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Linn Energy, LLC (NASDAQ:LINE)

Q2 2014 Earnings Conference Call

August 7, 2014 11:00 AM ET

Executives

Clay Jeansonne – VP, IR

Mark Ellis – Chairman, CEO and President

Kolja Rockov – EVP and CFO

Arden Walker – EVP and COO

Analysts

Brian Corales – Howard Weil

Kevin Smith – Raymond James

John Ragozzino – RBC Capital Markets

Praneeth Satish – Wells Fargo

Robert Balsamo – UBS

Eric Anderson – Hartford Financial

Amy Stepnowski – Hartford

Monroe Helm – Barrow, Hanley

Gary Stromberg – Barclays

Operator

Good morning. Welcome to LINN Energy Conference Call to discuss its Second Quarter 2014 Earnings. Today’s call is being recorded.

At this time, I will turn the call over to Clay Jeansonne, LINN Energy’s Vice President of Investor Relations, for some opening remarks. Please go ahead.

Clay Jeansonne

Thank you for joining our second quarter 2014 earnings conference call. In a moment, I’ll introduce Mark Ellis, our Chairman, President and Chief Executive Officer. But, first, I need to provide you with disclosure regarding forward-looking statements that will be made during this call. The statements describing our beliefs, goals, plans, strategies, expectations, projections, forecasts and assumptions are forward-looking statements.

Please note that the company’s actual results may differ from those anticipated by such forward-looking statements for a variety of reasons, many of which are beyond our control. Additional information concerning certain risk factors relating to our business, prospects and results is available in the company’s filings with the SEC, including LINN’s Form 10-Q for the quarter ended June 30, 2014, which we plan to file later this afternoon, and any other public filings and press releases.

We plan to file LinnCo’s Form 10-Q on Friday, August 8, 2014. Supplemental, financial and operational results, including the company’s statement of operations, selected balance sheet data and guidance table, are posted to LINN Energy’s Web site at www.linnenergy.com in the Investor Relations Center, under Presentations. Following management’s prepared remarks, we will take your questions.

I’d now like to turn the call over to Mark Ellis, LINN’s Chairman, President and Chief Executive Officer.

Mark Ellis

Thanks, Clay. Good morning. Joining us today from LINN are Kolja Rockov, Executive Vice President and Chief Financial Officer and Arden Walker, Executive Vice President and Chief Operating Officer.

I’d like to start by focusing on the strong operational results we generated in the second quarter. LINN reported record average daily production of more than 1.1 Bcfe per day, exceeding the high end of our guidance range and resulting in growth of approximately 2.4% over first quarter volumes. This organic growth occurred across a number of our operating regions, most significantly in California and the Hugoton Basin.

In California, production increased 9% from last quarter to approximately 29,000 barrels of oil equivalent per day. This exceptional performance was driven primarily by growth in the Diatomite of approximately 30% to an average of approximately 9,400 barrels of oil equivalent per day for the second quarter.

In the Hugoton Basin, production increased by 5% to approximately 151 million cubic feet equivalent per day, as a result of our highly efficient capital program in the area. In addition to improving capital efficiency, we are also extremely focused on operating efficiency, which was evidenced by our improved unit cost in the second quarter. During the second quarter, we exceeded guidance expectations on both lease operating and G&A expenses per Mcfe by 7% and 5% respectively.

As we continue to grow the company and consolidate larger positions in certain core areas, we expect to continue to improve our operating efficiency. 2014 has been a year of tremendous transition for LINN, driven by our successful and proactive business development efforts. On the heels of the $4.6 billion Berry acquisition in December 2013, we have announced the intent to acquire or trade for approximately $4 billion to $5 billion of long-life low decline MLP assets.

In addition, we have announced our intention to trade or sell approximately $4 billion to $5 billion of higher decline, more capital intensive assets, in order to fund the transformation. Completion of all the announced transactions, including the intent to sell the Granite Wash and Cleveland assets and the sale or trade of the remaining Midland Basin assets in the Permian, is expected to reduce our capital expenditure run rate by $300 million to $400 million and lower the company’s estimated annual decline rate to approximately 15%. This transactional asset rotation is expected to result in a more stable base business and sets the stage for future growth.

Early in 2014, we laid out a clear strategy for portfolio improvement, which included maximizing the value of our Midland Basin assets in the Permian. One of the alternatives outlined in this strategy, was a trade of some or all of our position in the Midland Basin for a long-life mature producing properties. While asset trades are typically challenging to accomplish at the end of May, we were pleased to announce an asset trade with ExxonMobil.

Under the terms of this trade, we will receive approximately 85 million cubic feet equivalent per day of production with a low 6% base decline, 700 Bcfe of proved reserves and 500,000 net acres in the Kansas Hugoton field, in exchange for approximately 2,000 barrels of oil equivalent per day of production and 25,000 net acres in the Midland Basin. This transaction is expected to close on August 15, 2014.

On our remaining Midland Basin acreage, we continue to see strong interest in the trade or sale, with industry activity and valuations continuing to be robust. Our properties there are comprised of approximately 30,000 net acres, and produced approximately 15,000 barrels of oil equivalent per day in the second quarter.

