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.
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.
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.
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.
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.
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.
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. :)