Linn Energy LLC (NASDAQ:LINE) and LinnCo, LLC (NASDAQ:LNCO) announced financial and operating results for the three months ended September 30, 2015.
“Our stable asset base continues to exceed expectations with strong results in the third quarter. We also continue to make exceptional progress in reducing costs across the Company which allowed us to generate an excess of net cash of approximately $111 million,” said Mark E. Ellis, Chairman, President and Chief Executive Officer. “In addition, we are evaluating opportunities to improve our capital structure and sustainability in this challenging commodity price environment.”
Third Quarter 2015 Results
Production decreased four percent to approximately 1,198 MMcfe/d for the third quarter 2015, compared to 1,245 MMcfe/d for the third quarter 2014. This decrease was primarily attributable to divestiture activities during 2014 and reduced capital expenditures.
Lease operating expenses for the third quarter 2015 were approximately $154 million, or $1.40 per Mcfe, compared to approximately $192 million, or $1.67 per Mcfe, for the third quarter 2014. This 20 percent decrease was primarily due to cost savings initiatives, a decrease in steam costs and lower costs as a result of the properties sold during the fourth quarter 2014, partially offset by costs associated with properties acquired during the third quarter 2014. Transportation expenses for the third quarter 2015 were approximately $55 million, or $0.50 per Mcfe, compared to $53 million, or $0.47 per Mcfe, for the third quarter 2014. This increase was primarily due to higher transportation costs associated with properties acquired in 2014. Taxes, other than income taxes, for the third quarter 2015 were approximately $46 million, or $0.42 per Mcfe, compared to $67 million, or $0.58 per Mcfe, for the third quarter 2014. This decrease was primarily attributable to lower commodity prices. General and administrative expenses for the third quarter 2015 were approximately $60 million, or $0.55 per Mcfe, compared to $75 million, or $0.66 per Mcfe, for the third quarter 2014, which includes approximately $13 million and $9 million, respectively, of non-cash unit-based compensation expenses. This 20 percent decrease was primarily due to lower acquisition related expenses and salaries and benefits related expenses. Depreciation, depletion and amortization expenses for the third quarter 2015 were approximately $207 million, or $1.88 per Mcfe, compared to $290 million, or $2.54 per Mcfe, for the third quarter 2014.
For the third quarter 2015, the Company reported a net loss of approximately $1.6 billion, or $4.47 per unit, which includes non-cash impairment charges of approximately $2.3 billion, or $6.43 per unit, non-cash gains related to changes in fair value of unsettled commodity derivatives of approximately $235 million, or $0.67 per unit, non-cash gains on extinguishment of debt of approximately $198 million, or $0.56 per unit, and gains on sale of assets and other of approximately $167 million, or $0.48 per unit. For the third quarter 2014, the Company reported a net loss of approximately $4 million, or $0.02 per unit, which includes a non-cash impairment charge of approximately $603 million, or $1.83 per unit, and non-cash gains related to changes in fair value of unsettled commodity derivatives of approximately $423 million, or $1.28 per unit. The impairment charges in 2015 were primarily due to lower commodity prices and the Company’s estimates of proved reserves. In 2014, the impairment charge was due to the divestiture of certain high valued unproved properties in the Midland Basin.
LINN’s revised 2015 oil and natural gas capital budget of approximately $470 million remains focused on optimization projects, including steam flood development and enhancement in California, as well as efficient optimization, workover and recompletion opportunities across its diverse asset portfolio. During the third quarter 2015, the Company continued to achieve excellent results from these programs as evidenced by outperformance throughout its operating areas.
In addition, LINN’s comprehensive cost reduction initiatives have generated significant savings. The Company anticipates full-year cost reductions in lease operating expenses of approximately $135 million, general and administrative expense reductions of approximately $30 million and interest cost savings of approximately $54 million on an annualized basis. In addition, LINN anticipates full-year cost savings associated with its oil and natural gas capital budget of approximately $75 million. Based on these successful cost management efforts and three quarters of favorable performance compared to guidance, LINN has increased its previously announced combined cost reduction targets to approximately $300 million on an annualized basis.
