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Why I'm Still Hopeful That Linn Energy Can Avoid A Distribution Cut
- Units of LINE and LNCO have crashed this year alongside the collapse in WTI crude oil prices. With yields touching 30%, clearly investors are expecting a distribution cut.
- However, LINE and LNCO enjoyed a major relief rally on December 16th and 17th. Management announced additional debt flexibility thanks to the company's asset sales.
- Investors will know more when LINE releases its 2015 capital expenditure plans and fourth quarter earnings, but until then, I remain hopeful the distribution can survive unscathed.
- Linn Energy in the latest quarter generated 65.5% of its $937 revenue from oil priced on average at $90 – this revenue stream is about to be severely cut.
- The company’s substantial derivatives book will soften the blow from the severe drop in oil prices; however, the drop will still cause the need for re-structuring of financial plans.
- A review of Linn Energy’s product mix and cost structure shows that its current break-even cost is reached at $55 oil.
- The recent common unit drop from $30 in the summer to under $10 today has driven the distribution yield to over 28% - signaling the market expects a distribution cut.
- In my opinion, the best risk-reward Linn Energy play currently is in company B1 rated Senior Notes, not the common units.
Why A Dividend Cut Should Not Scare Linn Energy Shareholders
- Income investors are spooked from Seadrill and North Atlantic Drilling's dividend cut.
- The spiraling drop in oil prices add to uncertainty for Linn Energy's dividend.
- Linn Energy is a compelling investment idea even if its dividend is cut.
- Alerian removed Linn from its large cap MLP Index due to the recent sell-off.
- Linn is an example of a company that got riskier as it grew due to an increasing reliance on debt funding.
- With falling oil prices, Linn has to cut its distribution, and it will struggle to access capital markets.
- Investors should sell Linn before it reaches single digits.
Here Is Why I Reluctantly Added To My Investment In Linn Energy
- Exploration and production MLPs are getting crushed due to the decline in oil prices. I own Linn Energy through LinnCo, and am sitting on a sizable loss.
- The sentiment is so overwhelmingly negative that one must wonder whether it has gone too far. To date, LinnCo has maintained its distribution, which now yields an astounding 22%.
- I can't help but think the doomsday scenario surrounding Linn Energy is not realistic. Its hedging practices are keeping it afloat right now, and its distribution might just survive.
- This is why I gave in to temptation and added to my position in LinnCo on December 9.
Linn Energy Keeps Distribution Intact, But My Confidence Is Not Fully Restored Yet
- With oil prices collapsing and Linn Energy units losing nearly half their value in the past three months, its 17% yield looks unstable.
- Surprisingly, Linn Energy maintained its December distribution, deciding to keep the distribution steady and not cut it, even in light of the carnage in the oil markets.
- Linn's hedging policy may provide enough cover to keep the distribution intact for now, but investors should wait until fourth-quarter earnings in order to be truly confident in the distribution.
Linn Energy: Is The Market Pricing In A Distribution Cut?
- Both LINE and LNCO have seen extremely volatile trading in recent days.
- This is likely a result of falling oil prices.
- Is the market pricing in a distribution cut?
Linn Energy: Cutting Distributions And Capex May Be A Wise Strategy
- OPEC's decision to maintain production volumes unchanged may mean a deeper and longer cyclical trough for oil.
- E&P operators with high leverage and strong exposure to oil prices need to adjust their financing and capital decisions in order to weather the storm.
- Given the very high debt level, Linn Energy may need to accept declining production and reduced or suspended distributions as a prudent necessity.
- LINE and LNCO dropped by 16% and 18% on Black Friday, pushing yields well above 15%.
- The market seems to give no credit for the derivative hedging activities of the upstream MLPs.
- Looking at the Linn Energy derivatives gains and losses trends indicates the company could post a monster derivatives gain for Q4, enough to cover distributions for all of 2015.
- Falling oil prices on Friday caused a broad sell-off in oil-related businesses.
- Linn Energy's shares collapsed 17%, and reached a new 52-week low.
- Mr. Market is in complete panic mode, but oil prices will likely recover.
- Long-term investors could find some decent value in Linn Energy at just $18 per share.
OPEC Changed The Game, Why I'm Now Considering Selling My Stake In Linn Energy
- I own Linn Energy through shares of LinnCo, its financial holding company. OPEC's decision to not cut production is a clear attempt to destroy onshore E&P operators.
