Flash Alert: The Scoop on Our Meeting with Linn Energy’s Senior Management
This section was last updated Thursday, April 17, 2008 at 4:05 pm.
We just attended a meeting and series of presentations hosted by Linn Energy’s (NSDQ: LINE) senior management. Future publications will feature a complete rundown of the proceedings, but in the interim, we’ll address some key developments on the partnership’s financial and business fronts.
In an energy market that is flush with distributable cash, Linn’s partnership format not only supports an increase in dividend payments, but also provides investors with steady to rising yields even when the stock price shoots up—a winning combination.
But all these advantages go out with the bathwater if management decides to shift its focus from individual to institutional investors.
We addressed this issue in our conversation with Linn’s senior management, who ardently confirmed that the company remains focused on individual investors.
The partnership has no additional PIPE deals (private investment in public equities) in the works, which is welcome news for shareholders; the stock’s rocky performance over the past year was due in part to the company’s reliance on PIPE deals to fund expansion.
But the issue that shareholders really care about is the partnership’s distribution. CEO Mike Linn stated that the company’s primary concern is maintaining the distribution and increasing it over the next several years.
Currently, without any additional developments or acquisitions, we can expect the distribution to grow by 2 to 4 percent. Any new business developments should push the distribution to grow at a high single- to low double-digit rate.
The kicker is that management targets dividend coverage at 1.2 times. Right now, given the market for petrol and including their hedges (through 2009), the company’s current coverage is running closer to 1.5 times. This could potentially result in an over 30 percent uptick in the dividend without or new development or acquisitions. Of course, this figure is still under the past year’s average gains in distributions of 37 percent.
The next issue facing partnerships and other dividend companies is the debt side of the business.
With the sale of an economically inefficient but very valuable asset in the Marcellus Shale in Appalachia raking in around $600 million, the company is in good shape in terms of paying down its syndicate credit facility, which matures in 2010 and/or a large chunk of its term loan that matures in 2009.
We’re concerned about the members of the syndicate, many of which are troubled Canadian and European banks; however, given the influx of cash slated for this summer, this should bode well for a renewal or another facility. We’ll expand on this development next week.
In regards to the term debt, this summer the company likely will bring a public issue to close just past the settlement of the Marcellus property. Management expects that given the forthcoming boost to its balance sheet, it will be able complete the deal with less drama than its other dividend-paying companies and partnerships might experience.
And the partnership has a massive amount of tax carry forwards, a topic that we will address in the near future.
In regards to the company’s underlying properties, our meeting confirmed some of the positive points we’ve been making about the stock over the past six months.
As we noted in our update earlier this week, the $600 million sale of Marcellus Shale acreage announced earlier this week looks to be the right move in today’s market. The Marcellus Shale is an extraordinarily promising play that is very hot among exploration and production (E&P) firms today.
However, the area is still in a relatively early stage of development; this reserve would require a large capital investment and some relatively high-risk drilling projects to get it producing properly.
This type of play just isn’t compatible with the partnership structure. Partnerships aren’t in the business of aggressively drilling to grow production quickly. Instead, these firms are focused on cash flows; the idea is to produce oil and gas from stable, well-known fields to generate predictable cash flow. It’s this cash flow that backs up Linn’s generous yield. Although Marcellus is promising, it doesn’t fit Linn’s model.
Moreover, based on the 197 billion cubic feet in estimated reserves, Linn received more than $3.05 per thousand cubic feet of reserves in this sale, a generous price.
Consider that the Appalachian properties that Linn has sold generated $50 to $55 million in annualized earnings before interest, tax, depreciation and amortization (EBITDA). However, the Lamamco buy that Linn announced late last year cost them just $552 million and generates $75 to $90 million in annualized EBITDA.
And management brought up another way to look at this deal. The company sold roughly 10 percent of its reserves for $600 million. If Linn sold the other 90 percent at the same price, the firm’s value would reach $6 billion. When you consider that the total market value of Linn’s outstanding debt and equity is just over $4 billion, that’s an encouraging sign, suggesting at least a 50 percent upside.
The other key takeaway was that Linn’s organic growth potential looks solid. Linn has 0.5 trillion cubic feet in proved, undeveloped reserves and another 1.3 trillion cubic feet in what it calls “high confidence” reserves—low-risk drilling projects near Linn’s existing wells.
We will offer a more detailed rundown of Linn’s reserves in an upcoming update and in The Energy Strategist. For now, however, suffice to say that Linn has identified a total of 4,169 drilling locations; based on the 253 wells which Linn intends to drill in 2008, that’s 16 years of drilling inventory.
These low-risk drilling operations allow Linn to offset the natural declines in production and generate 3 to 4 percent in annualized organic growth. Thus, Linn is not reliant on acquisitions to maintain and grow its distributions.
Another point to note is that investors should not assume that just because Linn hedges its production means it won’t benefit from higher commodity prices. More than one-third of Linn’s hedges are put options. Put options provide a floor for prices, but don’t limit the realization of potential upsides.
We have a lot more to report on Linn Energy, so look for additional updates on our website and in the next issue of The Energy Strategist.
