Linn Energy: Highlighting The Value Of The Merge/SCOOP/STACK Assets

Summary

• Linn Energy forms Roan Resources in partnership with Citizen Energy.
• This puts a spotlight on the value of the Merge/SCOOP/STACK assets and helps distance those assets from the stigma associated with Linn's bankruptcy.
• Linn's bankruptcy was very costly to a large number of individual investors and thus there is considerable distrust of Linn.
• Linn's new corporate structure and lack of debt make the chances of a second bankruptcy very low though.

Linn Energy (LNGG) continues to make progress post-restructuring, with its formation of Roan Resources in partnership with Citizen Energy. Linn has also divested the last of its California assets, and will have no outstanding debt. Linn's lack of debt should position it well for the current oil price environment, while the formation of Roan Resources should help provide a clear picture of the value of the Merge/SCOOP/STACK position, as well as help distance that asset from the stigma surrounding Linn's previous bankruptcy.

Roan Resources

The main recent news with Linn is the formation of Roan Resources in conjunction with Citizen Energy. The two companies are each contributing around 70,000 net acres in the Merge/SCOOP/STACK and will each own 50% of the new company. Roan's 140,000 net acres includes approximately 103,000 net acres in the Merge play. Linn's Merge production was around 6,700 BOEPD at the end of 2016 and was forecasted to reach 16,700 BOEPD at the end of 2017. Roan Resources is expected to have over 40,000 BOEPD in production by the end of 2017. Linn mentioned field level cash flow margin of around $18 per BOE at $45 oil and $3 natural gas, which may translate into over $225 million EBITDA for Roan based on 40,000 BOEPD production.

Source: Linn Energy

The combination of acreage will allow around half of the resource potential to come from longer-lateral drilling units. Laterals are becoming increasingly long these days (making contiguous acreage valuable). As well, the formation of Roan Resources should highlight the value of Linn's Merge/SCOOP/STACK assets, separate from its low-decline assets. The new company will also have a different management team, allowing it to distance itself from the stigma attached to Linn's name and management.

California Sale

Linn sold its remaining California properties for $100 million in early June. This sale involved Linn's Brea-Olinda asset, which produced 1,900 BOEPD in Q1 2017. The sale price of $100 million seems relatively low compared to its proved developed PV-10 of $126 million at $50 oil and its estimated 2017 field-level cash flow of $21 million. However, the relatively low price appears to be due to Linn's desire to fully exit California, as well as the environmental issues with operating in what is now a highly developed area.

Bankruptcy Aftereffects

Linn's bankruptcy resulted in a large number of investors losing significant sums of money. Due to its MLP status, Linn had a higher percentage of individual investor ownership than most upstream companies. As a result of the carnage caused by Linn's bankruptcy, there appears to be a significant stigma attached to Linn and distrust of its management.

I believe that it is reasonable to avoid investing in Linn because of a dislike of how it was managed before. However, that being said, Linn's current incarnation probably has one of the lowest bankruptcy risks among upstream producers now. As a C-Corp, Linn does not have the pressure to maintain or grow its distributions anymore, and that pressure may have resulted in riskier decisions before. As well, Linn is now able to use equity offerings as a viable way of raising funds to pay for acquisitions or improve its balance sheet. When Linn was an MLP, issuing equity just added to the potential distribution burden.

Linn now has no debt and is in a $45 to $55 oil world. Linn's bankruptcy risk is likely to remain negligible unless oil prices rise significantly. Although that may seem counter-intuitive, prolonged higher oil prices result in the potential for companies to become overconfident and overextend themselves financially. Budgeting for $90 oil and ending up with $50 oil can have catastrophic results, especially when heavily indebted. Budgeting for $50 oil and ending up with $40 oil (as an example) is very manageable if a company has little or no debt.

Conclusion

Linn Energy is now a much different company from what it was before, as it shed a significant amount of debt in the restructuring process and then eliminated the rest of its debt via asset sales. While there is still a stigma attached to the company due to its bankruptcy, the risk of another bankruptcy is very low due to the lack of debt, change in corporate structure and since it is now making plans around $45 to $55 oil. The formation of Roan Resources should put a spotlight on the value of the Merge/SCOOP/STACK assets and distance it from the stigma still attached to Linn.

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Analyst’s Disclosure: I am/we are long LNGG. 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.