- Linn and LinnCo's yields are dangerously high, at 15% and 17%. The market must be anticipating a significant cut or suspension, just as we saw with Seadrill.
- Income investors should consider integrated stocks like Chevron for their lower volatility and more reliable dividend growth.
- With OPEC deciding against a production cut, oil prices will be under pressure for some time.
- Given its already high leverage, Linn Energy is particularly vulnerable to lower prices.
- Linn will not generate enough cash to cover its $960 million distribution if prices remain low, and increased borrowing is infeasible given high leverage.
- As such, investors should exit Linn.
Linn Energy: Strong Buy On This Ridiculous And Short-Sighted Sell-Off
- Linn Energy's shares are down substantially over the last couple of weeks.
- Lower oil prices took a toll on Linn Energy's valuation, but they are almost sure to rebound.
- At $23, Linn Energy is an excellent contrarian purchase as Mr. Market quotes irrational prices.
- Linn Energy offers investors both capital appreciation potential AND a 13% dividend yield.
13.1% Distribution Linn Energy Had A Good Q3, But It May Be In Trouble If Oil Prices Don't Rise. Sell?
- LINE has had distribution coverages greater than 1.0x for the last two quarters.
- LINE guidance indicates that the distribution coverage will sink significantly under 1.0x for Q4 2014.
- Current low oil prices, about 65% oil hedging in 2015, a $75/barrel WTI forecast by Goldman Sachs for FY2015, etc. spell trouble ahead for LINE.
Update: Linn Energy's Earnings Show The Partnership Is Benefiting From The Change In Strategy
- The partnership announced its third quarter earnings.
- As we expected, the addition of mature assets have resulted in immediate increase in production, revenues, and cash flows.
- Linn Energy will continue to add more mature assets, which will allow the partnership to have stable revenues and cash flows in the medium-long term.
Linn Energy: Weak Guidance Overshadows Strong Q3 Results
- Linn Energy reports its Q3 2014 results.
- However, guidance for Q4 was quite weak.
- At current prices, Linn Energy yields nearly 12%.
11.4% Distribution Linn Energy Completed Its Needed 1031 Exchange Trades To Match The Devon Buy
- LINE announced the purchase of about 896,000 net acres of Devon Energy properties at the end of Q2 2014.
- On October 3, 2014 LINE announced two sales that together will form the "tax free" 1031 exchange for the Devon Energy purchase.
- LINE appears to have come out far ahead on this assets swap. The article reviews the details of the gains.
- LINE has lost revenues due to the recent oil price declines; but its savings on CapEx due to its recent "trades" should allow CapEx savings to offset oil revenues declines.
LINN Energy: Recent Correction Closes Valuation Gap
- LINN lost over $3 billion in market capitalization since early July.
- The units’ re-pricing largely addressed the wide gap that existed earlier between the enterprise value and the PV-10 of proved reserves.
- While the recent price move is way exaggerated at this point, the correction highlights the units' vulnerability due to high debt, high G&A and dispersed, high-cost asset base.
Tue, Dec. 16, 12:58 PM
- Linn Energy (LINE +22.1%) will delay its 2015 budget and use proceeds from assets sold in Texas and Oklahoma to cut debt 16%, VP of investor relations Clay Jeansonne tells Bloomberg, following other energy firms in putting spending on hold and reducing debt amid investor concern about payouts.
- LINE said yesterday that it closed the sale of its holdings in the Granite Wash and Cleveland plays in Texas and Oklahoma for $1.95B, and Jeansonne says expectations that the sale wouldn’t go through had helped push down the stock.
- Shares are turning around spectacularly from earlier losses as oil prices rebound.
- Earlier (I, II): Linn Energy, LinnCo (LNCO +15.2%)slashed by Baird
Tue, Dec. 16, 8:28 AM
Mon, Dec. 15, 12:52 PM
Wed, Dec. 10, 11:49 AM
- Stifel maintains its Buy ratings for Linn Energy (LINE -6.2%)and LinnCo (LNCO -9.9%) but cuts its target prices for both to $22 (from $27 for LINE and $33 for LNCO), as the companies trade sharply lower amid today's oil price skid.
- On LINE, Stifel believes distribution coverage will be challenged should the current commodity environment persist during FY 2015, but that management is committed to maintain the distribution; investors should benefit from LINE’s moves to lower the corporate decline rate which lowers the maintenance capex needs.
