Yes, that is precisely the big picure. It is all about pushing Linn back to the traditional E&P model, having a diverse portfolio (both in commodity mix, but also geographic basins) and having a large base of low decline, steady, mature legacy reserves that can be easily maintained and with predictable production decline profiles.
The ridiculousness of an E&P LLC having an "average" decline rate of 30% is finally over with...
I don't think CHK and LINE are really analogs to be compared directly, one being a c-corp that until recent years was primarily focused on natural gas and was driven primarily by aggressive drilling in the shale basins. Linn is an E&P LLC focused on growth primarily through acquisition of highly PDP reserves and they seek to mitigate risk through hedging. Now, Linn did stray some from the original plan, turning more into a growth vehicle with massive growth capital budgets but eventually they hit obstacles and have now corrected and are returning back to the original arbitrage mode.
The other thing is this, CHK's valuation was more based on future growth expectations whereas Lin's is based on cash flow. Also, CHK was putting every penny that they made, and typically much much more into drilling every year.
But the point is relevant, Linn must manage their debt load. It is presently too high compared to their current EBITDA. 2014 is a year of transition, where you will see multiple acquisitions and divestitures, lots of moving pieces. By early 2015, the picture ought to be much more clear. It will be a "new and improved" Linn. They will have digested Berry, the XOM and DVN deals and divested most of the capital intensive Wolfcamp and Granite Wash. Overall company decline will be hopefully sub 20%, ebitda ought to be up materially (driving down debt/ebitda metric modestly) and with the benefit of Berry's high IRR properties, capital efficiency should improve, all meaning a more manageable portfolio with less need for aggressive growth. Hopefully coverage ratio will be well above 1.10x as well, meaning no real worries about attacks from Hedgeye etc, since 1.10x coverage means nearly $100 million in cash that can be used to finance some growth, and coupled with modest borrowings, means far less reliance on the capital markets and the need to raise equity for moderate growth.
So, it is important then that Linn operate with more than a 1.0x coverage ratio, that they term out there debt to lengthy maturities, that they refinance higher debt when opportunity strikes. It is why companies have a CFO. It must be actively monitored and managed. It is also why many of the investment banking houses prefer them to operate with a leverage ratio around 3.0x rather than 4.5x. Higher leverage is not as forgiving. But I think most will be pleasantly pleased to see that management has gotten the message and that leverage will begin slowly trending down as they do 1031 swaps, turning non producing acreage and divesting relatively newer (i.e. higher decline) production for more predictable declining long lived production that is further down the hyperbolic decline curve.
That should read EPA buddies. not EPD buddies. Big typo there! EPD being my largest holding by a long shot..I am definitely pro EPD and anti EPA!
Sorry, not a believe in global warming. I'll let bozos like Al Gore and Obama's EPD buddies be the champions for that smoke and mirrors game.
All rationale scientist will tell you that the earth isn't warming up, at least over the last 10+ years. Each year that passes provides even more data that the warming is a hoax.
Sorry to burst your bubble Norris, but you must have forgotten that I am not a liberal. I don't support our current puppet regime. Sorry.
Actually I doubt anyone has forgotten about Kinder Morgan. KMI is doing quite nicely. As Kinder so eloquently put it on the call, "you sell and I'll buy and we'll see who is the better for it in the long run".
Kinder was also fond of closing his annual reports and conference calls with "the best is yet to come"..
And yes, he was always right. He delivers, like clockwork. He made me a pile of money on the first KMI and is making me good money on the 2nd coming of KMI. The days of monster growth are over due to the large size, but KMI is now a nice compounding cash flow machine.
I have no clue why anyone would bet against Rich Kinder. In my opinion, his only real peer was Dan Duncan who had extraordinary vision and also the incredible ability to surround himself with talented and driven individuals that he would claim are far brighter than him (but he had the money!). One might argue that a relatively newcomer to the game would be Kelcy Warren.
Yes, I;m making good money on Linn/LNCO thanks to their epic mismanagement and now recovery.
To bad sandforbrains isn't here today to loan us his calculator and figure out our nice returns for us like a good little lackey.
I guess he is still moping like a 5 yr old because his prediction of a distribution increase the Q after Berry closing never came to pass. Epic fail on his part, but it is to be expected from trivial peons. It did not know how to respond after having egg on its face, so it went away like a petulant little child.
Made up nothing about Berry. Ever. Once again though, you make innuendo and accusations, yet never provide facts. Typical liberal.
