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Saturday, December 27, 2008

Linn Energy gets a positive profile in this week's Barrons. You need to be a subscriber in order to read the piece but i'm sure the text of the piece will somehow pop up somewhere in the comments section. Magical how that happens!


Anonymous said...

That was wierd. I was just logging on to post a message about the Barron's article on Linn and, voila, you beat me to it, Joe. I'll post the link below, but if it doesn't work, I'll do a little cut and paste job later.

The link (I shortened it):


Anonymous said...

I tested the link I posted in the previous message and it worked for me, but that might be because I am a suscriber. I don't know. Anyway, here's the cut and paste I mentioned:

From a Drab Driller, a Welcome Gusher

Linn Energy emphasizes yield generation over flashy drilling projects.

THE COLLAPSE IN NATURAL-GAS and oil markets has sent the price of Linn Energy plummeting in the past six months, from over $25 in June to below $12 last week.

Linn focuses on mature fields that have ample reserves, but no longer produce at the high levels that the majors prefer.
Linn, a modest-sized gas and oil driller, is structured as a master limited partnership, paying out some 60% to 70% of its quarterly cash flow to its shareholders in tax-advantaged distributions. The big fear among investors is that those payouts will soon wither as a result of weak energy prices.

And as if that weren't enough, Wall Street worries that frozen capital markets will keep Linn from following its growth-through-acquisition policy that in the past has permitted the partnership to boost quarterly cash flows and therefore unit distributions.

Such concerns seem amiss. For one thing, Linn (ticker: LINE) is an astute and disciplined hedger and, as such, was able to lock in favorable prices during this summer's energy-price bubble for its products going out three to four years. In fact, based on its third-quarter distribution of 63 cents per unit (or $2.52 annualized), the company is throwing off a current yield of more than 20%.

Citigroup analyst Richard Roy wrote in a recent report that this distribution level is "relatively secure" for at least the next two years or more, even if Linn makes no new acquisitions in the period. As a result, Roy has a one-year price target on Linn of 22, while John Kang of RBC Capital Markets sets an even higher target price of 27, more than double the current level.

LINN'S OPERATING PHILOSOPHY is a conservative one, emphasizing yield generation over flashy new discoveries. As such, the company concentrates its acquisition and drilling activity on mature fields that have ample reserves but no longer produce at the high levels favored by the majors or aggressive exploration outfits. "We're looking for bunt singles and not home runs," avers Michael Linn, chairman and CEO of the eponymous company, who grew up in Pittsburgh but now runs the company out of Houston. In a nod to his natal city, the colors on the Linn logo and on the cover of its annual report are Pittsburgh Steeler black and yellow.

The company's fields typically have 20-to-30-year lives and undergo slow annual production declines. They also afford ample opportunity to boost production through reworking old bore holes, pumping equipment, water-injection systems and lifts. The geology of the fields is such that Linn generally has a near 100% success rate when it drills. Some of the fields, like the Naval Reserve Unit in Oklahoma and Brea-Olinda near Los Angeles, have nearly a century or more of productive history.

Even in a steady state with no new acquisitions, CEO Linn claims that the company can keep its production levels, and therefore distributions, flat or gently rising through work-overs and drilling additional wells on its existing acreage. The company has identified 4,100 low-risk drilling locations on its properties with promise of boosting production. "That's about 15 years worth of drilling at our current pace, or 200 to 300 wells a year," he says. "We could keep our production going at current levels with just 150 new wells a year."

And the company is not without financial flexibility, even in today's severe credit crunch. It opportunistically sold off three different properties so far this year for a total of around $1 billion, taking advantage of the frenzy in oil and gas speculation this summer. A particularly hot item was Linn's Marcellus Shale acreage in Pennsylvania's Appalachian Basin, which Linn adjudged to be promising but too expensive for a company of its ilk to develop.

AS A RESULT OF THE SALES, LINN now has about $500 million of borrowing capacity under its credit facility. This is after taking into account a $100 million stock- repurchase plan that the company has instituted but not unleashed. The latter gives the company plenty of potential firepower with which to defend its stock price. The company says it will be able to cover all of its capital spending and unit distributions next year from internally generated cash flow.

Crucial to Linn's rich distributions and past growth has been its hedging programs. First off, the company generally hedges, or locks in profit margins, on a higher percentage of its future production than its competitors. It also hedges production for more years in the future than certain of its rivals.

This has stood Linn in good stead during the galvanic commodity price swings that saw natural- gas prices slide from $13 per million British thermal units this past summer to around $5.50 and crude oil dive from $147 a barrel to under $40 over the same span.

Linn doesn't speculate by timing the market. Yet it did much to protect future price realizations during the summer surge by cashing in some profitable derivative positions and moving up the price floor at which it can "put" its production to different counterparties. For example, the company moved its put exercise prices for 2009 and 2010 oil production up to $120 and $110 a barrel, respectively, from $72 previously.

It also boosted the floor prices for its natural-gas output, which accounts for about 60% of its total production. "We felt we should lock in the windfall prices being offered, and it turned out to be a wise decision in light of the subsequent price collapses," observes Linn's chief financial officer, Kolja Rockov.

Linn's current production levels are hedged 99% for next year, 107% for 2010, 101% for 2011 and 66% for 2012 -- far greater coverage than at most rivals.

The Bottom Line:

The limited partnership's shares, pounded in recent months, could roughly double over the next year if the lofty level of cash-flow distributions holds up.The company uses futures markets and the commercial swap market to lock in set prices on forward sales for about 60% of its production. Put option purchases account for the bulk of the remaining hedges. The advantage of puts is that Linn can participate in any of the price action above the exercise price should the markets go wild, as they did earlier this year. Yet puts give the hedger a minimum should prices plunge, as they have lately.

As primarily a yield play for older investors, the company tries to be as plain and drab as "an old Chevrolet door handle," in the words of Michael Linn. And the company appears to have done a nice job of protecting its distribution levels. Given its current knockdown unit price, Linn seems poised to deliver some capital gains, too.

AggiePilot said...


Thanks for the post.


Anonymous said...


You're welcome. Incidentally, judging from your blogger name, I assume you are an A&M alum and a pilot (okay, that was probably obvious), and if so, you wouldn't happen to fly for Continental and live in or near Houston, would you?

Just one of those "Hey, we're neighbors; it's a small world" ephinanies...

Lee (The Woodlands, TX)