- With ~$2.5B in liquidity, the firm thinks LINE could pursue $1B in acquisitions without being forced to access the capital markets.
Mon, Dec. 1, 3:32 PM
- Prices of bonds issued by low-rated energy companies are falling sharply despite today's rebound in oil prices, amid worries that this year’s slump in oil markets will lead to a cash crunch.
- The most actively traded junk bonds at midday were Linn Energy’s (LINE -5.8%) two B-rated notes due 2019, which fell 9% to $0.82 on the dollar, pushing yields up to ~11.5%; Halcon Resources' (HK -1.3%) 2021 bond, which started weakening Friday, has dropped 10% today to $0.69 on the dollar, pushing up the yield to 17%.
- Energy XXI’s (EXXI -15.8%) debt which matures in 2017 fell 5.5% to $0.85 on the dollar and yielding 15.5%; Quicksilver Resources' (KWK +38.3%) bonds due 2016 have rebounded slightly but still trade ~$0.22 on the dollar.
- Should oil prices fall below $65/bbl and stay there for the next three years, J.P. Morgan high-yield energy analyst Tarek Hamid estimates that up to 40% of all energy junk bonds could default over the next several years.
Mon, Oct. 13, 2:57 PM
- Linn Energy (LINE, LNCO) is the largest oil and gas producer structured to resemble an MLP, but it is vulnerable because of considerable exposure to commodity price risks, unlike the vast majority of other MLPs, Goldman Sachs says.
- Most energy MLPs have a fee-based business as well as hedged positions when there is commodity exposure, ensuring that such companies will be insulated against commodity price declines, but Linn is not one of those companies, according to Goldman's analysis.
- The deteriorating pricing environment continues to hit oil and gas producers hard; last week, Linn was among the companies with the biggest drops - more than 11%.
- LINE -6.3%, LNCO -6.5%.
Tue, Oct. 7, 11:58 AM
- More analyst praise comes in for Linn Energy's (LINE, LNCO) recent asset sale, as RBC Capital says Linn has successfully exited the majority of its high decline, unconventional assets - including its entire Granite Wash and Cleveland positions, its Wolfberry assets and a majority of its Permian properties - which have dragged on portfolio efficiency.
- RBC says the final step in the asset rationalization strategy will be the sale of the remaining Midland Basin assets, which the firm believes ultimately will fetch up to another $750M in proceeds.
- RBC sees the moves ultimately reducing Linn’s overall portfolio decline rate to a far more manageable 15% on a pro forma basis; also, estimated $300M-$400M in capex reductions for 2015 further enhances Linn’s distributable cash flow generation potential.
- Earlier: Linn Energy asset sale praised, despite lower EBITDA outlook.
Mon, Oct. 6, 3:23 PM
- Analysts are touting Linn Energy’s (LINE, LNCO) recent $2.3B asset sale as an example of the company doing what it said it would do in achieving its objectives of lowering its overall production decline rate, reducing its capital intensity, and divesting assets that don’t complement its portfolio of mature assets.
- Though forecasting the net effect of the transactions as lowering EBITDA, Raymond James believes the reductions in maintenance capital spending will result in immediate distributable cash flow accretion of ~$0.06/unit, resulting in a 2015 distribution coverage ratio of 1.17x.
- Credit Suisse expects additional moves to come as LINN looks to fully exit its Permian Midland basin position, which should facilitate further M&A.
Fri, Oct. 3, 9:00 AM
- Linn Energy (LINE, LNCO) has struck deals to sell oil production assets in the Texas panhandle and western Oklahoma for $2.3B to repay debt it took on to finance its acquisition of Devon Energy assets in August.
- Linn will sell all its Granite Wash and Cleveland properties to affiliates of investment group EnerVest (OTC:EOSOF) for $1.95B, and is selling related midstream facilities.
- Additionally, the company will sell about 7,200 net acres in the Wolfberry field in Texas's Permian Basin to Fleur de Lis Energy for $350M.
- Linn expects to close the transactions in Q4, after which it would be left with 6,600 net acres producing 8M bpd in the Midland Basin.
- Previously: Linn Energy said to tap banks for $2B oil asset sale
- LINE +1.4%; LNCO +0.5% premarket
Fri, Sep. 19, 3:40 PM
- Linn Energy (LINE, LNCO) and ExxonMobil agreed to swap assets, with XOM receiving land in the west Texas Permian Basin and Linn getting land in California, which Credit Suisse views as an "incremental positive step" toward eventually resuming distribution growth.