Linn Energy (NSDQ: LINE) remains a buy.
We just attended a meeting and series of presentations hosted by Linn Energy’s (NSDQ: LINE) senior management. Future publications will feature a complete rundown of the proceedings, but in the interim, we’ll address some key developments on the partnership’s financial and business fronts.
In an energy market that is flush with distributable cash, Linn’s partnership format not only supports an increase in dividend payments, but also provides investors with steady to rising yields even when the stock price shoots up—a winning combination.
But all these advantages go out with the bathwater if management decides to shift its focus from individual to institutional investors.
We addressed this issue in our conversation with Linn’s senior management, who ardently confirmed that the company remains focused on individual investors.
The partnership has no additional PIPE deals (private investment in public equities) in the works, which is welcome news for shareholders; the stock’s rocky performance over the past year was due in part to the company’s reliance on PIPE deals to fund expansion.
But the issue that shareholders really care about is the partnership’s distribution. CEO Mike Linn stated that the company’s primary concern is maintaining the distribution and increasing it over the next several years.
Currently, without any additional developments or acquisitions, we can expect the distribution to grow by 2 to 4 percent. Any new business developments should push the distribution to grow at a high single- to low double-digit rate.
The kicker is that management targets dividend coverage at 1.2 times. Right now, given the market for petrol and including their hedges (through 2009), the company’s current coverage is running closer to 1.5 times. This could potentially result in an over 30 percent uptick in the dividend without or new development or acquisitions. Of course, this figure is still under the past year’s average gains in distributions of 37 percent.
The next issue facing partnerships and other dividend companies is the debt side of the business.
With the sale of an economically inefficient but very valuable asset in the Marcellus Shale in Appalachia raking in around $600 million, the company is in good shape in terms of paying down its syndicate credit facility, which matures in 2010 and/or a large chunk of its term loan that matures in 2009.
We’re concerned about the members of the syndicate, many of which are troubled Canadian and European banks; however, given the influx of cash slated for this summer, this should bode well for a renewal or another facility. We’ll expand on this development next week.
In regards to the term debt, this summer the company likely will bring a public issue to close just past the settlement of the Marcellus property. Management expects that given the forthcoming boost to its balance sheet, it will be able complete the deal with less drama than its other dividend-paying companies and partnerships might experience.
And the partnership has a massive amount of tax carry forwards, a topic that we will address in the near future.
In regards to the company’s underlying properties, our meeting confirmed some of the positive points we’ve been making about the stock over the past six months.
As we noted in our update earlier this week, the $600 million sale of Marcellus Shale acreage announced earlier this week looks to be the right move in today’s market. The Marcellus Shale is an extraordinarily promising play that is very hot among exploration and production (E&P) firms today.
However, the area is still in a relatively early stage of development; this reserve would require a large capital investment and some relatively high-risk drilling projects to get it producing properly.
This type of play just isn’t compatible with the partnership structure. Partnerships aren’t in the business of aggressively drilling to grow production quickly. Instead, these firms are focused on cash flows; the idea is to produce oil and gas from stable, well-known fields to generate predictable cash flow. It’s this cash flow that backs up Linn’s generous yield. Although Marcellus is promising, it doesn’t fit Linn’s model.
Moreover, based on the 197 billion cubic feet in estimated reserves, Linn received more than $3.05 per thousand cubic feet of reserves in this sale, a generous price.
Consider that the Appalachian properties that Linn has sold generated $50 to $55 million in annualized earnings before interest, tax, depreciation and amortization (EBITDA). However, the Lamamco buy that Linn announced late last year cost them just $552 million and generates $75 to $90 million in annualized EBITDA.
And management brought up another way to look at this deal. The company sold roughly 10 percent of its reserves for $600 million. If Linn sold the other 90 percent at the same price, the firm’s value would reach $6 billion. When you consider that the total market value of Linn’s outstanding debt and equity is just over $4 billion, that’s an encouraging sign, suggesting at least a 50 percent upside.
The other key takeaway was that Linn’s organic growth potential looks solid. Linn has 0.5 trillion cubic feet in proved, undeveloped reserves and another 1.3 trillion cubic feet in what it calls “high confidence” reserves—low-risk drilling projects near Linn’s existing wells.
We will offer a more detailed rundown of Linn’s reserves in an upcoming update and in The Energy Strategist. For now, however, suffice to say that Linn has identified a total of 4,169 drilling locations; based on the 253 wells which Linn intends to drill in 2008, that’s 16 years of drilling inventory.
These low-risk drilling operations allow Linn to offset the natural declines in production and generate 3 to 4 percent in annualized organic growth. Thus, Linn is not reliant on acquisitions to maintain and grow its distributions.
Another point to note is that investors should not assume that just because Linn hedges its production means it won’t benefit from higher commodity prices. More than one-third of Linn’s hedges are put options. Put options provide a floor for prices, but don’t limit the realization of potential upsides.
We have a lot more to report on Linn Energy, so look for additional updates on our website and in the next issue of The Energy Strategist.
Linn Energy (NSDQ: LINE) remains a buy.
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