In an effort to maximize value and further delineate our position, we recently completed our first operated horizontal well which targeted the Wolfcamp B interval. This well had a 24-hour initial production rate of 1,158 barrels of oil equivalent per day, 91% of which was oil and a 30-day rate of 1,017 barrels of oil equivalent per day, 89% of which was oil.

Now, we’ve drilled a second operated horizontal well in the Midland Basin, and are currently in the process of drilling the third. We expect to complete these two wells in the third quarter of 2014.

Following completion of our intended strategic alternatives in the Midland Basin, our Permian position will be focused on mature, low decline oil properties, primarily consisting of water floods in Delaware and Central Basin platforms.

Acquisitions have always been a core strength of LINN, and thus far, 2014 has been no exception. At the end of June, we announced the acquisition of assets in five U.S. operating areas from Devon Energy for $2.3 billion. These assets currently produced approximately 275 million cubic feet equivalent per day, a total proved reserves of between 1.3 Tcfe and 1.5 Tcfe and are an ideal fit for an upstream MLP, LLC with a modest 14% base decline rate. We believe these properties have been under capitalized for some time, and has significant upside and optimization potential.

On Monday, we announced our acquisition, the Pioneer’s interest in the Kansas Hugoton field for $340 million. These assets are currently producing approximately 40 million cubic feet equivalent per day with a 6% base decline rate and include proved reserves of approximately 340 Bcfe and 235,000 net acres making this another ideal upstream MLP, LLC asset for LINN’s portfolio.

Now, we first entered the Kansas Hugoton field with our $1.2 billion acquisition from BP in 2012, which we followed up with this year’s announced ExxonMobil trade, the Devon acquisition and our $340 million acquisition from Pioneer. These four transactions will establish LINN as the largest operator in the Kansas Hugoton field and combined with our Texas Hugoton position we will have pro forma production of approximately 275 million cubic feet equivalent per day with a low base decline rate of less than 7% and more than 1.6 million net acres. These Hugoton assets will represent approximately 28% of LINN’s total proved reserves or approximately 2.2 Tcfe.

In addition to our substantial production and reserve position, we will also own significant interest in two natural gas plants in the area that have combined processing capacity of approximately 690 million cubic feet equivalent per day. Now, we’ve assembled an outstanding operating team in the Hugoton Basin and look forward to leveraging their capabilities across this expanded asset position.

In addition to trades and acquisitions, we have also announced plans for divestitures intended to finance recent acquisitions and further optimize our portfolio. In connection with the announced Devon acquisition, we announced a planned divestiture of our position in the prolific Granite Wash and Cleveland place in the Texas Panhandle and Western Oklahoma. These areas are comprised of more than 147,000 net acres, which produced an average of 225 million cubic feet equivalent per day for June of 2014 and are 97% held by production.

Our technical team has identified more than 1,900 future drilling locations and over 17 different STACK pay zones. Recently we completed a horizontal well in the Lansing formation in Wheeler County, Texas, that had a 30-day rate of 2,243 barrels of oil per day, and 2.5 million cubic feet per day. We believe this well is indicative of the high-quality of our inventory in the area.

In addition, we developed a substantial integrated network of infrastructure including over 170 miles of gathering lines, a 30,000-barrel per day oil handling and storage facility, and water handling facilities, all of which are capable of supporting a significantly expanded rig program.

Also, this week we announced the sale of our rights in the STACK play on 26,000 undeveloped net acres in the Anadarko Basin for a purchase price of approximately $90 million. We will continue to evaluate our portfolio and believe additional value can be realized from other non-producing acreage positions within the company. We expect these transactions to have a powerful impact on the financial strength and stability of LINN Energy and have been driven by the goals of reducing our capital intensity and overall decline rate.

For 2014 budget, we’ve reduced the combined LINN and Berry capital by $250 million. Our efforts in 2014 are expected to further reduce our capital run rate on an additional $300 million to $400 million and lower LINN’s estimated annual decline rate to approximately 15%. Looking ahead, I’m enthusiastic about further efficiency gains, as we prepare our capital budget for 2015.

In closing, I want to thank our employees for their commitment and efforts in achieving these important goals. LINN’s past and future success is due to their dedication and professionalism, which they demonstrate every day.

Now, I’ll turn the call over to Kolja to discuss guidance and his financial update.

Kolja Rockov

Thanks, Mark. During the second quarter, LINN’s oil, natural gas and NGL revenues were approximately $968 million. We reported a net loss of approximately $208 million or $0.64 per unit for the quarter, which includes non-cash losses related to changes in fair value of unsettled commodity derivatives, including the reduction of put option premium value over time of approximately $393 million or $1.20 per unit.

For the second quarter, the company generated net cash provided by operating activities of $481 million and paid distributions to unitholders of $241 million. LINN fully covered its distribution for the quarter and reported approximately $32 million excess of net cash provided by operating activities after distributions and discretionary adjustments.

