Higher NG prices do not help Linn. They are hedged much higher than current prices and they cannot cut production because they need to deliver on contracts in the hedge book.
"In the first three quarters of 2015 LINN has over a billion dollars in operating cash flow, which will continue in 2016 due to the hedges"
You are missing a few things.
1) For 2016, oil is hedged 70%, compared to 90% for 2015, so for every dollar oil is below $90 cash decreases from 2015 by $1M per quarter per dollar. So at $40 crude, cash flow for 2016 will be $200M less than 2015. Just from having less hedged oil.
2) NG is hedged at 100% for 2016, sure, but at 60 cents less per mcf than 2015 -- which is roughly $140M less in cash flow for 2016 than 2015. This happens no matter what NG does in 2016.
3) 2017 is a looming disaster. Most crude hedges roll off and unless you think WTI gets back to $90 by the end of 2016, cash flow will be several hundred million less than 2016 and putting on hedges now is much more expensive than it was a year ago.
4) Linn's crude production is flat at ~$570MM capex. Debt service is ~$550MM.
So at $40 WTI, cash flow is reduced by $200MM + $140MM = $340MM for 2016 compared to 2015.
At $50 WTI, cash flow is reduced by $160MM + $140MM = $300MM.
They are already technically in default according to credit agencies as a result of the distressed exchange and the second lien notes they issued had a 12% coupon. Bankruptcy is looming by the end of 2016 or sooner. Chances are they will enter bk sooner than that to save the company from liquidation, but unitholders will get nothing.
I found it interesting when he responded to a question about hedge fund losses. He said they've performed well in the past and he mentioned their CIO as the person responsible for the investment book. Hedge funds are treated as an asset class for some reason and hence should not correlate with the markets -- something he mentioned but didn't explain why they did exactly that. I am inferring from his comments that he is blaming the CIO for the bad performance from investments but it seemed to me that he largely dodged the question. I hope they're not invested with Pershing Square.
Awful results. Across the board. Operations, investments. Yuck. What good are hedge funds if they go down with the market? Just put it all in index funds and you'd perform better than that.
And more restructuring? Haven't they said many times they are done with restructuring? They were supposed to have simplified the business two years ago. Shareholders should be much more willing to listen to Icahn after these results, even if they weren't already willing. Break up the company and get rid of this bloated, incompetent management team.
As far as Moody's is concerned, I can't understand how breaking apart a business could be credit negative.
" It just seems like management would do everything possible..."
Management has had reviews before. They include many many assumptions that turn out to be wrong over time. Interest rates, cost of care, length of care, longevity of policy holders, etc. Even independent companies will get it wrong. That's why most companies have gotten out of LTC. If after a couple of years, their current assumptions match with actual claims, then things can improve, but there is always the danger that one or more of those assumptions was off and those errors get magnified over time. Why do you think GNW's counter party credit ratings were lowered? You should read the reports by the credit agencies to get a better idea of this.
"No idea where that statement is coming from."
I was referring to LTC being spun off. It is now being supported by the other divisions in terms of counter party credit. Without the holding company it would not stand on its own. Debt servicing, they were clear, is being taken care of by income from the other divisions. If it could be spun off (ie, stand on its own) that would be the best option for GNW as a whole and they would have done it already. It currently can't even be run off because if they weren't taking new active policies, they would not get higher premiums approved by the states, which they need to support the problematic blocks. You'll have to go back to the CC transcripts for statements about options for LTC and/or breaking up the company in the Q&A sections.
My main point was that breaking up the company (especially separating LTC from the rest) and distributing the parts to shareholders ought to be the priority of management in reporting to shareholders. They ought to give target numbers for capitalization for each division and report their progress toward those targets every quarter and give a plan as to how they get there. Selling off the better parts (like Aus MI and GLAIC) in order to support the bad (LTC) should not be the goal. Spinning off should be the goal.
It is unequivocally a good thing. Carl is 100% right on all his points -- most of which have been made for a long time by some of the very excellent posters on this very board -- but he can scream in management's ear louder than anyone.
The further they get in the money, the lower the time value premium gets. That said, they are thinly traded and tend to move in spurts. They are still a good value. If the stock moves up to 90+ before expiration, the warrants will vastly outperform.
My point was that LTC is dragging down the other businesses because of the lower credit ratings which are directly related to LTC liabilities, and that included in earnings are assumptions about the profit/loss at LTC, which cannot really be known quarter to quarter. They have made clear that LTC cannot stand on its own -- hence, the reason it's still there. MI and Life should be able to stand on their own and are the more valuable businesses anyway, but they suffer because they can't be given credit ratings higher than the holding company, whose rating in turn suffers from its obligations to LTC. From last Q, we learned that sales at the life business were hurt by the lowered credit standing and the same will likely happen at MI if it hasn't already. Hence the urgency in working toward a split -- something that should be Management's top priority in reporting to shareholders.
GNW will report 22 cents in earnings -- maybe they'll beat that number or maybe they'll miss it, but it hardly matters. That's because the LTC liability is so huge and unpredictable (as evidenced by last year's write downs and reviews) that it's impossible for shareholders to know what the real earnings are. Estimates of those liabilities have been so inaccurate in the past, what makes anyone think they're accurate now? And all that's not to mention GNW's eroding competitive position due to credit downgrades. That's why the market doesn't care about price/book or even price/earnings. The only goal here should be a break up or an unwinding of LTC if at all possible and management should make it a priority to report the progress toward a break up quarterly. If capital is required for each division to stand on its own, then they should state what that number is for each and report their progress toward the goal quarterly.
"rotation into under valued ins industry ahead of rate increases next yr"
That's what I thought last year. I guess one of these years it'll be right.
A CFO leaving is never good. The street knows this and they punished the stock for it. Especially leaving abruptly like this, before earnings come out. Assume the worst.
There is no breakup coming anytime soon. LTC has huge liabilities and cannot stand on its own. They couldn't even sell off Life because the rest of the company could not maintain even the current terrible credit rating without it. This company is years away from any turn around or split.