Linn Energy (LINE)
Posted: Thu Oct 22, 2015 3:21 pm
I attended Michael Linn's presentation today in Houston.
First let me say that LINE will survive a couple more years of low oil and gas prices. By "low" I mean where they are today. Since LINE and LNCO no longer make distributions, they are in the Wall Street "Dog House". MLPs are sold to yield investors and they will not come back to LINE or LNCO unless they announce they will be making distributions again. Wall Street does not know how to value an MLP that does not make distributions.
Michael's talk was on the global oil & gas markets, not much was said about LINE. He did say that the Upstream MLP model only works if you have stable to rising commodity prices. Until that returns, which it will eventually, LINE and most of the Upstream MLPs will be in survival mode. Most of them are cut off from the capital and debt markets, so they can not make the acquisitions they need to grow. LINE has 100% of their natural gas hedged at good prices through 2017, 90% of their crude oil hedged through 2015 and 70% of their crude oil hedged through 2016. If crude oil is still under $50/bbl heading into 2017, Linn Energy is in big trouble and so are most of the upstream companies I follow. [MY OPINION IS THAT THIS OIL PRICE CYCLE WILL BE "HISTORY" LONG BEFORE WE REACH 2017.]
Michael did agree with me that the global oil markets are rapidly working back to a balanced situation. He ran off a list of several countries outside the U.S. where oil production is falling fast. I was not aware of how fast North Sea oil production is falling. Non-OPEC oil production, not including the U.S., will drop a million barrels per day from 2015 to 2016. He also said many of the big Gulf of Mexico projects that were expected to come on-line later this decade are now on hold and will be pushed out past 2020. "The seeds of the next Oil Crisis are already planted."
I have updated my forecast model for LINE and posted it to the EPG website. They will report 3rd quarter results on November 5, which should include a big gain on extinguishment of debt. Instead of making distributions, they are buying back their public debt at a deep discount. This is exactly what they should be doing. They should also report a big mark-to-market gain on their hedges in Q3. Cash flow (net of interest expense) will be $250 to $275 million. LINE is generating lots of free cash flow that is being used to lower debt.
None of LINE's NGL's are hedged. That is what is hurting them the most today.
LINE should no longer be valued as an MLP. It is more a bet on rising oil and gas prices. My Fair Value Estimate can be found on the forecast model that I just posted to the EPG website.
First let me say that LINE will survive a couple more years of low oil and gas prices. By "low" I mean where they are today. Since LINE and LNCO no longer make distributions, they are in the Wall Street "Dog House". MLPs are sold to yield investors and they will not come back to LINE or LNCO unless they announce they will be making distributions again. Wall Street does not know how to value an MLP that does not make distributions.
Michael's talk was on the global oil & gas markets, not much was said about LINE. He did say that the Upstream MLP model only works if you have stable to rising commodity prices. Until that returns, which it will eventually, LINE and most of the Upstream MLPs will be in survival mode. Most of them are cut off from the capital and debt markets, so they can not make the acquisitions they need to grow. LINE has 100% of their natural gas hedged at good prices through 2017, 90% of their crude oil hedged through 2015 and 70% of their crude oil hedged through 2016. If crude oil is still under $50/bbl heading into 2017, Linn Energy is in big trouble and so are most of the upstream companies I follow. [MY OPINION IS THAT THIS OIL PRICE CYCLE WILL BE "HISTORY" LONG BEFORE WE REACH 2017.]
Michael did agree with me that the global oil markets are rapidly working back to a balanced situation. He ran off a list of several countries outside the U.S. where oil production is falling fast. I was not aware of how fast North Sea oil production is falling. Non-OPEC oil production, not including the U.S., will drop a million barrels per day from 2015 to 2016. He also said many of the big Gulf of Mexico projects that were expected to come on-line later this decade are now on hold and will be pushed out past 2020. "The seeds of the next Oil Crisis are already planted."
I have updated my forecast model for LINE and posted it to the EPG website. They will report 3rd quarter results on November 5, which should include a big gain on extinguishment of debt. Instead of making distributions, they are buying back their public debt at a deep discount. This is exactly what they should be doing. They should also report a big mark-to-market gain on their hedges in Q3. Cash flow (net of interest expense) will be $250 to $275 million. LINE is generating lots of free cash flow that is being used to lower debt.
None of LINE's NGL's are hedged. That is what is hurting them the most today.
LINE should no longer be valued as an MLP. It is more a bet on rising oil and gas prices. My Fair Value Estimate can be found on the forecast model that I just posted to the EPG website.