As many of you know in early July, we received a favorable ruling by the U.S. District Court for the Southern Districts of New York. The court dismissed with prejudice a securities class action lawsuit against the company that have been pending since last summer. We are very pleased with the court’s ruling, which noted that “Plaintiffs are unable to identify a single instance in which LINN’s disclosures of how it calculated adjusted EBITDA, DCF, the distribution coverage ratio or maintenance CapEx were incorrect.” The court also stated that the Plaintiffs acknowledged that “DCF is a measure of cash flow, yet they contend that cash outlays made in previous periods should be deducted in a period in which the cash is not paid out,” which the judge referred to as a “demonstrably flawed argument.” A PDF of the complete 50-page opinion is available on LINN’s Web site under the Investor Center tab.

Following strong operational performance in the second quarter driven by organic growth and efficient cost management, we anticipate a continuation of this trend for the balance of 2014. LINN expects production for the third quarter 2014 to average between 1,210 MMcfe to 1,260 MMcfe per day, and is increasing full-year 2014 production guidance to a range of 1,217 MMcfe to 1,268 MMcfe per day from its previous range of 1,075 to 1,135 MMcfe per day.

We expect to fully cover the distribution and generate excess of net cash provided by operating activities after distribution to unitholders and discretionary adjustments of approximately [$63] [ph] million for the third quarter 2014, and $103 million for the full year.

Guidance for the third and fourth quarters of 2014 includes results from the Mid-Continent assets which the company plans to sell. In addition, third quarter 2014 guidance includes a partial period impact from the pending trade with ExxonMobil and acquisitions from Devon and Pioneer. This revised guidance represents a significant improvement in our results which is the outcome of the positive steps we have taken over the last several months.

As Mark mentioned, during 2014, we have announced we intend to acquire or trade for approximately $4 billion to $5 billion of new assets, substantially all of which were intended to be funded with internal asset sales for trade. As a result of the $2.3 billion acquisition from Devon and prior to the planned sale of the Granite Wash assets, LINN entered into a $2.3 billion of committed interim financing which should provide adequate liquidity.

Since acquiring Berry, and including the intended transactions, we anticipate that we will have reduced our capital expenditure run rate by approximately $550 million to $650 million and reduced our estimated annual decline rate to approximately 15% all with little to no negative impact on operating cash flow. These accomplishments put us in an excellent position to deliver stable cash flows and a sound platform for future growth.

As evidenced by significant transaction activity during 2014, we continue to believe the rationalization of the E&P space between growth assets and material assets is accelerating.

LINN is well-positioned to take advantage of this trend. LINN is a large liquid entity with excellent access to capital. LinnCo’s currency enables us to make C-Corp acquisitions in a tax-efficient structure. And lastly, LINN has the scale and experience to absorb the great deal of transaction activity. Against this backdrop and with current yields of approximately 9.5% and 10% for LINN and LinnCo respectively, we believe significant potential for yield compression exists.

I would now like to turn the call over to the operator for questions.

Question-And-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Corales with Howard Weil.

Brian Corales – Howard Weil

Hey, guys. Good quarter. I know there has been a lot of moving parts lately. Once all this dust settles, I mean, what do you – what’s your ideal kind of debt metrics either on a debt-to-EBITDA or, however, you think is best to look at it? How do you want the company to look from these divestitures?

Kolja Rockov

Brian, this is Kolja. Right now our debt levels, we feel pretty comfortable with where they are, but I can tell you that we’re estimating that those metrics will improve as a result of all the transactional activity. But for me to give you an exact number, I’d have to estimate what the actual sales proceeds and/or trade values would be, and just not prepared to do that right now. But as far as what I’m looking at and what we think it’s going to be, we think that metrics will look a lot better as a result of the transactions that are contemplated.

Brian Corales – Howard Weil

And Kolja, maybe let me – I’ll ask a little bit different way is, when – I mean is it the total corporation being kind of cash flow neutral, when could we see a distribution increase, is it debt dependent or is it more cash flow dependent, where does that sit?

Mark Ellis

Yes, Brian, this is Mark, let me take that one. Obviously, what you have seen us do this year is creating an awful lot of stability for the distribution going forward and building an outstanding platform of assets on which to grow upon. We still hold to the premise that distribution growth really for us comes through accretive transactions and looking forward with the stability that we’ve created this year, great platform for growth, we think the market is going to be there for additional transactional activity, that’s really what’s going to drive distribution growth in the future for us.

Brian Corales – Howard Weil

Okay. And I’m going to ask one more and then I’ll hop off.

Mark Ellis

Okay.

Brian Corales – Howard Weil

So it sounds like you just continue to bolt-on these, I mean, you did a great job in the Hugoton, and probably other areas you want to bolt-on with the shallower declines. Are you all going to do similar things to earmark other divestures or once the Granite Wash is kind of monetized or most of the divestures kind of been done, there won’t be any more major clean up?

Mark Ellis

Yes. Great question, I would tell you right now the organization has got a pretty full plate as we sit. I mean we are actively integrating assets. We obviously have just begun a sales process in the Granite Wash. We have been very active in the trade process in the Permian. So we got a pretty full plate right now.

That being said, we’ll obviously look at the assets going forward and make sure we have the right assets for long-term, distribution stability and the best platform for growth going forward. So I think we are very pretty good right now in terms of the activity that we have out there.

