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Inergy, L.P. Message Board

rrb1981 178 posts  |  Last Activity: 14 hours ago Member since: Apr 18, 2001
  • Reply to

    Market Snooze

    by rrb1981 Sep 19, 2014 12:47 PM

    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.

  • Reply to

    Market Snooze

    by rrb1981 Sep 19, 2014 12:47 PM

    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).

  • Reply to

    Market Snooze

    by rrb1981 Sep 19, 2014 12:47 PM

    john2webster,

    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.

  • Reply to

    Market Snooze

    by rrb1981 Sep 19, 2014 12:47 PM
    rrb1981 rrb1981 Sep 19, 2014 9:44 PM Flag

    bluedreamdreamer2,

    "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.

  • Reply to

    Market Snooze

    by rrb1981 Sep 19, 2014 12:47 PM
    rrb1981 rrb1981 Sep 19, 2014 8:14 PM Flag

    Our shop is an energy focused boutique.

  • Reply to

    Market Snooze

    by rrb1981 Sep 19, 2014 12:47 PM
    rrb1981 rrb1981 Sep 19, 2014 1:52 PM Flag

    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.

  • rrb1981 by rrb1981 Sep 19, 2014 12:47 PM Flag

    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.

  • rrb1981 by rrb1981 Sep 18, 2014 8:17 PM Flag

    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.

  • Reply to

    Huge depth

    by innagrigorenko Sep 5, 2014 3:06 PM
    rrb1981 rrb1981 Sep 7, 2014 7:55 PM Flag

    opinions,

    Berry has actually performed quite well since they acquired it. Now, it has not resulted in a distribution increase which was disappointing to most investors that are preoccupied with distribution growth and as such, it has been viewed by some as a disappointment. The reality is that Berry saved Linn from what would have been a very messy ordeal had the deal fallen apart. If you actually run the numbers at the time of acquisition, Berry was very accretive and as a result helped their DCF/unit tremendously (showing just had bad it would have been without Berry).

    The Wolfcamp acreage they brought to the mix is now being paired with Linn's existing Wolfcamp and will eventually be converted to stable mature production via either a swap or a 1031 exchange.

    It also validated the use of LNCO as an acquisition currency for c-corps.

  • Reply to

    Huge depth

    by innagrigorenko Sep 5, 2014 3:06 PM
    rrb1981 rrb1981 Sep 7, 2014 7:41 PM Flag

    No mistakes were made whatsoever.

    If you look closely, I said it was accretive. It just didn't result in an immediate increase in the distributions. Linn would be a disaster had it not made the Berry deal. Increasing geographic and commodity diversification helped tremendously as did size and scale increase.

    You keep trying to spin things but as always fail miserably.

    BTW, Linn bond now trading at same price as it was 4 years ago (you know, when Jack bailed out). Just in case you forgot.

  • Reply to

    Huge depth

    by innagrigorenko Sep 5, 2014 3:06 PM
    rrb1981 rrb1981 Sep 7, 2014 7:25 PM Flag

    legalbark,

    Agreed, the board is much better without the political discussions. I'd also point out that the quality of discussion on the board has gone up exponentially after the degenerate sandforbrains left the board. There was simply no place on this board for his degenerate, vile and subhuman thoughts. Perhaps his absence is actually yahoo blocking him due to the number of "flags" for inappropriate comments. I suspect that may be the case.

  • Reply to

    Huge depth

    by innagrigorenko Sep 5, 2014 3:06 PM
    rrb1981 rrb1981 Sep 7, 2014 7:22 PM Flag

    Wrong again Norris. Your attempts are becoming increasingly desperate. Only confusion on your part.

    As was clearly spelled out, increasing the number of units issued in the acquisition of Berry did not impact Linn's debt nor the ebitda they acquired via Berry, but clearly it impacted the ebitda and DCF on a per unit basis.

    Berry was the lifeboat for Linn. Those that thought Linn overpaid would be shocked (likely dismayed) to see the shape that Linn would have been in without it. Linn management knew that paying up for the quality assets was necessary, even to the point that no appreciable increase in the distribution was to be had, though clearly it was highly accretive and brought with it a host of high IRR PUDs where they could divert much of their budget, increasing capital efficiency.

    Nice try though son. You get points for effort.

  • Reply to

    Huge depth

    by innagrigorenko Sep 5, 2014 3:06 PM
    rrb1981 rrb1981 Sep 7, 2014 6:47 PM Flag

    john2webster,

    I respectfully disagree.

    The number of shares issued for Berry did not impact the debt (remember, the Berry deal was an equity exchange of LNCO for BRY, with Linn of course assuming Berry's existing debt). That increase in units did impact coverage ratio no doubt, as the DCF acquired via Berry had to be spread across a greater number of units, but it in no way reduced the amount of ebitda that they acquired nor did it require them to take on any more or less debt than was already outstanding at Berry. So while the Kaiser fiasco did impact DCF/unit, it did not impact ebitda/unit or debt/unit.

    I too am pleased with the general direction over the past year. Our firm has believed for several years that Linn would be unable to manage the hybrid model and time has proven that to be the case. The Hogshooter fiasco was the straw that broke the camel's back. Now, they are returning to the model that wall street knows is manageable. Hold stable, mature producing properties with relatively low decline rates, run with a 1.10x coverage ratio and utilize the coverage ratio cash cushion to balance operational ups and downs. That "equity capital" cushion is vital. Linn is executing that plan.

  • Reply to

    Huge depth

    by innagrigorenko Sep 5, 2014 3:06 PM
    rrb1981 rrb1981 Sep 7, 2014 4:58 PM Flag

    endless like your mindless rants on ethanol on an E&P LLC board.

