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Linn Retrenches on Spending, Boosts Capital Access

Anticipating "a significantly lower current crude oil price than in 2014," Linn Energy LLC and LinnCo LLC slashed oil and gas capital spending for the year by 53% and cut their dividend/distribution to $1.25 per share/unit from $2.90 annually. Additionally, a $500 million private capital agreement was struck to fund drilling.

"Despite today's challenging commodity price environment, we believe we are prepared to continue growing throughout 2015 and will look to take advantage of acquisition opportunities in the current market," said CEO Mark Ellis.

Linn's new $1.25/unit annualized distribution is a dramatic cut from the $0.2416 monthly distribution ($2.89/unit annualized) the company declared in December. That $2.89 rate represented a whopping 28.6% distribution yield based on Wednesday's $10.13 per unit close. The new $1.25 rate lowered the distribution yield on Linn's units to a more tenable 11.1% intraday Friday. Still, the median distribution rate for the 15 publicly traded MLP companies was 15.9% intraday Friday, with seven of the 15 MLPs sporting a distribution yield above 20%. "Some of those other high-yielding MLPs may need to follow suit in dropping their yields, especially if low crude oil prices persist well into 2015," said Patrick Rau, NGI director of strategy and research, and a former sell-side MLP analyst.

Houston-based Linn plans to spend $730 million this year on oil and natural gas activities, down from $1.55 billion in 2014. The program is to be funded from internally generated cash flow.

On Friday Linn also announced a nonbinding letter of intent with private capital investor GSO Capital Partners LP (GSO), the credit platform of The Blackstone Group LP, to fund oil and gas development. Funds managed by GSO and its affiliates have agreed to commit up to $500 million with five-year availability to fund drilling programs on locations provided by Linn.

GSO would fund 100% of the costs associated with new wells drilled under the agreement and is expected to receive an 85% working interest in these wells until it achieves a 15% internal rate of return on annual groupings of wells, while Linn is expected to receive a 15% carried working interest. Upon reaching the internal rate of return target, GSO's interest would be reduced to 5%, while Linn's will increase to 95%.

Linn said it is working on a similar agreement with private capital sources in order to fund acquisitions.

Linn Energy shares soared more than 12% Friday to close at $11.38. LinnCo units gained 11% to close at $11.51.

The decrease in oil and natural gas capital is approximately half in response to lower commodity prices and half as a result of the divestiture of the company's higher-decline Granite Wash assets and the majority of its Midland Basin assets in the Permian Basin, as well as reduced investment in other areas across its portfolio, Linn said (see Shale Daily, Oct. 3, 2014).

Capital will be focused on lower-risk development and optimization projects, including steam flood enhancement and expansions in California, natural gas drilling in the Jonah Field, Hugoton Basin and Piceance Basin, non-operated drilling in the Williston Basin, as well as Cotton Valley and Bossier development in East Texas and North Louisiana.

"A significant portion of Linn's 2015 capital budget is dedicated to efficient and lower-risk optimization, workover and recompletion opportunities on existing oil and natural gas wells," the company said.

Key 2015 budget assumptions include:

  • Average annual production of 1,110 to 1,235 MMcfe/d; 54% natural gas, 32% oil and 14% natural gas liquids (NGL);
  • Overall decline rate of about 15%;
  • Unhedged Nymex oil price of $60/bbl;
  • Unhedged Nymex natural gas price of $3.50/Mcf; and
  • NGL realization of 39% of Nymex oil price, or $23.40/bbl.

"After transforming the company's asset base in 2014 toward a significantly lower overall decline rate, we were able to materially reduce capital in a lower commodity price environment but still expect projected cash flow to increase quarter over quarter during the course of 2015," Ellis said. "Our budget projects a 1.18x coverage ratio at the new annualized distribution rate of $1.25 per unit with $730 million of oil and natural gas capital."

The company is hedged about 100% on expected gas production in 2015, 2016 and 2017, net of expected gas consumption related to heavy oil operations in California. For expected oil production, LINN is hedged about 70% in 2015 and about 65% in 2016. Linn has hedged natural gas differentials in certain producing regions but has not hedged any of its exposure to oil differentials. Linn does not directly hedge NGL volumes.

Linn has liquidity of about $2.2 billion. In December Linn and subsidiary Berry Petroleum Co. LLC received approval from lenders to increase Linn's borrowing base to $4.5 billion and reaffirm Berry's borrowing base at $1.4 billion. The maximum credit amount under Linn's credit facility is $4.0 billion and the commitment amount under Berry's credit facility is $1.2 billion.

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