Brian Corales – Howard Weil

All right. I appreciate it. Thanks guys. And good quarter.

Mark Ellis

You bet. Thanks Brian.

Operator

Your next question is from the line of Kevin Smith with Raymond James.

Kevin Smith – Raymond James

Hi, good morning gentlemen. Congrats on a nice quarter.

Mark Ellis

Good morning, Kevin.

Kevin Smith – Raymond James

And really strong guidance.

Mark Ellis

Thanks.

Kevin Smith – Raymond James

Yes. I’d like to spend some time on California. Mark, Arden, you’ve had now two really good quarters in a row where you’ve delivered 9% sequential production growth from an asset base that most of us aren’t expecting to see those type of numbers. Would you mind commenting on why your production is doing so well and thoughts on – and can you keep that base up?

Mark Ellis

Yes. Great question, Kevin. I couldn’t be more pleased with our folks out in California. We knew that we’re a great technical team and had a good field for how to develop those assets, when we bought the Berry transaction, but I would tell you we’ve been very impressed with the results they’re generated.

As far as future growth, we do have a sizable amount of acreage position in the Diatomite for further development. I can let Arden comment on a little bit, but we would like to continue to expand that presence because I think we’ve got a pretty well figured out. They’re performing quite well. So Arden, do you want to add into that?

Arden Walker

Yes. I would just add to what Mark said, and we are pleased with the growth we’ve seen out there. We’ve actually been a little positively surprised with some of the Diatomite recently, we’re actually out-performing some of our initial type curves. I think, what we’ll see is continuation of that over the next several years, it may be a little lumpy, given the fact that we have a group of wells come on and then it may be a couple of quarters before we have group of wells coming on. So I wouldn’t expect it to be at that pace every single quarter. But I think, over time, you will see that growth continuing up into the right.

Kevin Smith – Raymond James

Okay. I appreciate that. And then I guess, staying on that subject, Mark, would you mind talking about the current operating environment in California. Is there any political discussion that you’re watching that could potentially have a negative impact on your operations or development plans?

Mark Ellis

Yes. Kevin, great question. And obviously, we watch the political environment out there quite closely. And I’d tell you, there’s a lot of talk and a lot of dialog, I know there’s been a lot of discussion about steam injection, but let me assure you that we are in Kern County, we are not in some of the counties in which that activity has taken hold. And there’s been no discussion in Kern County that would have any adverse effect on our ability to deliver on our business model and appreciate the future development of our assets.

Kevin Smith – Raymond James

Okay. And then just one last question or kind of a housekeeping, I’ll jump off. Kind of surprised that your realized NGL prices in the quarter was so strong, I was expecting more of – kind of a step down. Did you maybe reject more ethane in 2Q or anything you can comment or attribute to that?

Kolja Rockov

Well, Kevin, we do. We are continuing to be in ethane rejection mode. But we’ve been there all years, so nothing really has changed from quarter-to-quarter. I would tell you we’re in different markets, when you look at other companies, you may see different areas geographically that are stronger, weaker. We have particularly strong NGL pricing contracts in place in a couple of areas, the Granite Wash in particular, as well as in the Hugoton Basin area. I think that’s what probably helps support our NGL prices that we realized for this quarter. I think when you look out in time, there is some weakness in that marketplace and we guided appropriately when you look out through the next two quarters.

Kevin Smith – Raymond James

All right. Thanks. Once again, congrats on the nice quarter.

Kolja Rockov

Hey. Thanks, Kevin.

Operator

Your next question comes from the line of John Ragozzino with RBC Capital Markets.

John Ragozzino – RBC Capital Markets

Hey, Good morning, guys.

Kolja Rockov

Good morning, John.

John Ragozzino – RBC Capital Markets

Congrats on a solid quarter. Kolja, you mentioned a little bit about the second half production guidance. So I just wanted to get a little bit more color on all the moving parts and kind of what the thought process is behind including the yet to be closed acquisitions, however, not excluding the assets that have been earmarked for sale? I mean, explain to me why that’s not double dipping and historically in my career I’ve always seen people update guidance after the fact, when deals are closed. So if you can just walk me through the thought process there?

Kolja Rockov

Yes. I mean I think, look, what we have with respect to pending acquisitions, we know exactly what those effective dates are going to be and that’s always been our practice. When the assets that we might sell or trade, those haven’t been defined at this point, but ones those are completed we would go back and remove the impact of that. We just don’t have that information to guide to it. So we’ve guided to what we know. And then when the other piece becomes apparent, we would guide and report to that as well.

But I would tell you also that, while there are a lot of moving parts, the second quarter is an absolutely clean quarter, the fourth quarter is an absolutely clean quarter and there is a lot of strength there absent all the moving parts that are a little bit confusing in the third quarter. So we’re happy with the base business, we’re happy with the new acquisitions. And I think our methodology is very consistent, it will be applied when we know what the facts are regarding the pending trade or sales.

John Ragozzino – RBC Capital Markets

Can you maybe give us a ballpark estimate, on what you think the cash flow impact is? I think that Devon identified about $350 million from the assets, that they let go, and perhaps what you guys expect from the Granite Wash and how that compares, when you think about the decline rate differences?

