Linn Energy: Modeling 2016 And 2017 Cash Flow

| About: Linn Energy, (LINEQ)

Summary

Linn Energy is expected to have around $400 million to $500 million in positive cash flow in 2016.

There is a risk that 2017 cash flow may be negative though.

Most of its cash flow is expected to be devoted to paying down its credit facility as it faces borrowing base reductions.

Linn may face a challenging combination of negative cash flow while running below the $500 million minimum liquidity required by its credit agreement.

During my last article on Linn Energy (NASDAQ:LINE)(NASDAQ:LNCO), there was some discussion about what cash flow Linn would manage to achieve in 2016. I've modeled out cash flow in 2016 and 2017 below and found that Linn is likely to have around $400 million to $500 million in positive cash flow in 2016, but also has a risk of negative cash flow in 2017 depending on how much oil prices recover. Linn would have decidedly negative cash flow without its hedges.

The challenge for Linn is that its borrowing base will be reduced as its hedges roll off unless oil and gas prices stage a very strong comeback. This would result in that positive cash flow going to pay down its credit facility out of necessity.

Assumptions

Here are some assumptions that go into the model:

  • Daily 2016 production is similar to the midpoint of Q4 2015 guidance.
  • That level of production can be achieved with $450 million in total capital expenditures. I think this may be potentially on the low side for maintaining flat production levels versus Q4 2015 levels. Linn may choose to accept modest declines in production in exchanged for reduced capital expenditures.
  • Realized oil prices that are 90% of WTI, realized NGL prices that are 27% of WTI and realized natural gas prices that are 97% of Henry Hub.
  • Operating expenses range from $2.35 to $2.43 per Mcfe depending on oil and gas prices. This compares to current 2015 guidance for $2.43 per Mcfe. The variance in 2016 operating expenses is due to taxes.
  • Cash general and administrative expense of $220 million compared to 2015 guidance for $257 million to $267 million.

2016 Outlook

The below table shows expected cash flow at various WTI oil and Henry Hub natural gas prices for 2016. Linn is expected to generate positive cash flow that will likely be in the $400 million to $500 million range. This includes its hedges, which could provide over $1 billion in value during 2016. Without its hedges, Linn would have significant negative cash flow.|

2016 Cash Flow In $ Millions

Nat Gas/Oil

$30

$40

$50

$60

$2.00

$376

$447

$519

$590

$2.50

$386

$457

$528

$600

$3.00

$396

$467

$538

$609

$3.50

$407

$478

$550

$621

Click to enlarge

As shown in the table above, it would take an extreme change in conditions to push cash flow above $600 million or below $300 million in 2016. As discussed in my previous article, it is quite likely that this positive cash flow will be needed to pay down Linn's credit facilities though. If oil rises to $60+ sometime in 2016, Linn may have enough of a reprieve with its borrowing base reductions to have a modest amount of extra cash to put to use for something other than paying down its credit facility.

Possible Variances

There are a few items that could potentially affect Linn's cash flow by a significant amount. One of the biggest items is capital expenditures. I've used $450 million as Linn's capital expenditures for 2016 and assumed that it can maintain Q4 2015 production levels for that amount. Linn mentioned that it expected to spend a little less than $470 million in oil and gas capital in 2016, but that doesn't include expenditures on plant, pipeline and other projects, which totaled $80 million in 2015.

Another potentially large variance is reductions in operating expenses. There may be some room to trim operating expenses a bit further in a continued low price environment. A $0.10 change in operating expenses would affect Linn's cash flow by approximately $42 million.

2017 Outlook

For 2017, Linn has significantly reduced oil hedges, so changes in oil prices will have a large impact on Linn's expected 2017 cash flow. Linn does still have a sizeable amount of natural gas hedges. Without its hedges, Linn would still have negative cash flow at $60 oil and $3.50 natural gas.

2017 Cash Flow In $ Millions

Nat Gas/Oil

$30

$40

$50

$60

$2.00

-$243

-$77

$91

$259

$2.50

-$228

-$61

$106

$274

$3.00

-$212

-$46

$121

$289

$3.50

-$196

-$29

$138

$306

Click to enlarge

Even with its hedges, there's a reasonable chance that Linn's cash flow will be negative. This could cause problems similar to BreitBurn's, where there is the potential for negative cash flow to be combined with a borrowing base deficiency (in Linn's case it would be a violation of the $500 million minimum liquidity that it needs to maintain). Linn's borrowing base is expected to be reduced as its hedges come off unless oil and natural gas prices rise substantially.

Conclusion

Despite positive cash flow in 2016 and the potential for positive cash flow in 2017, Linn Energy remains very challenged by its debt position. The primary near-term challenge is dealing with probable reductions in its borrowing base, which will likely result in most of its cash flow going to pay down its credit facility. The situation in 2016 is probably manageable, but if oil is still very depressed in 2017, there could be major problems as Linn would face negative cash flow along with liquidity that falls below the $500 million it needs to maintain its credit agreement covenant.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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