP (Encore), they ran a very lean operation for many years when they drilled very few wells and poured the bulk of their maintenance capex into purchasing existing production, which reduced their drilling execution risk.
I like the operation, but I don't worry about day to day bumps and bounces.
They can "live" off of Berry for a long time opinions as long as maintenance capital is allocated appropriately and commodity prices don't collapse.
But I think you are looking at it incorrectly. The model is set up to be sustainable. It is not supposed to be parasitic where they make a deal and live off of it for some time before moving to another deal. Of course, that is what the Hedgeye folks were questioning, whether or not Linn was really a sustainable model.
The proof that the model is sustainable is where Linn, or any other E&P MLP for that matter, can go for years without making acquisitions (issuing units and adding debt) and still maintain a 1.0x coverage ratio. It's really simple, if they are allocating enough money towards maintenance capex and barring drastic sustained collapses in commodity prices, the model should be sustainable. Of course, it implies solid execution and cost controls. A decent coverage ratio helps too.
opinons, I am at a loss for words why you are concerned about the few well results in the Permian that have not been announced. This company is near $20 billion in enterprise value. It will take many monster wells to have a meaningful impact on the company bottom line. You're being lured into sands bait and switch tactic. He's a sucker for IP rates. He did the same thing with the Hogshooter and before that with the Granite Wash and the non-operated Bakken. Always pumping the board about the "next big well results". We saw how that ended in the Hogshooter didn't we (drug up and moved to Oklahoma side where they had a lower working interest)? Same thing in the Granite Wash, which is slowly becoming less important (even reducing rig count) as they move to better returning and lower risk, more predictable basins.
Besides, we all know that IP rates are not nearly as important as cumulative production at 6 months, 12 months, 18 months 24 months and likewise, the decline rates at 1 month, 3 months, 6 months, 12 months, 18 months and 24 months. It is the IRR that people should be worried about, not the IP.
IP rates are the sizzle, IRR's are the substance. Remember Brigham running their Bakken wells wide open (no choke) to inflate their IP rates, only to see massive declines thereafter? Cumulative returns are what is important. Heck, even the Utica producers are choking back heavily to preserve reservoir pressure, accepting lower upfront rate for better reservoir integrity and hence better long term returns.
Furthermore, it is the collective returns of the whole lot of wells they are drilling, not a select few high performers or a select few duds. This is an E&P MLP, where cost of capital and returns are paramount. C-Corps don't typically pay out dividends, they can better weather the storm of duds.
There were a lot of folks wanting concrete info on the Permian strategy. Linn is not going to give target dates. Look at what happened at EVEP regarding their proposed Utica divestiture. They gave dates and missed them. They got ripped to shreds by investors and analysts alike.
In deals like these, it is best to simply state your intention of divesting and then announce the deal once it is signed and not make announcements on pending deals or potential/probable deals.
I'm quite pleased to see a near 1.0x coverage, with many predicting "dire" results like VNR experienced, the .98x coverage was, in my opinion, superb.
While the bump in the exchange ratio for Berry looks to have prevented distribution increases, the strong Q shows how beneficial Berry was to Linn. As I've stated numerous times, can you imagine the results without Berry? They'd be much worse without the accretion Berry provided. But accretion aside, the high IRR PUDs that Berry brought to the table were something that gets very little discussion. Linn's improved capital efficiency is almost soley due to Berry. Also chalk up that Berry's overall decline rate was much lower than Linn's and you see yet another reason why Linn made the deal happen. I think investors get too hung up on the distribution miss, and let's be clear, Linn totally screwed the pooch by giving distribution guidance before the deal was closed. It not only didn't happen, but it gave Berry plenty of leverage to ask for a better ratio. Of course, the SEC/Hedgeye attacks provided the opportunity for Berry to ask for more.
That aside, Linn is slowly turning things around. 3 or 4 more Q's of solid execution in the base should prove to the naysayers that they can maintain production, reserves and DCF w/o deals. Any divestitures of Permian assets and or other acquisitions are simply icing on the cake. Moderation of the company wide decline rate and decreased capex will show up in '15 and beyond.
I'd say the call was good. Those that were expecting news on the Permian will simply have to wait. In the interim, you collect distributions on a monthly basis.
Divestiture of the high decline and capital intensive Wolfcamp and swap out for mature, low decline properties will manifest itself in a lower maintenance capital budget and more stability (less reliance on results of new wells).
Achieving a corporate wide decline rate under 20% would be significant.
Trades will likely result in quicker "results" than JV'ing the property. I'd suspect that if they are saying there is plenty of interest, then, they likely have one or more deals working towards finalization.
As we've all known from the beginning, this is going to be a lengthy process. I'm expecting slow but steady progress. In the interim, we now know that Linn can achieve close to 1.0x coverage ratio. That should calm the nerves of the jittery retail investors.
It's a game of patience at this point but clearly the tides have turned. A string of trades over the next year resulting in a boost to the coverage ratio, DCF and a reduction in maintenance capex will resolve most of what the street has been concerned with.
I bought some more LNCO today and now have my distribution reinvestment set up. Compound away.
I doubt Linn has any interest in purchasing VNR. Their is very little ability to arbitrage any value out of VNR.
Linn has far better opportunities to take advantage of buying either production from a c-corp, or buying the c-corp itself.
Remember, the whole purpose of this company is to exploit the difference in valuation that the public market places on cash flows held in a E&P MLP/LLC vs those valued in a c-corp or held privately.
It would be tough for Linn to purchase VNR and achieve any accretion.
Instead, look for Linn to continue to buy packages that are being discarded by large independents that are looking to increase oil/liquids production. Examples include the Oxy divestiture of Hugoton properties (to Merit) and the Encana divestiture of properties to private equity. Both are large, mature fields that were monetized to pour money into rapidly growing oil programs.
Ellis has not performend up to the expectations of many, but he was dealt a tough deck of cards when Mike Linn left. Linn faced a huge cash flow cliff with declining hedges. He's done billions upon billions in acquisitions to turn the company around. The Berry deal was fantastic, despite the lack of immediate bump in the distribution. I liken Linn's turnaround to that of Energy Transfer, where Kelcy Warren did billions upon billions in deals that resulted in minimal distribution growth, but paved the way for long term stability.
Does anyone realize what coverage would be WITHOUT Berry? Berry was very accretive, even at the final price they paid. It was the lifeboat that gave them huge oil potential and stable production to help dampen out their overall high decline rates, which were becoming untenable.
Coverage was better than some had predicted based on peers having issues. I think the basin diversity helped Linn whereas it likely hurt VNR.
So coverage of essentially .98x, with 1 quarter of Berry under their belts and that Q was one of the bad weather Q's.
I'd expect the next 2 Q's to be generally more favorable in terms of weather and hence should potentially have less impact on oil.
For those that are disappointed, I'd remind them that this is what a "typical" E&P MLP is supposed to do, crank out steady (if not boring) results quarter after quarter, where they manage decline, commodity prices and cash flow. Linn was a little light this Q, but will likely be above 1.0x the next 2 Q's. We also have not seen the full impact of the moderating capital program, which will manifest itself in the form of reduced maintenance capex.
If this drops much today, I'll add some more LNCO, which is still giving a very nice yield with the potential for nice capital gains when the divestment/JV happens.