Mark Ellis

Not ready to do that yet, just because we don’t have the final numbers on the Devon acquisition. But also, there is just a lot of moving parts John. I don’t think we’re prepared to give you that number at this point. But as you know, that the Granite Wash on a four rig program is declining, so it’s contribution over time is less while the Devon assets are fairly flat, so it just depends on which period you want to isolate. I think, the further out you go, the better that accretion looks, so those are some of the variables, but all of that will be crystal clear when we close these things and report.

John Ragozzino – RBC Capital Markets

Okay. That’s helpful. Just a little bit of housekeeping on some of the liquidity stuff. Can you remind me how should we be thinking about the total enterprise liquidity situation, you’ve got $1.8 billion of availability on the LINN revolver out of a $4 billion commitment? And the Berry revolver has got $1.2 billion of availability, am I thinking – am I double counting by saying that you’ve got $3 billion of availability on the total commitments or how to think about it?

Kolja Rockov

The Berry facility is $1.2 billion which is fully drawn and we are not able to utilize that so when you think about liquidity just look on the LINN side and there we have about $1.75 billion of availability into that line. And going forward, obviously when the pieces start moving, you will be able to see what that is, I mean, it all depends on what kind of proceeds are generated from the Granite Wash sale and then what happens with the remainder of the Permian, whether that’s traded or sold. But with the interim financing of $2.3 billion, which matches up with the Devon acquisition, we feel like we’ve got plenty of liquidity to get us through the conclusion of those processes.

John Ragozzino – RBC Capital Markets

I apologize. I read the release, it’s having $1 million of outstanding and borrowings as opposed to borrowing capacity, so that’s my fault. And then as we wait for additional updates on the divestiture processes, you guys have got a recently upsize ATM pertained view, expect to rely on that in an accelerated manner or can you give us an update on what you’ve done to date on the ATM?

Kolja Rockov

We’ve done nothing on it. I think we had an ATM and a buyback program on LINE, but I think we’ve been a bit remise in terms of just putting in place one for LinnCo as well. So we kind of took this opportunity to do some housekeeping and level set both of those programs to give us flexibility to go either way. But we have not used them and really aren’t going to guide to what we are going to do there. I think we just have wait and see. But again, I think the main message is, we’ve just lined up both programs to be equal to give us flexibility going forward and it’s just a bit of housekeeping, so just stay tuned for future quarters and we’ll see what happens.

John Ragozzino – RBC Capital Markets

Okay. And then going back to the revolver. Again, when you consider 1.4% acquired from Devon, another 340 Bcfe on TXD, 700 Bcfe from Exxon and if we just assume that we – it goes past October 31 before we see a meaningful Mid-Continent divesture. You’re talking 400 million barrels of additional reserves. What type of increase to the revolver would you expect?

Kolja Rockov

Well. I don’t know, honestly we’ve got to put all those numbers into the process with the banks to figure out what that would be, but that’s not really the way we are running the business. I think we are using the $2.3 billion of interim financing to give us time to sell the Granite Wash and trade or sell the remainder of the Permian and when all that dust settles, just conservatively I would say we’ll probably end up in the same place, but there is a chance that could be better.

John Ragozzino – RBC Capital Markets

Okay and just two more quick ones. Can you perhaps give us a rundown of any additional non-core assets either producing or undeveloped acreage that perhaps hasn’t gotten much attention in the past, but maybe very right for divestitures similar like this STACK way?

Mark Ellis

Yes, John. I mean there’s not much I want to draw your attention to. I mean there are some things that we are looking at right now. But I am not ready to I guess release those in terms of these are the things that we have on the plate. Like I mentioned earlier on the earlier question, I think that Brian had – we’ve got an awful lot on our plate right now with the programs we have out there both from acquisition and sale process. And I think that’s enough for the marketplace right now.

John Ragozzino – RBC Capital Markets

Okay. And then just with the disruption in the infrastructure and refining complex in Permian basin, we saw some meaningful blowouts into the Midland Basin differential for a significant portion of the quarter. Right now, jumping to the crude oil differential guidance and we also saw a slight I think an uptick in your NGL price realization as expected. You guys seem like a bit of surprise. Any comment there?

Kolja Rockov

Yes. Let me do the NGL one first. We had 38...

John Ragozzino – RBC Capital Markets

I’m sorry. It was a downtick.

Kolja Rockov

Yes. We are being conservative there, and projecting more weakness in the NGL prices. So we are stepping down from around $38.50 per barrel to $35 flat. And then with respect to the Permian, we produce oil obviously in a lot of different regions. So what you are looking at is a blend of those numbers. But I can tell you with respect to Mid-Cush specifically, that was about $5.30 off TI in Q1. It was $9 off in Q2. So you had pretty big degradation in blowout there. Like you said, that’s probably accounted for about $23 million less revenue quarter one to quarter two for us.

But going forward, we are projecting $776 in the third quarter and $683 in the fourth. And I think that’s pretty much flat with what the forward strip is in Q3. And then in Q4, the strip projects only $3 off. So we are actually conservative by almost $4 a barrel in that number. So I would say with respect to Mid-Cush, we’re actually more conservative than the curve, but it’s also included in the total for all the oil producing regions we have. So it’s kind of hard for you to split out, but I think I just gave you the details.

