I think that those who are denying bankruptcy is not likely are simply in denial.
Quicksilver has been mismanaged for some time. They are now on the slippery slope towards bankruptcy.
The reality is that ARP is going to have a very tough time growing the distribution at the rate they have exhibited in the past couple of years. Not only are they much larger, but they are now nearing the 500/50 splits.
I personally like the natural gas exposure. Gas is beaten down but the reality is that gas is not likely to drop much lower than $4 for any lengthy duration. Aside from associated gas, there aren't many gas plays in the US where producers can capture a meaningful margin with sub $4 pricing. So, with that "floor", albeit a soft floor established, ARP is likely to keep plodding along. If gas prices return to $5 or $6, they will be doing well, but I'd temper any enthusiasm on that front as there are a lot of gas heavy producers that can ramp up drilling.
The oil exposure is nice but wasn't necessary..I think it was more Cohen trying to pander to the market, hoping he would get a pop in the unit price. He'll never learn. He' senile. They should stop trying to make deals and focus on their PUDs via the private drilling partnership.
Linn management continues to execute on their plan to restore stability to Linn.
They have now executed (2) direct swaps, which at present, appear to have been easier to effectuate than the 1031 exchanges (still waiting to divest Wolfcamp III or Granite Wash/Cleveland Sands) to be paired with the Devon asset package.
What will be interesting to see is how the market responds to the finished product. Linn will be back to a moderately low decline rate (perhaps 15%) which is a far cry from the completely untenable 40% of a year ago. Abandoning the hybrid model and returning to the original model is in full stride and may be completed before year end. The street appears to be in a wait and see mode. The unknowns of importance will be what DCF coverage will be, what the maintenance capex budget will look like and of course, leverage metrics.
Hope things are well with you. If you care for another tip like the MWP I gave you about 10 years ago, take a look at CEP (soon to be SPP). A nice turn around story.
As I recall, management said they would shun equity issuance at this price. Of course, that means very little.
I continue to believe that ARP is best suited simply doing nothing on the acquisition front. There is nothing wrong with focusing all of their efforts on high-grading their PUDs and looking for cost efficient recompletions etc. They don't need to grow. They have plenty of high IRR drilling opportunities in the Marble Falls, Utica, Miss Lime and Barnett. The private drilling partnership business continues to plod along and help carry some of the development drilling.
A year of zero activity and coverage above 1.0x might do wonders for the price. Simply prove to the market that the model is sustainable with maintenance capex and without the need for acquisitions.
No, the name change does not impact shorting.
However, the change in name implies that management feels certain that they will have enough votes to consider the conversion to an MLP with SOG and affiliates as the GP as all but a formality.
This transformation means a likely restoration of the distribution (small at first) and likely a supply of mature legacy production for drop down into SPP.
Well, I have a different definition of "homerun". While Linn is up from the artificial lows brought on by Hedgeye, it is essentially flat over the last 5 years. That can hardly be construed as a homerun, especially in comparison to the market return. I understand that Hedgeye should/could be viewed as an anomaly but the fact is that it happened and Linn's price has still yet to recover.
Linn does however provide a nice income stream. It also possess the potential for yield compression if the market ever decides to remove the risk premium (or many of the other E&P MLPs for that matter).
Of course, in the interim, you sit back and collect the distributions, or in my case, simply reinvest them and let the income compound.
If you are addressing me regarding how the investment is doing for me, my answer is fine. My average buy price is in the $27's (thanks to the Hedgeye clowns). Also DRIP'ing the distributions.
This isn't a homerun investment. It's simply a nice income play.
Well, I think bulls and bears alike can agree that management has executed on their latest plan. They have divested 2/3 of the Wolfcamp and no doubt are working diligently to divest GW/Cleveland Sands.
I think some are surprised in the lack of uplift but I suspect 2015 will bring much greater visibility/clarity.
One must remember, this is a $10 billion market cap, $20 billion enterprise value. It takes time to turn around a company this large.
It will take time. Linn had major issues this time a year ago. Total average decline rate was 35%..and Linn had plenty of low decline production in the mix, so it gives you a sense of how reliant Linn had become on peak, IP flush production. The Hogshooter fiasco exposed the weakness of the hybrid model.
Now, they are slowly returning to what they know they can execute, which is to operate mature, legacy production, control costs and work to high grade their portfolio and drill only their highest IRR opportunities.
Linn still has what amounts to about 1/3 of the Wolfcamp plus the Granite Wash/Cleveland Sands package to divest. The GW/CS has been projected to cover the Devon deal, so Linn's transformation is slowly but surely being executed.
What you will see in '15 is a blended decline rate of around 10% for the company. Maintenance capital will drop substantially and of course, with less need to drill, they can high grade their prospects and achieve a higher blended return. I suspect 2015 objectives will be to build coverage ratio and to work on lowering debt/ebitda ratio back to acceptable limits.
The problem for Linn has been the cash call, whereas many of the c-corps do not pay an appreciable dividend unlike Linn's distribution which consumes much of their cash flow. Of course, debt requires servicing whether it be at a c-corp or an MLP. The strong hedges were what separated Linn from some of the others that struggled. But no doubt, as Linn's $8/mcf hedges rolled off the books and were replaced with outlying $7/mcf hedges (then $6/mcf, then $5/mcf...), Linn's margins got compressed necessitating billions in acquisitions to plug the holes in DCF.