    :)

  • Reply to

    Huge depth

    by innagrigorenko Sep 5, 2014 3:06 PM
    rrb1981 rrb1981 Sep 7, 2014 4:54 PM Flag

    Now now, Silly pagan Norris. Letting hated fill your heart and mind as always. You still haven't learned there is no such thing as ebitda to leverage ratio. It is the debt to ebitda ratio.

    Attempting to spin the terming out of debt as anything than what it is shows how desparate you are.

    Yes, as you point out, Linn still remains overly leveraged (bloated would be appropriate). Management can say they are "comfortable" with it, but the market sees that they are a full turn above the rest of the industry.

    Perhaps we can get back sandforbrains on the board. Maybe he can whip up one of his special finviz charts showing Linn's underpeformance over the past 4 years? Stagnant unit price.

    Of course, with Norris, hope springs eternal. Always has an excuse for managements short comings. Always. And when he doesn't, in typical liberal fashion he changes the subject...to ethanol.

    Some day he may actually see his beloved Linn bond return to $40. Someday. :)

  • Reply to

    Huge depth

    by innagrigorenko Sep 5, 2014 3:06 PM
    rrb1981 rrb1981 Sep 7, 2014 3:47 PM Flag

    Well, I wouldn't say that Linn has "gotten away" with anything. Their unit price has been hammered from $40 down to the low $20's (in part due to Kaiser) and now resides in the low $30'S. Linn is essentially trading at the same price it was at 4 YEARS AGO. Investors in Linn have missed out of a good portion of what amounts to the greatest bull market ever and have had a roller coaster ride in the process. Additionally, management had to eat crow on the Hogshooter fiasco after essentially banking the companies future on it.

    As for the mix between oil and gas, being contrarian on their buys is just smart business. Large independents are jettisoning mature natural gas properties at prices that allow Linn (and other E&P MLPs and of course, Private Equity buyers en masse) to make a good margin and lock in that margin for 4 or 5 years with stable to slightly rising gas prices. Why would Linn want to buy oil properties at the top, then have to go out and hedge forward when the strip is in a backward dated market? Instead, they are focusing a large portion of their drilling budget on oil, where they can harvest their high IRR PUDs, get really good returns on the flush initial production and get pay-out early on and have less risk with the tail end production.

  • Reply to

    Summary and Recommendation (mcdep)

    by mikeyhorsehead Sep 2, 2014 6:49 AM
    rrb1981 rrb1981 Sep 7, 2014 3:07 PM Flag

    DMLP is one of my "quiet" sleepers. The boom in the Permian and Bakken should continue to result in a nice influx of reserves and cash flow and help offset the decline in some of their more mature producing areas where drilling has waned.

    I don't worry about this one much, I just collect the distributions each quarter.

  • Reply to

    Huge depth

    by innagrigorenko Sep 5, 2014 3:06 PM
    rrb1981 rrb1981 Sep 7, 2014 2:57 PM Flag

    opinionsarelike33,

    "Something is going on with all these moves that doesn't add up."

    I doubt it. Management stated that all of the recent transactions would be paid for internally via the divestiture of the Wolfcamp and of course, the Granite Wash/Cleveland Sands. They also divested the Stack play in the Woodford (undeveloped acreage). Financing these via debt would be a major departure and a smear on their credibility..so as was pointed out, this is likely them simply doing typical housekeeping and terming out debt at fairly attractive rates.

    Of course, most investors are impatient and want these kinds of transactions to happen overnight. The divestiture and acquisition of what amounts to billions in producing properties takes time for the due diligence. This involves a tremendous number of people to assess production history, titles and financials. Also keep in mind that Linn is likely running numerous iterations on the Wolfcamp (i.e. being sold as a single package vs in parcels).

    2014 is a year of transition. Too many moving pieces to fully assess all of the individual moves. 2015 should bring much greater clarity including no more concerns over execution in the Hogshooter. No more nail biting about whether the well will be a gusher or a barely economic producer. 2014 is a back to basics year where management is once again embracing the tried and true concepts and shunning the hybrid model.

  • rrb1981 rrb1981 Sep 6, 2014 3:47 PM Flag

    It is a function of the fact that SBR has a tremendous position of undeveloped acreage. Without the burden of having to fund development, SBR, along with DMLP find themselves as 2 of the best royalty plays within the sector.

    Yes, a review of the annual reports provides a wealth of knowledge. I built a spreadsheet and trend all of the critical metrics on both SBR and DMLP. SBR is not actively managed, whereas DMLP is...both have been incredible performers for my portfolio.

  • Reply to

    Bollinger band width

    by lordofdoggtown Sep 5, 2014 10:34 AM
    rrb1981 rrb1981 Sep 6, 2014 2:49 PM Flag

    opinionsarelike33,

    You are correct. Management proved they could not effectively manage the high decline rates associated with an overly active drilling program. It became untenable for them to manage all of the facets associated with a multi-rig program, not the least of which was timing and completion. Factor in that they got overly excited over a few gushers, which ended up being exceptions and not reflective of the average type curve and it resulted in them learning a very expensive lesson. Assuming your entire Hogshooter acreage is highly prospective turned out to be a low point for management especially after trumpeting their initial success so loudly. However, management has learned their lesson and are instituting a "back to basics" strategy. Focus is being placed on shifting their portfolio back to mature, low decline legacy production. This reduces their capital intensity as it requires far fewer wells to be drilled to address a 15% corporate decline rate versus a 35% corporate decline rate. Fewer wells allows them to be methodical in their selection of capital projects to pursue be they new drilling efforts or cost efficient workovers/recompletions and infrastructure projects to help lower LOE. Additionally the high quality, high IRR PUD opportunities that Berry brought to the table are allowing Linn to maximize capital efficiency by focusing their capital on their best returning opportunities. Once again Berry continues to prove itself to be one of the best acquisitions they have made since inception.

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