Linn Energy Needs Deal Announcement To Move the Value Needle
This article covers LinnCo LLC, a Dividend Hunter recommendation. The Dividend Hunter subscribers get first look at the article before I will submit it to Seeking Alpha for a broader release. It is my practice to let subscribers first see any articles I write on the newsletter portfolio recommendations.
There is little if any chance of a distribution cut from Linn Energy LLC (Nasdaq:LINE), LinnCo LLC (Nasdaq:LNCO) in 2015. What the market needs to see is one or more announcements about growth project agreements. It is starting to feel a little late for Linn to follow up on some earlier announcements.
Upstream MLPs Slow to Make Deals
Back at the start of 2015, the dozen or so upstream MLPs all discussed how they planned to take advantage of low energy prices by making strategic acquisitions of now cheaper production assets. Yet so far only Vanguard Natural Resources (Nasdaq:VNR) has made any meaningful deals, announcing merger agreements with two smaller publicly traded upstream MLPs. You can get the details in my latest article on Vanguard. Now we’ve finished five months of 2015 and into six months since the WTI benchmark crude dropped below $60 per barrel, and the upstream partnerships that will thrive in the lower energy price environment should be starting to make some acquisitions or other type of deal announcements.
It is especially interesting that Linn Energy has not announced on any follow up confirmed investments based on the agreements the company announced earlier in the year. In February, with its first quarter earnings release, Linn announced an agreement with GSO Capital Partners LP, part of The Blackstone Group LP (NYSE:BX) to fund up to $500 million in oil and natural gas development. Linn referred to this as the “DrillCo” deal. In March, Linn announced another agreement to receive up to $1 billion in capital from private capital investor Quantum Energy Partners to fund acquisitions and development of oil and natural gas assets. With this “AcqCo” agreement Linn would be an initial 15% to 50% equity partner in any deals put together under the funding arrangement.
With the DrillCo arrangement, the development funds would be spent on assets already owned by Linn. With drilling costs down significantly compared to earlier in the year, it seems that Linn should soon announce that some asset development has begun using the DrillCo money. The structure of the DrillCo deal has 85% of the net profits going to GSO Capital Partners initially, with Linn’s true benefit coming after GSO has earned a 15% internal rate of return. Any development under DrillCo would be of longer term benefit to Linn, with the eventual primary ownership of producing wells paid for with outside capital.
The AcqCo agreement requires Linn to chip in some capital, which may be the reason for the recent 16 million unit public offering. The press release noted that “Net proceeds from the offering are expected to be used to repay debt under LINN Energy’s Credit Facility, which debt was primarily incurred to fund the open market repurchases of LINN and Berry’s senior notes.” Lowering the balance on its credit line could provide the capital Linn needs to fund its share of any AcqCo deal.
Unit Values are Undervalued
Upstream MLPs have sold off in recent weeks, and the two Linn units have fallen even farther on the negative perception in the market concerning the equity issuance. LINE is under $11, compared to almost $14 per unit in early May. LNCO is now on par with LINE, compared to a $12.75 peak a month ago. The units now yield 11.5%. Back in January when Linn reduced its distribution rate, the company stated that the new rate was sustainable in a market with $50 oil and $3 natural gas. WTI crude is at $61.40 and gas is $2.70, so the distributions should still be secure.
At under $11, LINE and LNCO are attractive values on a peer comparison yield and short term total return potential. Any announcement from the company that DrillCo or AcqCo money has been put to work would drive the unit prices up above $13.