Actually I did the math, even spelled it out for you. As I commented on, you simply have to supply some of the key assumptions, such as multiple on ebitda and expected maintenance capex as a percentage of ebitda (with mature producing properties typically being 20-25%).
Yes, I fully agree that the internal bank of the Permian is enough to push LINE/LNCO back above a 1.0x coverage ratio. It is why I have been buying LNCO nearly every week. I'm not calling a bottom, but I like LNCO's risk/reward profile a lot under $28. Of course, the Permian bank is the plan B. The original intent was that Berry would plug the gaps and allow an increaes to $3.08. Hedgeye/Barrons and ultimately the SEC prevented it..but it also speaks volumes about how desparate (there, I said it) management was to close the deal. It was crucial for long term success of Linn to delever and shift the commodity mix profile from gas/NGLs to oil/NGLs.
And of course, I like how you continue to change the subject rather than address the obvious. Berry was a fabulous deal for the company because it allowed them to clean up the balance sheet which had become terribly bloated. It provided them with a tremendous portfolio of high IRR oil projects, which allowed them to not only reduce overall capital (because Berry's properties provide a higher return for each $ invested) but Berry's properties are less exposed to NGLs, so Linn does not have to worry as much about ethane rejection, illiquid NGL hedge markets etc since most of their Berry projects are more oily than NGL rich.
Nevertheless, I am very long LNCO and happily collecting distributions and waiting for a favorable resolution to the Permian divestment and to potentially other acreage divestments within their extensive portfolio. Hopefully they can achieve a sub 20% decline rate and push the company back into a more manageable position. I believe the fiasco of the GW/Hogshooter has taught them a lesson about putting too many eggs in one basket.
Agree..I prefer to buy low. Linn's days of heady growth are over. It's now a nice yield play that should achieve 3-4% annualized distribution growth. It's why a lot of us affectionately call it "Linn bond". It's an equity, but the reality is that the law of large numbers dictates it will be very difficult for it to achieve anything over 3-4% annualized distribution growth rate.
The Permian transaction may result in a meaningful bump, or management may simply allow coverage ratio to creep back up from the .98x they project for the year from the base assets, to say 1.10x or higher depending on how successful they are in the process. I personally have to think that management has finally learned their lesson in not running with a sufficient coverage ratio. They were, and still are, at the mercy of clowns like Hedgeye and Barrons. WIthout access to cheap (relatively speaking) equity capital, it is hard for Linn to continue to make acquisitions unless they tap the debt markets, and we know the balance sheet is already levered more than they want it to be long term. They have plenty of dry powder in terms of borrowing capacity (revolver) but they don't want to use that as a permanent means of financing. Hence, why they have resorted to the "Permian bank" strategy, which will likely manifest itself again in other areas (Mississippian bank perhaps..or Cleveland Sands bank...). I have no qualms with divesting the higher returning assets, but ideally an E&P MLP ought to hold onto some of its crown jewels for internal development. Linn simply has far more than it could ever hope to develop at a reasonable rate.
So, you get a nice income stream that will likely grow by 3% a year and the potential for some yield compression once they straighten out their coverage ratio and get the balance sheet a little closer to 3.0x debt/ebitda. Then with a lower yield, the arbitrage machine can be put back into service. But don't forget, they have to feed 330 million units...
In typical fashion you change the subject.
You still dislike it when people point out that Linn has managed only a meager $.38/unit increase in the distribution over the past 6 years and it took nearly $12 billion in acquistions to accomplish that pedestrian growth rate.
As for the accretion from the Permian, you're wrong again (a recurring theme with you). The math is quite simple if you make some assumptions. For example, how much DCF does the current 17,000 boepd of production generate. You see, that production produces a significant amount of cash flow, but also has a terribly high maintenance rate since it is composed of many relatively new wells that will experience steep decline rates the first few years.
We know that mature legacy (older low decline) production typically sells for 8x ebitda (I'll provide numeous examples if you desire) and that after you net out the typical 20-25% for maintenance capex, you pay around 10x DCF. So, the calculation, which has already been done by numerous folks both on the board and also by several analysts in their brokerage reports (I have access to several) is simple. Figure out the DCF they can purchase (or swap for, and keep in mind this is after maintenance capex) net out the DCF they divest and divide by units outstanding. There are a a lot of moving parts such as whether they swap directly (likely) or sell and then do a 1031 like kind purchase, whether all the deals close at the same time etc. It's why most of the analysts have given a broad range. But, once again, the math is quite simple, it is the assumptions that one must grapple with in arriving at a reasonable calculation.
I prefer LNCO over LINE so long as the discount persists. It remains to be seen if the current discount is merely a function of the sudden overload in liquidity (as Kolja Rockov suggests) or if it is structural (similar to KMR's discount to KMP that never seems to converge). Point is, as long as LNCO's tax liability is zero (looks to be until around '17 per management), then LNCO looks like the better deal as long as it trades at a discount to LINE.
I've been a bear on LINE for many years due to a variety of reasons (high dollar hedges running off the books, aggressive drilling program that let their overall company decline rate get nearly untenable etc.). However, now that the market has evaporated the LLC premium and Linn is selling for essentially the NAV of the production and reserves, I am quite pleased to be buying LNCO in the $27's.
Do I think Linn is a good investment? Well, what are your objectives? Linn has a $9 billion market cap, a $18+ billion dollar enterprise value. It's a behemoth. Through billions upon billions in acquisitions, the company has finally turned the company around. The nearly $6 billion dollar Berry deal was the final component. Now with Berry tucked into the fold, Linn has gotten themselves to the point where they can almost fully cover the distribution based on base operations. If you want a solid yield with the potential for decent capital appreciating, then yes, I thik Linn is a "good" investment. Keep in mind, the bulk of my MLP portfolio is in midstream (EPD,ETE,SXL,MMP, PAA, KMI, TRGP/NGLS, DPM and others). This is simply a value/yield play for my portfolio, along with some ATLS/ARP. I prefer to buy low and sell high, but actually with most of my MLPs, I prefer not to sell at all and just let the distributions reinvest (EPD especially).