You are correct, there is no plan in place to pay down most of the long term debt at Linn. That is how nearly all MLPs operate. They continue to roll forward debt and look to manage interest rate risk with swaps and by terming out as long as possible. Debt increases relatively in proportion to equity as they make new deals and grow the company (total assets)
It is also why the calls for massive debt pay downs with proceeds from any divestiture that wasn't a swap, were absurd. It behooves Linn far more to convert cash proceeds into production, thereby raising ebitda and lowering their debt/ebitda metric a more meaningful amount than by simply reducing the numerator(debt). I
The same holds true for the calls for unit buybacks. Linn is/was far better off growing ebitda overall (and on a per unit basis) than attempting to shrink the unit count (and boosting ebitda/unit with a stagnant ebitda number). It gives them so much more flexability by increasing reserves/production than by shrinking debt or unitcount (unless unit value gets absurdly low).
The main priority right now is for Linn to shrink the debt/ebitda metric and that is being accomplished via these swaps, which result in meaningful accretion without increasing debt. Converting non productive (yet highly prospective acreage) into cash flow is good business and should result in Linn no longer being sub 1.0x on its coverage ratio.
Part of a good maintenance program should be the replacement of reserves, not just production and cash flow.
Yes, it can catch up with you, especially if you do not allocate maintenance capital appropriately, or if commodity prices collapse for a meaningful time period and you outrun your hedges or if you are not efficient with your capital.
Linn views long term debt as a permanent financing option albeit well balanced with an appropriate portion financed by equity.
Debt/Capital and debt/ebitda are still meaningful metrics and Linn.
Why don't you get your long lost best friend sandforbrains and have him dig through all of my posts (heck, go back all the way to 2000 when I first started posting on the MLP boards) and see if he can find me making even a single negative attack on the ExxonMobil-Hugoton swap that was recently completed.
You can't. And you won't.
But the board does smell much better without sandforbrains and his tiring, long-winded copy and paste gibberish.
I disliked the purchase price of the first Hugoton deal, especially since they got hammered by the NGL component. I never disliked the second deal, again, that is you making things up, as you are so fond of doing. The second deal gave them a lot more critical mass, which helps keep SG&A down, as opposed to moving into a new basin which forces them to add field crews.
The OXY Hugoton deal would have been better though in large part due to the fact that Oxy had a much oilier component than XOM's or the BP deal.
Keep trying son, one day you might be able to hold jack's jock strap
I haven't seen the Wells Fargo report yet, but will look at it after lunch.
I'm not really sure we have all of the information yet. We have the purchase price to Devon and an EBITDA number from '13 from Devon that we can surmise is reflective of what it would be in '14, but not much more.
Perhaps Linn will put out a better supplemental slide.
Of course, the real analysis won't be complete until after Linn has divested the GW/Cleveland Sands packages. This will be, assuming they can complete the second transaction in a timely manner, a 1031 exchange. So, once the divestiture is completed, we can see what was given up and what was received in terms of total production, production mix, decline rate and accretion in terms of DCF (the ultimate metric above and beyond mcfe or boe, above ebitda, etc). Until such time, the market will only be dealing with snippets of data.
You asked the question, so i will answer it for you.
Linn made billions upon billions in accretive deals (Goldsmith, Berry, Exxon swap, Devon to name the most recent ones) which have now largely stemmed the shortfall in DCF.
As for Barrons, now you are just being argumentative for the sake of being argumentative. The reality is that our shop calls them out as being in collusion with Hedgeye, just like we called out the pending shortfall in DCF due to falling hedges years ago (about the time old jack decided to get out).
If anyone on this board is deluded, it is you son. Our shop was happy to be being at $27, knowing full well that Linn has a borderline 1.0x coverage and a bloated balance sheet, because we recognized the value inherent in their reserves and world class field operations. Management finally realized that running Linn like a growth c-corp E&P wasn't going to work and they have changed course and reverted back to the original business model, which is to acquire and exploit, mature, low risk, low decline developed properties and to arbitrage the difference between what the MLP universe will pay for a solid cash flow stream and what the private market is willing to pay for conventional PDP cash flow streams. At that point, Line became a strong buy and has done nothing but perform spectacularly for us since then.
Now, if they can manage to make a large mostly equity deal with LNCO, they can finally chip down that nasty leverage ratio a few turns or at least a full turn.
I am not surprised Barrons has tried to spin the news negatively. What is comical about the situation is that not really that much info was released on the deal, with the $350 million EBITDA figure being released by Devon, and that being a full year '13 number. How on earth could Barron's do a reasonable review of the deal, from a financial perspective knowing such little information? It's simple, they can't.