Borrowing Base Redetermination
As previously announced, the Company recently completed its semi-annual borrowing base redetermination for both the LINN and Berry Petroleum Company, LLC (“Berry”) senior secured credit facilities. Following the redetermination, LINN’s maximum borrowing availability under its credit facility was reduced to $3.6 billion, including the $500 million term loan, and the borrowing base under the Berry credit facility was reduced to $900 million, including $250 million of restricted cash previously posted as collateral with Berry’s lenders. The Company’s lenders have also approved a potential combination of the LINN and Berry credit facilities under certain conditions, subject to a combined borrowing base of $4.05 billion. LINN currently has undrawn capacity of approximately $790 million, assuming borrowings outstanding as of September 30, 2015.
As part of the redetermination, LINN and Berry each entered into an amendment to their respective credit facilities. Among other items, the amendments include the ability to incur junior lien indebtedness, a reduction in the minimum interest coverage ratio and increased ability for LINN to divest assets which do not contribute to its borrowing base. Under the terms of the amendments, LINN and Berry may incur up to $4 billion and $500 million, respectively, of junior lien indebtedness, in each case subject to borrowing base reductions in certain circumstances. The Company’s minimum interest coverage ratio has been reduced from 2.5x to 2.0x through December 31, 2016, increasing to 2.25x through June 30, 2017, and then returning to 2.5x thereafter.
The next borrowing base redetermination is scheduled for April 2016.
Balance Sheet Management
LINN is focused on improving its balance sheet, reducing interest expense and improving liquidity. For the nine months ended September 30, 2015, the Company has repurchased approximately $783 million of outstanding senior notes for a total cost of approximately $557 million in cash, resulting in annual interest cost savings of $54 million. The Company is currently evaluating several strategies to continue its effort to achieve these three objectives. However, execution, timing and success of these objectives are dependent upon market conditions and are subject to restrictions governing LINN and Berry’s existing indebtedness.
LINN is hedged approximately 100 percent on expected natural gas production through 2017 at average prices ranging from $4.48 to $5.12 per MMBtu. The Company does not currently hedge the portion of natural gas production used to economically offset natural gas consumption related to its heavy oil operations in California.
For expected oil production, the Company is hedged approximately 90 percent for the remainder of 2015 at an average price of approximately $88 per Bbl and approximately 70 percent in 2016 at an average price of approximately $90 per Bbl.
LINN’s hedge book had an estimated net positive mark-to-market value of approximately $1.9 billion as of September 30, 2015.
Cash Distributions and Dividends
During the third quarter 2015, LINN paid three monthly cash distributions of $0.1042 per unit on July 16, August 18 and September 16, 2015.
LinnCo paid three monthly cash dividends of $0.1042 per common share on July 17, August 19 and September 17, 2015.
On October 6, 2015, the Company announced the Board of Directors’ decision to suspend further payment of LINN’s distribution and LinnCo’s dividend effective September 30, 2015. LINN’s Board of Directors will continue to evaluate the Company’s ability to reinstate the distribution and dividend.
Potential Tax Liabilities
LINN continues to evaluate opportunities to improve its balance sheet. Potential future repurchases or cancellations of outstanding senior notes at a discount and/or asset sales could result in a tax liability for LINN’s unitholders. The effect to each unitholder would depend on the unitholder’s individual tax position with respect to the units. If available, prior year passive losses from a unitholder’s interest in the Company may serve to reduce or eliminate a unitholder’s current and future year taxable income and related income tax liability. (Original Source)
Shares of Linn Energy closed yesterday at $2.83. LINE has a 1-year high of $24.50 and a 1-year low of $2.01. The stock’s 50-day moving average is $2.89 and its 200-day moving average is $6.36.
On the ratings front, Linn Energy has been the subject of a number of recent research reports. In a report issued on October 12, FBR analyst Chad Mabry downgraded LINE to Sell, with a price target of $2, which reflects a potential downside of -29.3% from last closing price. Separately, on October 6, Stifel Nicolaus’ Brian Brungardt downgraded the stock to Hold .
According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Chad Mabry and Brian Brungardt have a total average return of -36.7% and -62.1% respectively. Mabry has a success rate of 21.7% and is ranked #3821 out of 3824 analysts, while Brungardt has a success rate of 0.0% and is ranked #3812.
Overall, one research analyst has rated the stock with a Sell rating, 4 research analysts have assigned a Hold rating and . When considering if perhaps the stock is under or overvalued, the average price target is $2.75 which is -2.8% under where the stock closed yesterday.
Linn Energy LLC is an independent oil and natural gas company. The Company’s properties are located in United States in Rockies, Hugoton Basin, California, East Texas and north Louisiana, Mid-Continent, Permian Basin, Michigan/Illinois and South Texas.