John Ragozzino – RBC Capital Markets

Great. Thanks very much for the color and great quarter.

Kolja Rockov

Thanks, John.

Operator

Your next question comes from the line of Praneeth Satish with Wells Fargo.

Praneeth Satish – Wells Fargo

Hey, guys. Good morning. Just a couple of quick questions. I guess, first thanks for the guidance around where you think the future decline rate will shake out? I was just wondering if you could provide the decline rate maybe on a year-by-year basis over the next few years. It’s really just for the sake of comparison with some of your peers that gave average decline rates?

Mark Ellis

Praneeth, we really don’t have that number. I mean, what we gave you is what we see the first 12 months of a calendar year decline rate. We think that’s the conservative number and the right number that we are talking about. If we were to project that out, obviously it goes down over time. But we really think the number that we are providing is the appropriate number.

Kolja Rockov

But let me add something to that too. I think when you look at 15%, what that includes is all the assets that we have earmarked to either trade or sell. It does not include the impact of what assets we might purchase or trade for in that equation. So that number has – the chance is going lower.

And so, giving you a longer term number is a little difficult, because we basically have identified more assets to sell or trade than we’ve identified assets to buy on the backside. So I think it’s pretty conservative what we’ve given you, because it’s a) one-year number and not a long-term number. So it’s the highest decline rate to publish. And then the second component is like I said we haven’t spent proceeds or traded for the assets. And so assuming that those assets are sub-15 that we acquire or trade for that number could be lower.

Praneeth Satish – Wells Fargo

Got it. And then I saw with the Pioneer acquisition that you are picking up some processing assets or at least an interest in a plant. I guess did you place a lot of value on those assets, is it a big piece of the overall pie?

Mark Ellis

It was just a piece of the overall program at Pioneer. It is a nice processing facility that will be operated by us going forward. Now, we’ve got a really sizeable position there and it’s going to be interesting to see how and when we deploy our talents across our broader asset position what all we can get from an operational efficiency standpoint out there. So very encouraged by the positions that we picked up there like the integration of the assets.

Praneeth Satish – Wells Fargo

Got it. And just last question from me. I was just wondering I you could break out how much of the $300 million to $400 million decline in CapEx is growth CapEx versus maintenance CapEx?

Mark Ellis

Yes. I can’t – that we won’t break that out at this point in time.

Kolja Rockov

I mean we have to make some assumptions there Praneeth, I mean I think when you take the CapEx run rate for Permian and the Midland Basin Permian and you take the CapEx run rate for Granite Wash, we come up with the number like $470 million, $480 million. And then we have new assets that are going to come in, right? So that’s why we’ve narrowed it down because those new assets will have some capital spending on them, and so the net we believe to be $300 million to $400 million, so it’s kind of – you’re making some assumptions just to get to the total and then to further slip that without having identified what assets are coming in is just difficult for us to do.

Praneeth Satish – Wells Fargo

Okay. That’s it from me. Thank you.

Mark Ellis

Thanks, Praneeth.

Operator

Your next question comes from the line of Robert Balsamo with UBS.

Robert Balsamo – UBS

How are you doing guys? Thanks for taking my call. I want to look at the guidance you guys put out for the full-year CapEx. Could you address the legacy production and kind of how that your original guidance would have changed, obviously there’s an impact to your partial quarter and through the third quarter in acquisitions?

Mark Ellis

Yes. I think, your question is....

Robert Balsamo – UBS

Quarter-over-quarter?

Mark Ellis

So, the question is how are the legacy asset performing through the course of the year?

Robert Balsamo – UBS

Correct.

Mark Ellis

Relative to original guidance?

Robert Balsamo – UBS

Correct.

Mark Ellis

Okay. Yes. Good question. Obviously a lot moving parts in the third quarter. We’ve looked at that and when we look at it, our original program was to generate growth over the course of the year at around 4% and that’s exactly what we’re on trend to do. Kolja mentioned earlier, first quarter and second quarter were purely organic and very clean quarters, and we’re actually probably a little bit ahead of our growth targets in both of those quarters. So when you carry that out through the third quarter and fourth quarter, we’re really right on track to deliver on the expectations as originally set out.

And I got to tell you, I got to give the organization a lot of credit for executing during some pretty difficult times for us or confusing times for us with all the ins and outs of assets and transactional activity going on. So they’re really executing quite well on the operating plan.

Robert Balsamo – UBS

Great. And then just a follow-up, the 15% decline rate at end of the year post-Granite Wash sale, do you guys have the rough number without the Granite Wash, kind of where you are with just the acquisitions to-date, assuming that everything closes in the third quarter?

Mark Ellis

No. We didn’t split that out. And I don’t have that number off the top of my head.

Robert Balsamo – UBS

All right. That’s it for me. Thanks, guys.

Mark Ellis

You bet. Thank you.

Operator

Your next question comes from the line of Eric Anderson with Hartford Financial.