I would not worry about a distribution cut at Linn if that concerns you. The Permian divestment should provide plenty of breathing room.
And we are all well aware of the fact that E&P MLPs are more suited towards mature (low decline) oil/gas wells that are in the flat part of the decline curve which is typically 3 or 4 years out where the it starts to flatten out to the mid teens. We've been hollering this for years now, as Linn got in over its head with their development programs, relying on aggressive drilling not just for growth, but for base maintenance. The collapse of NGLs, the poor returns in the Texas side of the Hogshooter and the fact that they let the overall coroporate decline rate creep up near 30% all culminated with high dollar hedges rolling off the books, necessitating billions upon billions in acquistions to plug the holes in their dwindling cash flow.
Furthermore, their efficiency in converting acquisitions into distribution increases has been downright dismal since '10. You notice that Kolja conveniently doesn't talk about it anymore, kind of like they stopped reporting debt/eibtda metrics when they let the balance sheet get bloated. In 2010 they made $1.4 billion in acquisitions, in '11 they made $1.5 billion, in '12 they made $2.9 billion and in '13 they $5.5 billion...so for a total of $11.3 billion in acquisitions to grow the distribution from $2.52 to $2.90 on a per unit basis, and even now with the fabulously accretive Berry deal, they aren't even covering at 1.0x and their projection for the year is to be below 1.0x (barring a transaction in the Permian).
Can you imagine how ugly it would be if they had not made the Berry deal?
Well put. The average decline rate has been on the rise the past few years and was rapidly becoming untenable. The Hogshooter fiasco was the straw that broke the camels back.
Pushing the base decline below 20% will resolve many of Linn's problems, coverage ratio being one of them.
Seems like you are selling LINE near the bottom. I have no opinion on any of the shipping stocks you mentioned but Linn is likely nearing an inflection point when they complete their Wolfcamp divestitures.
I looked at the math that you mentioned. I think it was built using very good data from recent sales in the Permian involving both existing Wolfcamp production and acreage.
Of course, the numbers that have been tossed around ranged from $1.5-$2.0 billion. One must remember that the 17,000 boepd of current Wolfcamp production generates a lot of cash and has a lot of value, so the real kicker is divesting the non productive acreage and of course, as you alluded to, reducing the maintenance capex. I don't think it is a fair assumption to think that the all of the $250 million in current maintenance capital dedicated to the Wolfcamp falls to the bottom line because clearly the acquired properties will have maintenance requirements, but we do know that it alleviates a lot of stress off their need to execute perfectly on the wells they drill.
Not mentioned much on the boards, but a coverage ratio of 1.10x would mean ~$90 million annually in cash that they can put back into the business without having to tap the equity or debt markets.
SBR is finally starting to get some respect and recognition for their massive royalty portfolio. I've been wondering when the market would wake up, especially with the Permian boom. I also own a significant amount of Dorchester Minerals (DMLP) which I also consider as an integral part of my income portfolio along with SBR.
Yes, there are great gains to be had thegreatone561 by focusing on oil/liquids. When natural gas prices collapsed, it was the great wake up call for many producers.
As I mentioned though, while oil and liquids are in vogue at present, I prefer a company that has exposure to each to have a balanced portfolio, though clearly, the better value at this point is buying dry gas assets which are in utter contempt by many producers. PE firms (and Linn) can purchase dry gas assets are attractive prices and can elect to put their maintenance capex to work in basins where drilling will provide higher IRRs. If (more like when) gas prices recover, they can shift their maintenance capex back to the gas basins. Looks at Atlas, they just made some coal bed methane acquisitions recently. Got fairly attractive pricing. They won't likely be drilling many new wells until pricing recovers, but it is still a nice cash generating asset that they can develop when pricing makes it economic.
As I've said before, I don't think it will be long until we start seeing a lot of heavy PDP shale gas assets start making their way into E&P MLPs. Barnett, Fayetteville and Haynesville are all likely candidates.
Yes, we are familiar with the 1031 like-kind exchange process to avoid gains on disposal of assets if the proceeds are reinvested into a similar asset.
Same process was used in '08 when Linn divested the Marcellus properties and rolled the proceeds over into the Lamamco assets (Osage-Hominey, Naval Reserve etc).
The lack of parity between natural gas and oil on a btu basis has resulted in many producers shifting focus towards oil. The article on CHK's switch is sort of old news. In fact, one might argue CHK is largely responsible for the massive supply of shale gas as they were at one time one of the largest gas drillers in the country. With a 6:1 BTU basis and an economic basis that is skewed by a 3.3x factor, it makes more sense to punch holes in the ground for oil than it does for gas for many producers, depending on what acreage they hold.
It is one of the reasons why Linn went after Berry. It is very possibly that in time, given enough LNG exports, that natural gas will once again climb in price to help close the gap, and then gas prices will likely rise (see the flurry of private equity firms moving into gas in a big way....patience, gas will recover in time between the boom in LNG exports, plastics revolution (many new crackers and PE plants) and general shift away from coal.
I've been adding heavily to my gas holdings.
It is good though to have a good mix of commodities (oil/gas/ngl) as well as geographic diversity.
The odds of a direct swap are quite high actually. Look at Vanguard, they just did one. And to clarify, by direct swap, we are talking about Party A giving Linn mature production in exchange for the Wolfcamp (acreage and production).