Tomlinson: Linn helped by hedging
concentrate on getting the most out of existing wells to minimize costs and maintain revenues.
“Wehave taken several strategic initiatives designed to improve our ability to grow. The first was obviously adjusting our capital expenditures and the distribution,” Rockov said.
That step is important because Linn has about $10 billion in long-term debt due in 2019 and has a debt to earnings ratio of 5.6, a very high number even for the E&Pbusiness. The steps taken Jan. 2 will allow Linn to reduce spending by nearly $1.6 billion next year, by some calculations. Stock downgrade
Linn’s unit price initially jumped 10 percent after the conference call but has since dropped to its lowest levels in more than five years. Barclays downgraded the stock to equal weight, suggesting it will not beat the market average, but Moody’s praised the move as an improvement in the company’s creditworthiness.
“Reducing distributions will ease the upstream MLPs’ cash needs, which helps their credit quality, but these companies will continue to face exposure to commodity price risk and the depleting nature of their assets,” the Moody’s analyst note said. “If weak oil prices last into 2016 ... these upstream MLPs will likely need to implement further distribution cuts.” Staving off debt
Not incurring more debt is critical to maintaining the company’s $2.2 billion in liquid assets, which Rockov said will be available for when competitors start selling assets or seeking mergers at bargainbasement prices.
“It’s challenging, no doubt, but there are going to be a lot of opportunities to grow the company in this environment,” he said.
Linn can do this because it hedged against lower oil prices by trading on the futures market.
Linn covered 100 percent of its natural gas production from 2015-2017 at $4.70 for a thousand BTUsand70 percent of oil production in 2015 and 65 percent in 2016 at an average of $92.46 a barrel. Some analysts criticized Linn for hedging so much at the time, but those options are nowworth $2 billion, Rockov said, with oil trading around $45 a barrel. Option on drilling
To keep a steady flowof oil into the future, Linn also signed a five-year, $500 million agreement that gives GSOCapital Partners, a unit of private-equity giant the Blackstone Group, the option of financing new drilling on Linn’s acreage. GSOwill collect 85 percent of the profits until the company recovers 115 percent of its invest- ment. After that, Linn will collect 95 percent of the profits without spending anything to drill on the acreage.
The lower distribution mayhave disappointed investors looking for income, but these steps typify what it takes for an E&Pfirmto survive a bust. By getting its debt under control, Linn Tomlinson is the Chronicle’s business columnist. His commentary appears on Sundays and Wednesdays. chris.tomlinson@chron.com twitter.com/cltomlinson