Pricing not only was an issue, it continues to be an issue to contend with. You yourself have even noted the precipitous drop in '16 of the gas hedges.
I've put pencil to paper on what that drop means in terms of DCF and DCF/unit. It actually surprises me that some of the more astute investors on the board have no mentioned it more often. It is something that a strong coverage ratio can mitigate, but most investors only seem to look at the percentage of overall production that is hedged, not the realization.
I suspect you have run the numbers as well and that is why it is such a prickly point of contention with you because you prefer to keep the rose colored glasses on and don't like criticism.
What Linn has done is simply declide to return to what they know they can do well, which is to operate and exploit mature legacy production.
If you recall, back in the downturn, Linn actually did exceedingly well by focusing heavily on re-works, recompletions and other behind pipe capital efficient projects that had very high IRRs. Now, those types of projects may not move the needle aggressively in terms of growth, but they can stem decline and reduce operating costs, which are both crucial.
It is indeed the niche that Linn excels at. ExxonMobil and the other large operators (BP, Devon, Pioneer to name a few of the recents) are interested in showing appreciable production growth. Linn is looking to exploit overlooked opportunities that were perhaps not large enough to interest the XOM's of the world.
Hugoton is a perfect example of Linn acheiving size, scale and scope. I predict you will see appreciable synergies in the form of reduced LOE in Hugoton especially once they are able to integrate all of the assets into a single business unit.
We are seeing the same take place in California. It really all comes down to operating efficiencies and managing both field costs (LOE) and overhead (SG&A).
I believe many of Linn's problems were self inflicted. It is very obvious that Mike Linn saw and fully understood the declining hedge issue. Linn had major margin compression over the past 5 years. Deals that were made in '08 when gas prices were 2x to 2.5x current pricing no longer make sense in today's environement, yet the financing that brought those on board still remains whether it be debt or equity. As the hedges rolled off the books and were replaced with ever lower prices, total realizations and margins compressed yet for the most part, interest expense did not decline proportionately with gas price decline and cash calls on equity (distributions) only increased both overall and also on a per unit basis. Plugging gaps in the its DCF is precisely why Linn went on a spree yet exhibited marginal distribution growth. It is also why management quietly stopped talking about their own metric (accretion per unit per $ spent on acquisitions) and why debt/ebitda became bloated.
Had Linn operated with a sufficiently high coverage ratio (a topic itself worthy of a lengthy discussion) then I agree that Linn would likely have held onto most of their Wolfcamp and GW acreage. The reality is that all new wells exhibit high decline rates, be they conventional or unconventional, vertical or horizontal. It is laughable to hear people talk about drilling in areas of high decline. Decline can be impacted by many items with geology (reservoir pressure and porosity) and completion techniques being 2 of the primary drivers, but make no mistake, all wells decline rapidly after IP. It is also obvious that with a sufficiently high enough coverage ratio, managing an active drilling program, including timing of completion as well as variance in results could have been managed. It is also obvious that the Wolfcamp and GW possess more "upside" in terms of long term production growth.
"I also imagine LINE will refrain from raising the distribution for some time, holding back whatever DCF it can to to pay down debt as another way to chip away at high debt/ebitda"
I suspect that Linn would much rather devote surplus DCF to increasing production (and consequently ebitda) via either the drill-bit or thru acquisition of mature, low decline production. This makes far more sense as it both increases the denominator (lowering the ratio) while also boosting reserves, whereas debt reduction only reduces the numerator (also lowering the ratio).
One must also remember that Linn still faces a rather steep '16 drop in natural gas hedges (near $100 million or 10% of DCF using back of the envelope numbers). I suspect maintaining a strong coverage ratio will be an integral part of their "back to basics" strategy.
We don't "feel" that it adds $.06-$.09/unit, management stated $20-$30 million in accretion, which spread over the ~331 million units gives $.06-$09/unit.
Looks like the market is snoozing again. Linn just continues to execute their plan, as they have been articulating now for some time regarding their back to basics strategy.
Our shop has been quite pleased with the progress that has been made e.g. abandoning the hybrid model.
This transaction appears to be accretive to the tune of $.06-$.09/unit per the company while also reducing maintenance capital by $20-$30 million annually, which of course allows them to continue to be ever more selective in their development capital, high grading their prospective PUD inventory and achieving much higher blended IRRs across their overal development portfolio.
In an overly inflated market, our shop continues to view Linn as a protective play given how much of the LLC premium was evaporated by Hedgeye fiasco. Buying assets at or near NAV appears highly favorable to buying them at overly inflated prices and "hoping" to grow into the valuation.
They still have ~1/3 of Wolfcamp to divest plus the GW. Moving pieces slowly falling in place. The removal of the "cowboy culture" regarding aggressive drilling program is doing wonders for the company in terms of allowing them to once again be able to manage the overall blended decline rate. The 35-40% overall decline rate of 2 years ago was simply untenable, it forced them to be too aggressive and too dependent on having success in drilling. Now, with a low double digit (perhaps eventually a high single digit) decline rate, the pressure is off of them to knock the cover off the ball every time. Additional work remains regarding cleaning up the capital structure but can likely be managed via a large LNCO c-corp acquisition, helping shift debt/ebitda back to an acceptable multiple.
Will be interested to see when we receive our proxies. I'm up well over 50% and expecting to see continued capital appreciation assuming the Sanchez deal is consummated. It is definitely a nice contrarian play in this very overpriced market.