Eric Anderson – Hartford Financial

Hey, good morning. Great quarter. Couple of questions if I may on the Hugoton assets that you’re really seem to be building up position in. If any thought with regards to the second plant that you’re going to be picking up from the Pioneer transaction and will be operating? Two, link it to your Jayhawk plant either to provide for a redundancy or efficiencies and processing some of the NGLs?

Mark Ellis

Yes. What I would say, I mean good question, obviously, we built a strong position there. I mentioned earlier, really looking forward to really looking at development of the entire area now that we have a really large asset position and a great gathering and processing facilities there. So I think it’s early to say, what we might do in the future with the entire facility position there, but obviously we’ll take everything in the consideration as we look at getting the most out of that asset position.

Kolja Rockov

And Eric, I would just add, there is infrastructure in place today to move, physically move gas between those two facilities and there is gas that moves between those facilities during interruption period. So it’s not like we’ve got to go out and spend bunch of money to make that happen, it exists today and we have benefited from that flexibility and the path as two different owners, and I think we’ll continue to benefit in the future as we own both of those facilities.

Eric Anderson – Hartford Financial

One thought I had is that or one thing that, now I was thinking about it as I know that formation has got a fairly decent production of helium, which is quite valuable and didn’t know if one of the plants did a better job at extracting helium than the other?

Mark Ellis

I don’t know about extraction efficiencies, ours is a very efficient plant and we are a major helium producer and do sell a fair amount of helium in our mix.

Eric Anderson – Hartford Financial

Okay. And then just as a follow-up, if we went back in time to 2012, when you blocked the first asset from BP. How things evolved compared to your expectations? I do remember you talked at the time about having a fair degree of excitement about rig completions and chassis formation. So I’m just wondering kind of how things have evolved over the last couple of years? Obviously, you’re happy with the basin or you wouldn’t be adding to it?

Arden Walker

Eric, this is Arden Walker. What I would tell you there is, we’ve had a lot of success on the recompletion side, we’ve gone in, and I think the numbers are close to 500 wells that we’ve gone and worked on since 2012 when we took over the original BP properties. We think, we’ll have similar types of opportunities with both the Exxon assets, the Devon assets, and the – now, the Pioneer properties as we do believe we’ll have continuation of opportunities there.

I think in addition to that, we’ve been very successful with our drilling program. We’ve had, we drilled about 40 wells there in 2013. We’ve already drilled about 70 wells of our 80-well program in 2014, very predictable, repeatable type projects we’re getting good returns there. In fact, I would tell you, I’d be expecting to pick up additional rig out there in 2015 to accommodate the now larger portfolio.

We see probably 1,000 locations out there in inventory to drill. So both on the drilling sides as well as recompletion side as well as just optimization types of opportunities, we’ve been able to drive cost down and I think that’s where we get the leverage of being bigger in a particular area.

Eric Anderson – Hartford Financial

And that’s really not even taking into account that some of the Exxon properties are being processed by different plant?

Arden Walker

Not yet.

Eric Anderson – Hartford Financial

So, I mean that’s potential more upside for you in terms of efficiency?

Arden Walker

That’s right.

Eric Anderson – Hartford Financial

Thank you very much for taking my questions.

Mark Ellis

You bet. Thank you.

Kolja Rockov

Thanks.

Operator

Your next question is from the line of Amy Stepnowski with Hartford.

Amy Stepnowski – Hartford

Hi. I was wondering if you could just talk a little bit more about the leverage. You said on the call that your content with where – you weren’t worried about where leverage is right now, it could potentially go lower, when you close out these transactions. But just from a long-term perspective, while you are satisfied with where it is, is the goal to go lower?

Kolja Rockov

Yes. I think it’s always to go lower. I think what I am trying to say is, where we now we are comfortable, particularly because you’ve had a pretty big rotation in the kind of assets that we have I mean with the onboarding of Berry and then with the announced trades and sales lowering the declined rate, lowering the capital intensity vis-à-vis the current leverage, I think we’re comfortable.

But you haven’t seen the benefits I guess yet of the rest of the transactions being completed, which I think will bring the leverage ratios down yet again. But overall, I think our goal is always to try to get that number down, to add more stability to hopefully compress both our cost of capital on the equity side and the debt side and make us more competitive going forward. So I think the Berry transaction went a long way towards reducing our leverage metrics and the things that we are contemplating this year, will go long way again, towards reducing them and then we’ll be opportunistic going forward, so.

Amy Stepnowski – Hartford

Okay. Thanks. And then just one other question on the CapEx, and we talked about $500 million to $600 million reduction or decline on the run rate from when you first got there. Can you just help me out with what you consider the run rate to be, the numbers that moved around a bit?

Kolja Rockov

Yes. I mean it was $8 billion with Berry and then we took it down to $1.550 billion during the budget process for 2014. And then, what we were talking about earlier was when you take the Permian CapEx, with the Granite Wash CapEx and that’s Permian Midland area, that’s around $470 million to $480 million total. And then what we said is, we’re cutting another $300 million to $400 million, so we’ve made basically an assumption that the new assets that we onboard would be have a run rate of anywhere from $50 million to $150 million.

