I think you are being a bit premature taking credit for the $1.5 billion that MAY be invested by GSO and Quantum.
Remember, on the DrillCo, Linn gets a carry and a back-end step up on the working interest provided certain return hurdles are met. This is not a major source of cash flow for Linn, but does allow them to prove up acreage and they get full ownership of any PUDs generated. No monies have been invested as of the last Q report.
The AcquisitionCo with Quantum is similarly not a major source of cash flow. They do get a promote, but let's be serious, this is also not a meaningful source of cash assuming the whole $1 billion is invested.
Actually, Perry did a decent good job while Governor of Texas. For those that really look at his record, he managed the state finances capably through the downturn and the economy has expanded at a nice clip and contrary to popular belief, is not tied so heavily to energy as many would believe. His legal issues are nothing more than political chicanery brought about by the only liberal bastion in the state (Austin). I suspect the 2nd indictment will no doubt be tossed, as the first one was. Unfortunately for Perry, his campaign is simply going to run out of money and he will likely drop out of the race. The GOP race will likely narrow quickly with major donors deciding who will and won't be advancing.
Texas was fortunate that after Perry left office, they elected Abbott over the dim-witted Wendy Davis, whose knack for making tacky, crude and callous comments conjures up memories of Clayton Williams campaign of 1990 vs Richards. In my opinion, Wendy Davis's campaign was so poorly run that she has likely ended her chances of holding major public office in the State of Texas for some time and raising funds from donors will be quite a chore after she so ineptly wasted them making personal attacks on her opponent rather than discussing her ideals. One does not simply attack a man because of his physical disabilities and get away with it, not even liberals.
I don't think you will have to wait until 2017 to know if Linn will survive.
Watch the pricing action on their notes as well as the strip.
Linn's survival will be largely dependent on commodity prices, but also prudent management of cash flow. At present, it appears retiring notes at 50% of par provides an excellent return with essentially no execution risk. Linn's management of their revolver as well as maximizing capital efficiency are crucial. Every dollar they can take from their cap ex and redirect towards debt reduction buys them time.
It is very likely that we may see some rationalization of their portfolio in an effort to further reduce G&A. The South Texas assets are not a meaningful portion of Linn's reserves and production and certainly not receiving meaningful cap ex and are prime candidates to be divested and likely will find eager buyers in the well developed South Texas basin. Additionally, the Michigan Antrim Shale gas assets are also candidates for divestiture if they can receive a price enticing enough to part with the low decline gas assets.
Overall, I expect Linn to continue to find ways to high grade their drilling inventory, meaning do more with less. Reducing the maintenance capital budget while keeping production flat and buying time by continuing to reduce debt at 50% of par. They also seem interested in proving up the Ruston area in an attempt to monetize it. Similar to what we saw in the Wolfcamp. Extract more value by de-risking the play. It remains to be seen how much capital this will take, but is likely one of the best wild cards the company has in terms of showing meaningful value creation.
If Linn does everything right, and that is a big if, considering they have Ellis and Rockov leading the circus, they might survive...with strong cooperation from the commodity markets in 2016-2017.
Management abandoned long term hedging, let the balance sheet get bloated, lost focus on what an MLP should do, tried to be a hybrid driller/operator, tried to buy their way out of trouble. It is staggering to see the collapse, but we can't say it is surprising. Ellis was a gunslinger that never really bought into the idea of purchasing mature stable assets and operating them and Rockov was an egotistical quant that thought he was smarter than everyone else. Rocov's reckless margin call should have served as a clue to investors at how reckless he was.
The market is mostly efficient, but not always, especially when information is changing so quickly (vis a vis, crude pricing, yuan devaluation).
Linn's May 2019 6.5% notes are trading at 51 cents on the dollar. The September 2021 6.5%'s are trading at 43 cents on the dollar.
Linn actually has a real chance of surviving especially if crude recovers into the $60's or $70's within a year or two.
I've said it before and will repeat it, Linn is spending $500+ million to keep production flat (actually grow it by ~1% annually) versus letting it go into decline at ~15%. I will be surprised if they do not cut cap ex again and devote more of that cash flow to note repurchases. At current prices they get the dual benefit of meaningful interest expense reduction coupled with debt reduction and likely achieve a much higher rate of return.
