Greater clarity is now emerging regarding the health of Linn Energy (LNGG). Although investors knew that the company's zero-debt and meaningful asset sales had created a positive structure for the once-bankrupt E&P, the fact that so many asset sales had been agreed upon left open the question of just how attractive the enterprise and its remaining assets could be considered. Now, with the release of its fourth quarter earnings results for last year, we have an enhanced (but still somewhat opaque) look into Linn and what kind of value the business offers to shareholders.
Some major updates
Last year, Linn managed to do quite well for itself. During the 12 months of 2017, management finished the divestiture of six properties in exchange for net proceeds to the business of $1.47 billion. So far this year, four properties are on track to being unloaded from Linn's books for further proceeds of $378 million. Some of this capital was used to pay off Linn's remaining post-bankruptcy debt, but as you can see in the image below, management has bought back a tremendous amount of stock.
*Taken from Linn Energy
Roughly 13 million shares in Linn have come off the market between 2017 and 2018. The total value here stands at $531 million. A sizable chunk of these purchases took place at a weighted-average price of $34.99, while the tendered shares were done at $48 per unit. In all, this has come out to around 14% of Linn's outstanding shares, but management isn't done yet. Currently, the firm has $194 million in spare buying capacity under its buyback program. At today's price of $38.85 per unit, management could buy back a further 4.99 million shares, reducing the firm's share count by another 5.5% from where the count stood prior to the buybacks taking place.
*Taken from Linn Energy
This cash will likely come from what Linn has on hand. At the end of 2017, this figure stood at an impressive $465 million. As you can see in the image above, a large chunk of this money has come from offline due to Linn's tender, but pending asset sales should help to offset this and, if all goes well, leave the company with cash and cash equivalents at the end of the first quarter of this year of $405 million. In addition, management has a revolving credit facility right now with capacity of $378 million, granting pro forma liquidity of $783 million. This could allow a material ramping up in the business' operations if management were so inclined.
*Taken from Linn Energy
Also last year, Linn ended up posting some interesting results from a production and cash flow perspective. As you can see in the image above, production fell from 796 MMcfe per day in 2016 to 637 MMcfe per day in 2017. This led to a significant falloff in cash flow, as measured by both EBITDAX and operating cash flows. For 2018, current expectations are even worse. In the image below, you can see that production for the business should be lower this year than last, with EBITDAX slated to be around $153 million. There is, however, a major caveat here.
*Taken from Linn Energy
As opposed to reporting financial expectations for the entire enterprise, Linn's management team is showing you figures here just for what it calls NewCo and for its ownership over Blue Mountain Midstream. In the image below, you can see how these numbers adjust to factor out Blue Mountain Midstream and adjust for other variables as well. In all, NewCo's EBITDAX for 2018 should come out to around $133 million.
*Taken from Linn Energy
This chunk of data warrants further attention. As I mentioned in a prior article, Linn has decided to split its company up into three separate sets of operations. The first of these, NewCo, will comprise all of its miscellaneous properties, ranging from low-decline regions like Hugoton and Michigan/Illinois, to "emerging growth" properties like NW STACK, Arkoma, East Texas, and what it owns in Louisiana. Collectively, these properties produce around 18.55 million boe (barrels of oil equivalent) per year and management expects them to result in significant free cash flow in the years to come.
The second piece of the business is, as I already mentioned, Blue Mountain Midstream. Comprised almost entirely of its Chisholm Trail assets, the business will serve as the legal entity behind a cryogenic gas processing facility that will be responsible for the processing of up to 225 MMcf of product per day. Once it is finally launched (management expects costs toward construction to fall off after this year, but some expenses will be incurred next year), the entity should be capable of generating EBITDA of between $100 million and $125 million per year.
*Taken from Linn Energy
The last piece, as you can see in the image above, will be Roan Resources. The parent company, Linn, will serve as a holding company for its 50% stake in Roan. Total production of this enterprise today, which focuses on the Merge/SCOOP/STACK assets in Oklahoma, averages 40,800 boe per day, or 14.89 million boe per year, most of which is in the form of oil. Some of these details are clearer than what we have seen in the past when management discussed its plans, but we are still missing a great deal. For instance, we know that management sees Roan as a pure growth play, but no forecast has been provided to indicate what kinds of results we might anticipate.
One thing we do know is that the assets being contributed to Roan by Linn are not immaterial. As you can see in the image below, while Linn's NewCo assets have an SEC Standardized Measure of $1.045 billion (management's own PV-10 gives a higher reading of $1.346 billion), Linn's 50% ownership of Roan has a value of $598 million. It's important to note, though, that these numbers are severely inappropriate now. Oil prices are assumed to be just $51.34 per barrel, while natural gas is assumed to be $2.98 per Mcf. Oil today is 22.1% higher at $62.68 per barrel, while natural gas has declined by 10.2%, so it's hard to say what Roan's reserves are worth now, but considering that 73% of its production today is in the form of liquids, it's safe to assume an upward adjustment is highly probable.
*Taken from Linn Energy
Takeaway
A lot of changes are happening with Linn and that's bound to be exciting. High cash holdings, combined with positive cash flow and plans to monetize different parts of the business by splitting the firm into three, are all interesting and serve as a sign of value for shareholders. Unfortunately, a degree of opacity, especially regarding Roan, makes the picture difficult to digest, but with no debt on its books and plenty of excess cash, it's an E&P that carries little risk so long as energy prices don't tank and stay low for a few more years. Even in that kind of scenario, though, Linn has the potential to be one of the last small players standing.
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