But until those are identified it’s very hard to be more specific. So that’s the best estimate we can give right now. But that’s still, like you pointed out $500 million to $600 million is a pretty dramatic move. And then, sort of the icing on the cake, as we think we’ve done it without much degradation in cash flow generation. So that’s kind of what the run rate is and I can’t get any more granular than that until we identify the specific assets that are going to be bought or traded for with what’s been announced.

Amy Stepnowski – Hartford

Okay. Thanks you very much.

Operator

Your next question comes from the line of Monroe Helm with Barrow, Hanley.

Monroe Helm – Barrow, Hanley

Congratulations on executing your game plan. Just two quick questions. Historically, you’ve been able to keep some production out from your acquisitions on the forward market but the forward gas curve that you wouldn’t regret right now. Can you talk about how that’s impacting your ability to make acquisitions at this point in time and what you can do to offset it – anything or you’re just going to let your hedge position decline over time, as far as the gas goes? And I’ll come back with the second question.

Kolja Rockov

Yes. Monroe, it’s a great question. I think when you look at all the different moving pieces, you have the Devon assets coming in which are primarily gassy. And then you have the Granite Wash assets coming out, which were also primarily gassy and some of the other moving pieces. We actually feel like the hedge book, we’ll have to wait till everything is completed obviously, but right now the hedge book the way it is, it’s actually pretty good covering us on all the moving pieces. So we don’t feel like we need to add or subtract to it at all. But going forward, the strip at four and change, for five years, it’s kind of what we plug in to incremental acquisitions. And so that’s going to give you an answer that derives what’s your bid is going to be. We haven’t seen that be a strategic disadvantage in any material way.

And then the other piece to think about is in California, we’re consuming quite a bit of natural gas. So what we’re trying to do post Berry is the unhedged on that piece so we have kind of a natural hedge to your LOE input there. And so that’s – I guess the recent acquisitions we’ve made, if you think about it, we’ve added a lot of gas, but we haven’t intended to hedge that, because that’s sort of a natural hedge against the input foreseen generation in California. So the longest winded of saying that, at the end of August, this shuffling, the hedge book we have now actually covers this exactly where we want to be. So no incremental needed.

Monroe Helm – Barrow, Hanley

Right. And it should not be the case with the asset swaps, I’m just wondering about, going forward if you need to – you sound exactly of gas assets to acquire and given the forward curve, something that you would need to sell some of your other gas assets, we already have hedges in place or would you like the hedge position to decline over time for the right asset?

Kolja Rockov

No. No, what we would do is, I think we would incorporate what that gas strip is going forward into our bid economics and that would give you an answer and if that’s not competitive, then we don’t – we may not win. But I haven’t seen that be an issue, I think that’s a little bit more of an issue on the oil side with the big backradation I mean, the gas curve, has a little bit of a U in it, but over a five-year period, it’s kind of fairly flat.

Monroe Helm – Barrow, Hanley

All right.

Kolja Rockov

So I haven’t seen that really be much of an issue.

Monroe Helm – Barrow, Hanley

Okay. On the Granite Wash, I assume that or the debt rooms already opened and is this asset, you think more likely to be sold or swapped?

Mark Ellis

This is a cash sale, as what we’re looking at, that process is up and running, data is available. We’ve had a tremendous amount of interest in this process. So really looking forward to concluding the process as we look out over the next several months.

Monroe Helm – Barrow, Hanley

Okay. So it would be this year event, in your opinion?

Mark Ellis

We’d like to have it to be this year event, absolutely.

Monroe Helm – Barrow, Hanley

Okay. Thanks for your answers.

Mark Ellis

You bet.

Operator

And we have time for one more question. Your final question comes from the line of Gary Stromberg with Barclays.

Gary Stromberg – Barclays

Hi, good morning.

Mart Ellis

Good morning, Gary.

Kolja Rockov

Good morning.

Gary Stromberg – Barclays

Just a follow-up to Amy’s question on the CapEx, do you have guidance for full year 2014 in CapEx or we still look at $1.55 billion or $1.6 billion?

Kolja Rockov

I think that’s right Gary, I mean the assets that are coming into the company; the spending this year is very minimal if any. So yes, I think that’s a good number.

Gary Stromberg – Barclays

Okay. And then second question, just timing on the Permian sale or swap, is that also you think in the next couple of months?

Mark Ellis

Yes, Gary. We’re still active on a number of those packages, obviously we’ve got the one closing that’s coming up and I think we said on the 15th of August is the first trade that we have announced, any other activity would be later this year that we would like to conclude something this year on the remaining position in the Permian as well.

Gary Stromberg – Barclays

And would it be sold as a one package or could it be multiple packages?

Mark Ellis

It could be either.

Gary Stromberg – Barclays

Okay. Great. Thank you.

Mark Ellis

You bet.

Operator

And there are no further questions at this time. I would now like to turn the conference back over to Mark Ellis, CEO.

Mark Ellis

Okay. Well, thanks and thanks for everyone for participating this morning. That concludes our call.

Operator

Thank you. This does conclude today’s conference call. You may now disconnect.

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Source: Linn Energy's (LINE) CEO Mark Ellis on Q2 2014 Results - Earnings Call Transcript
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