I also believe that once the redetermination is complete, Linn will likely pull down the revolver and use those proceeds to snap up as many notes as possible at ~50 cents on the dollar. In terms of real cash on cash return, it presents a very attractive option, again while also helping clean up the balance sheet, that management so recklessly cratered.
Equity holders might still have an opportunity for Linn to survive as a going concern, but it likely won't really be due to the actions of Ellis and Rockov but rather the commodity markets.
It depends on what you consider "recover".
Crude oil production is going to taper off within 2 months for many independent producers.
I don't think we will see $100, but a slow steady climb to $60 seems likely.
Management will use the revolver to buy back deeply discounted debt but likely only after the redetermination, that or they will only pull down what they feel will be available based on the upcoming price deck. Decreasing total debt and appreciably reducing interest expense is the only real #$%$ they have to turn and fortunately for them, it can be meaningful. They may also look to reduce cap ex to a point at which production goes into modest decline rather than 1-2% annual growth. That might free up another couple hundred million.
Make no mistake about it, Linn is in survival mode but with 3.5 years, they have plenty of time to modestly deleverage and wait for commodity prices to recover.
I think Linn is projecting a reduction in the revolver to around $1 billion. I think they may pull it down to close to nothing and go after major debt reduction ($2 billion of face value). That would mean material interest expense savings over the next 3 years. On the order of over $300 million over the next 3-3.5 years.
You will likely be very disappointed if you put any faith in Eddie Cohen.
His history of self-dealing, inept blunders and value destruction is well known in the MLP sector. Need I mention his penchant for always promising something big in the near future ("stay tuned") etc. It typically never materializes.
All this being said, many of these E&P MLPs and c-corp E&P's are entering zombie mode. They might not go under, but they will be devoting all cash towards deleveraging.
At current prices, ARP ought to eliminate the distribution and either purchase bonds at a huge discount, or simply let cash accumulate on the balance sheet. As I said before, this looks like Cohen simply milking ARP to the benefit of ATLS. He needs to shed debt at ATLS so that if ARP goes under, he can walk away still owning Lightfoot, Arc Logistics GP, AGP etc none of which are producing significant cash, but have prospects.
The market isn't giving them credit for the distribution. As I said before, many of their assets are quite good. Low decline assets such as the coal bed methane provide steady cash flow. Rangely was a huge mistake, but nothing can be done about it.
Cash should be used to increase the likelihood of survival.
And no Latin this time... :(
The E&P MLP model doesn't work. At least, not in times of high prices. I think you could make a very good case for starting one now, with crude at $43 and gas under $3.00/mcf.
Too much debt and too much desire to produce growth. I think, under the right circumstances, you could make it work. Heavy hedging, avoid NGL properties which are harder to hedge, target low decline, finance almost entirely with equity, strong coverage ratios.
I look at DMLP, a royalty MLP, which I have followed for 15 years (since it was Dorchester-Hugoton). No debt, floating distribution policy. Probably one of the best royalty managers in the business and it too is being pounded.
As for Linn, the elimination of the distribution is the smartest thing they have done in years. Buying back debt at 45 cents on the dollar is brilliant. They should pull the revolver down to whatever they think the banks will leave them after the next redetermination. They might be able to pull down $700 million and retire well over $1.5 billion in debt, meaning interest savings of $80+ million. I would also cease most development capital and let production slip into modest decline (perhaps instead of targeting 1-2% growth, they could accept 5-6% loss) and allocate that capital towards debt reduction. They have 3.5 years until the 2019's come due.
ARP needs to follow suit if they want to survive.
Someone is going to have a field day in the next couple of years buying quality E&P assets from overleveraged firms.
Cohen is a clown if he thinks ARP will benefit from this downturn. He is looking at an equity stub that has marginal value and has no real sponsor. At least MEMP has MRD.
The problem is that while assets such as the coal bed methane are quality assets with no NGL exposure, ARP financed too much with debt rather than equity.
These guys are toast. Cohen would peddle return trip tickets on the deck of the Titanic while it was sinking.
I don't argue that they put together a nice set of properties. The low decline nature of most of them should have made it easy to manage. However, they have historically had high expenses.
The only major positive that they have made is making Schumacher the President. Schumacher is an operations guy and can manage that side of the business. As for financing, Herz is nothing more than a Cohen lap dog.