- While the deal was only a portion of the remaining Permian assets Line has been looking to trade or sell, it will be accretive in 2015 and will provide Linn with underdeveloped assets to develop over time in a capital-efficient manner, Credit Suisse says as it continues to watch for further steps that can strengthen the balance sheet and cash position to take distributions higher.
Thu, Sep. 18, 5:23 PM
- Linn Energy (NASDAQ:LINE) and LinnCo (NASDAQ:LNCO) agree to swap a portion of their Permian Basin properties to Exxon Mobil (NYSE:XOM) for operating interests in California's South Belridge Field.
- Linn will receive XOM's interest in its Hill Property located in the South Belridge Field, which it believes offers significant upside potential through optimization projects, increased steam injection and extensive down spacing from more than 300 future drilling locations; current production totals ~3.4K boe/day but Linn estimates total resource potential of ~67M boe.
- In exchange, XOM will receive ~17K net acres in the Midland Basin core area in west Texas that is most prospective for horizontal Wolfcamp and Spraberry development, and now produces ~4.7K boe/day, plus 800 acres in the New Mexico Delaware Basin.
- The deal is the second such asset swap this year by the companies (earlier).
- LINE +1.4% AH.
Mon, Sep. 8, 12:49 PM
- Linn Energy (LINE -0.5%) and LinnCo (LNCO -1.8%) are reinstated with Outperform ratings at Credit Suisse, which sees a 20%-plus total return outlook over the next 12 months and eventual distribution growth.
- CS believes LINN is taking the right steps toward resuming distribution growth, and moving past the challenges of last yea; while the firm does not see LINN in a position to take distributions up in this year or the next, but does forecast distribution growth by early 2016.
- Further accretive M&A dependent on upcoming Granite Wash and Permian sales could speed the timetable, the firm says.
Thu, Sep. 4, 3:23 PM
- Linn Energy (LINE -1.5%) and LinnCo (LNCO -1.2%) are poised for a great 2015, Howard Weil analyst Brian Corales believes, with Linn on track to be very close to achieve its ultimate goal of total cash inflow equaling total cash outflow, which would answer questions posed by many of its questions.
- Weil foresees a $1.2B capital budget in 2015 and, combined with distributions, would be outspending its cash inflows by only ~$300M next year and even better in 2016; the firm thinks maintenance capex questions would go away if the total corporate cash flow is essentially in line with capex plus distributions.
- The firm maintains its Outperform ratings and $37 price targets for both LINE and LNCO.
Fri, Aug. 15, 6:25 PM
- Linn Energy (LINE, LNCO) reportedly has hired banks to sell oil production assets in the Texas panhandle and western Oklahoma in an auction that could raise as much as $2B.
- Linn said in June it would sell the Granite Wash assets to pay back debt it took on to finance its $2.3B acquisition of oil and gas assets from Devon Energy.
- Sources say other oil and gas companies likely will dominate the sale process, but P-E firms also have shown interest.
Fri, Aug. 8, 3:42 PM
- Raymond James analysts clearly prefer LinnCo (LNCO +2.9%) over Linn Energy (LINE +0.5%), noting LNCO is trading at a ~$1.60 discount to LINE while also yielding ~50 bps more than LINE.
- The firm says it is not clear what's keeping LNCO's valuation suppressed, other than it is taking an extended period of time to place the incremental ~95M shares issued in the Berry acquisition into a more stable investor base.
- LNCO reported solid Q2 results, with production and cash flow coming in above guidance; the firm believes it should ultimately trade at a ~7% premium over LINE, given its improving distribution coverage and potential to unlock further value from its Permian Basin acreage.
Tue, Jul. 1, 2:52 PM
- Linn Energy’s (LINE +0.8%) $2.3B asset purchase from Devon Energy (DVN -0.1%) earns the praise of Raymond James analysts, who note that LINE plans to sell its high-decline Granite Wash assets to fund the deal, meaning the company is not likely to need to tap debt or equity markets for related funding.
- The firm estimates LINN may need to reserve only 20% of EBITDA to maintain the cash flow from the new assets vs. ~40% of EBITDA likely need to maintain the Granite Wash; through this transaction and the Permian divestiture program, LINN could reduce its overall capital budget by ~$400M.
- LNCO -0.3%.
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