It's easy to analyze the deal from a strategic and high level perspective (reducing overall decline and thereby reducing capital intensity, trading highly prospective PUDs for PDP etc, but neither Devon nor Linn has released enough info for Barron's to do anything more than a back of the envelope analysis.
Our shop is calling it outright collusion with Hedgeye...which of course is old news.
I'm pleased with the announced transaction. It furthers the plan outlined a year ago. It reduces the growth capital budget, which in turn lowers the need to raise capital).
The 14% weighted average decline rate is materially lower than the company average decline weight and significantly lower than the Granite Wash area decline rate, meaning they benefit double, by both increasing the weighting of low decline production as a percentage of overall production and by reducing the weighting of high decline acreage with the future pending divestment of the GW acreage.
It also finally gets us out of the GW and gets Linn back to being a more traditional E&P MLP focused on acquiring mature, legacy low decline production and off of the treadmill of a growth E&P. The stark change in direction gives notice that management learned their lesson well. It is now back to being an arbitrage machine, prowling for conventional production that c-corps are looking to monetize in order to fund shale drilling and other unconventional production.
I have not seen any comments regarding accretion, but this move should materially impact DCF/unit (especially once the second half of the transaction is completed and the interim financing is removed). This deal should help alleviate concerns of the falling nat gas hedges and oil hedges in the coming years and help them achieve a more meaningful coverage ratio that can be used to help them overcome any cashflow shortfalls created by commodity hedge price drops.
Also like seeking value by going for heavily natural gas weighted production. The spring is being coiled tighter and tighter and any material weakness in oil prices may only serve to lower associated gas production, which has in large part been helping maintain the façade of strong gas production nationwide. The contrarian trend of PE players buying gas that began 3 years ago is becoming clear now to the layman media. Gas is where the value is/was at. Loving my LNCO buys at $26!
I echo your sentiments. The company may not be able to pay $.60/unit now that the midstream assets have been divested.
Of course, Q1 may have been an anomaly as well....
It is worth mentioning, this company is still led by Joe Mills, the most inept MLP CEO since Erik Sevin (former CEO of StarGas).
Mills has nose dived this thing twice and still does not appear to understand how to run an MLP. He has sold off the quality assets (the mineral royalty portfolio and the midstream assets). Now, can an inept CEO grow EROC back out of the hole??
Technically we are tied to Sanchez Oil & Gas, the privately held affiliate of Sanchez Energy (SN). I think ultimately though CEP will be able to acquire mature producing assets from SOG, SEPI and SN.
This really gives them a lot of options, similar to EnerVest, Quantum and Lime Rock. They have a lot of vehicles with SN and SEPI likely being geared more towards growth and CEP potentially being the vehicle for them to monetize their mature assets to. It allows them to continue to grow total assets under management (critical to help lower SG&A while freeing up capital).
What has been missing in the sector for quite some time is a true E&P MLP with a real sponsor. EVEP and QRE and LRE definitely have sponsors, but the drop downs haven't been terribly frequent. I have a feeling that with Sanchez, it might be a bit more active.
It also allows SN/SOG/SEPI to bid on packages that include both acreage and existing production, where perhaps SN/SOG/SEPI are not as interested in acquiring the existing production, CEP might pick it up. Of course, that would come much later down the road if CEP is able to bulk up to meaningful size. At the current sub $100 million market cap, they won't be able to digest much.
I'm buying a lot. Yes, PostRock is liquidating. A year or two from now, I think this will be materially higher and paying a nice distribution (perhaps as much $.24/unit)
Understood on being burned. My personal belief is that Constellation (likely to be renamed Sanchez Energy Partners or something to that effect), is at or near the bottom of its valuation. The NAV of the assets coupled with the pending "partnership" with Sanchez should result in CEP being able to do what they were created to do, which is be a cash paying entity. I've been acquiring CEP and will likely to keep adding. I see much more upside than downside especially in a market where not much is "undervalued". This is the classic Graham value buy.
I would like to see a fairly large deal that is mostly financed with equity (think $25-$30 million). That should help improve the debt/ebitda metrics which should push up their borrowing base and give them some cushion for future deals. A deal of that size, coupled with their current position, which has them teetering around having just enough cash flow to maintain production to slight growth, should result in them having enough free cash flow, perhaps $5-$6 million, which would allow for a $.16/unit/yr distribution. I'd like to see them ease into that over the course of 1 yr increasing the distribution by $.01/q ($.04 annualized).