It is just a matter of time before they will have to eliminate the distribution and devote that cash towards deleveraging. I am in full agreement that they should be purchasing bonds at a steep discount. That is what Linn is doing, and Linn is in survival mode.
It would have been far more prudent for ARP to have absorbed ATLS during the NGLS/TRGP transaction and left them with 1 entity instead of 2.
I can't help but laugh at Cohen. The man is so clueless.
Reading between the lines, ATLS is in trouble. The only reason ARP hasn't stopped paying distributions is because Eddie wants to take care of his precious little toy. ATLS has $80+ million in debt and the bulk of the cash flow comes from ARP, not Lightfoot or AGP etc.
This isn't going to end well for them..
At noon, virtually every MLP turned downward on heavy volume. That isn't based on fundamentals. It is based on some other event, such as a margin call or hedge fund blowing up.
It' very ugly, just like 2008. The good news is that at some point the sector will bottom. I'm betting we are seeing capitulation. Names like EPD which are financially strong are being destroyed, along with the weak names (like Linn).
Low oil prices will linger, but it is clear that the world cannot be sustainably supplied at $45. Perhaps at $65, but not $45. It will simply take time for the market to clear the glut. Rig counts are down and that will help tremendously, but it will take another 6 months.
Regarding debt repurchases, I think it is very likely that after the next revolver redetermination, in which it is expected that Linn's borrowing base will be reduced to around $1 billion, that Linn will pull down a significant portion of that and use it to retire debt at 50 cents on the dollar, and likely the 2019's. At 50 cents on the dollar, they can put a significant dent in their interest expense. With a lot of help from commodity prices, Linn may actually survive thru 2019 but may need to resort to all manner of 2nd lien borrowings, asset divestitures etc.
Roughly speaking, it seems possible that Linn could manage $1 billion over the next 3 years from savings from cutting the distribution. That, coupled with borrowings on the revolver could allow them enough breathing room to survive thru 2019, but again, they will need $70 oil most likely.
Given the poor commodity price environment, coverage of 1.10x looks fairly good. If they can achieve 1.0x or better throughout the year, then I think it will be a testament to how well they have managed the business a terrible environment and also given how poorly timed the APL merger was.
I think Targa will trudge through the malaise, clearly growth is slowing down but maintaining 1.0x coverage is huge to surviving.
Buckeye's results were quite good given the commodity price environment and also given that the 2nd and 3rd Q's are usually weak for BPL. They are still projecting 1.0x coverage for the year.
As for oil pricing, I think we are in a panic mode right now. It is clear the market is oversupplied. That oversupply will take another 6-12 months to work off. Rig count is now down over 50%, and we all know that it is a leading indicator. Bakken production is starting to flatten off, other basins will follow. I don't know where it will bottom, but I do know that the world cannot be supplied long term at $45/bbl. I think I have seen at current rig count, US production is scheduled to drop by 500K bpd this year. It remains to be seen.
PAA, another holding of mine, has some excellent presentations where they talk about long term supply demand fundamentals. They note that over the 4+ years of $100+ oil, the rest of the world produced essentially zero growth while the US/Canada grew volumes by 3+ million. It seems obvious that US production needs to drop, but US basins may not be the high cost producers, meaning other supply sources may drop, such as the North Sea etc.
Long term sustainable price seems like $60-$65. I think the rest of this year will be rough or producers but a glimmer of hope may be coming in 2016.
Bankruptcy is indeed a possibility, but I doubt it happens before 2018.
Even sub $40 oil, which while possible, seems unlikely, won't hurt them until next year, when they have far less oil hedged than this year.
Linn really is just a leveraged proxy for oil now.
It will take both prudent use of cash, balancing cap ex and debt buy backs for Linn to survive. It's evident that retiring debt, especially near term (2019, 2020, 2021) dated debt at a huge discount helps keep bankruptcy away. Gaining flexibility from their banks on the revolver is also important. Linn can survive perhaps even past 2018 by going into zombie mode, simply letting natural decline take over and putting all cash towards debt reduction.
I do think that the days of Linn ever being an income play are over with.
It's probably also time for Linn to jettison Ellis and Rockov. Ellis never understood the MLP format and always saw Linn as a high growth c-corp. Rockov mismanaged his own finances with the same recklessness as he did with Linn's.
Kelcy is going to get Williams. He recognizes the opportunity in front of him.
He lost out on Targa last year. Now he will get Williams.