Linn Energy (LINE and LNCO)

[dan_s]

3 Things Linn Energy Wants Investors to Know --

By Investopedia | May 07, 2015 AAA |

The past year has not been kind to Linn Energy (NASDAQ: LINE). Units have been thrashed by the market and are down just over 50% over the past year. That said, the company is making good progress on its plan to improve its position and it recently reported fairly decent first-quarter results. Still, investors and analysts have concerns about its future, which the company directly addressed on its first-quarter conference call. Here are three things its management team wants its investors to know.

1. Not worried about liquidity
One of the reasons Linn Energy sold off so steeply is that investors were worried that its liquidity would dry up due to weak oil prices. However, according to CEO Mark Ellis, "We're really not in a position where liquidity is the big issue for us." This is because, as Ellis pointed out, "We're living within cash flow at this point in time." Furthermore, even if the borrowing base on its credit facility is reduced as anticipated, Linn expects to end the year with $1 billion in liquidity, with potential upside to that number if commodity prices improve.

2. How it plans to delever
That said, the company is well aware of the fact that its debt level has become an issue. However, the company's management team isn't all that worried about that either, as it sees debt coming down in time without the company making any real dramatic moves such as a debt-for-equity swap or a straight equity raise to pay down debt.

Instead, Linn Energy sees its leverage coming down as it grows. "As it relates to delevering," Ellis pointed out, "I think transactional activity is probably the biggest driver to that. So as we look at the acquisition market, yes, the equity has gone into a spot where it becomes attractive to finance acquisitions with equity." Said another way, Linn Energy is planning to issue equity to buy assets instead of just issuing equity to pay down debt as some have thought the company should do.

3. Lots of ways to grow
In addition to issuing equity to acquire assets, Linn Energy also has three other options to drive future growth even if commodity prices remain weak. More important, none of the three options would detract from its liquidity, or add any additional leverage.

The first option the company has is left over from its 2014 repositioning plan. As part of that plan Linn traded and sold several assets in the Midland Basin and Mid-Continent; however, it still has about 6,000 acres in the Midland Basin to trade. On the conference call, CFO Kolja Rockov noted that Linn continues "to have some trade dialogue" regarding this acreage package. If the company does close a deal, it would likely receive assets that are already producing above the 8,000 barrels a day that this asset is producing, so that deal would provide an immediate boost to production and cash flow.

In addition, Linn's management team also spent time on the call detailing the potential to grow through the drillbit via its DrillCo agreement. That deal provides the company $500 million over a five-year period to drill wells. What's important about this funding is the fact that it is off balance sheet, as the wells would be drilled through the venture, with Linn receiving a cut of the production without putting up any of its own capital.

Finally, the company's management team went through its AcquisitionCo agreement, which will provide it with $1 billion in equity capital for acquisitions that Linn wouldn't typically have made via its own account. That's because the acquisitions it would target with AcquisitionCo would be much earlier in their lifecycle and require more development capital than Linn typically likes to spend. However, by funding a deal in this vehicle, Linn can participate in that upside without putting up all the capital.

Investor takeaway
While weak commodity prices are having an impact on Linn Energy's cash flow and its liquidity, that impact isn't as bad as investors first feared. In fact, the company really isn't all that worried about its liquidity, as it believes it has plenty and it sees its leverage coming down as it uses equity to acquire assets. Finally, the company has three other very compelling options to drive growth in 2015 and beyond, which is why it is still very optimistic about its future.


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[mrtangible]

Hi all,

I found this on another forum this morning; it relates to Linn (and possibly other upstream entities). It's over my pay grade so any comments appreciated.

More Important Than Product Prices or Cash Flows or Reserve Bases



The most important factor IMO to an investment today into a US Public E&P is determining just exactly how LINN, and others in the very recent past, have seemingly gotten away with selling 85% WI of all future PUDs, that were paid for and established by former Equity Shareholders and Debt-holders, presumably against their knowledge and prior agreement, to GSO Capital Ptnrs.



This, to me, is a rehypothecation that would make a TBTF WS Banker blush.



It does no one on this board one bit of good to invest in a public company if, at managements' sole discretion, they can "sell" acreage and/or PUDs to third parties right out from beneath existing shareholders and debt-holders that proved taht acreage and likely used as their basis for investment and/or holdings of the position to begin with.



This is bigger than any 50% reduction in oil and gas prices folks. You have been warned.



Imagery.

[setliff]

fwiw, that poster is on my ignore list.

[mkarpoff]

Seems to me that its just another way to raise $. How is it different than issuing shares or issuing debt? They all lessen a current shareholder's financial position in the company.