Linn Energy : Motley Fool Review

LINN Energy LLC’s Earnings Are Full of Surprises
LINN Energy LLC and LinnCo LLC both ax their monthly distribution to conserve cash.

Linn Energy Llc Permian Tall
SOURCE: LINN ENERGY LLC

With the price of crude taking a second leg down over the past few weeks, it’s forcing oil companies to take a hard look at their future plans. Hard choices are also being made with LINN Energy LLC (NASDAQ:LINE) and affiliate LinnCo LLC (NASDAQ:LNCO) now making the difficult choice to suspend monthly cash distributions as a means to conserve cash as the downturn persists. But that was just one of the many surprises LINN Energy and LinnCo unveiled to investors in their second-quarter report.

Surprise! We’re axing the distribution
After first halving the payout earlier this year, LINN Energy and LinnCo are now suspending it indefinitely. In commenting on the move in the earnings release, CEO Mark Ellis had this to say:

After careful consideration, management has decided to recommend to the Board of Directors that it suspend payment of LINN’s distribution and LinnCo’s dividend at the end of the third quarter 2015 and reserve approximately $450 million in cash from annualized distributions. The Board and management believe this suspension to be in the best long-term interest of all company stakeholders.

As Ellis points out, the move is being made to preserve cash as LINN will save $450 million over the next year by not paying distributions. It’s money the company can use to fix its balance sheet, which has come under a lot of pressure due to persistently weak oil and gas prices. While this is a very unpleasant surprise, in all honesty it’s a prudent move given how worried investors have grown over its debt-laden balance sheet.

Surprise! We’ve buying our bonds hand over fist
The second surprise is actually directly related to that balance sheet as the company announced it was taking advantage of investor fears to buy back a huge slug of its debt at a hefty discount. Over the past month, the company has repurchased $599 million of its outstanding senior notes for a total of $392 million, or a 35% discount to par value. This is actually a really great use of capital as LINN is basically earning a 50% return on its investment in buying back these bonds at such a discount.

With those repurchases, LINN has now reduced its debt by $783 million year to date, which will save it $54 million in annual interest payments. That’s a meaningful reduction in debt for the company and this isn’t likely the last of the debt repurchases as CFO Kolja Rockov hinted in the press release of “potential future repurchases.”

Surprise! We had better cash flow and production during the quarter
Another positive surprise was the company’s operational results for the quarter, which trounced its guidance. The company had expected to produce 1,100-1,220 MMcfe/d during the quarter but actually produced 1,219 MMcfe/d, which was 1.5% higher than the second quarter of last year. Further, as a result of production right at the high end of its guidance range, the company is now able to boost its full-year production guidance by 4% given what it sees on the horizon.

In addition to this, LINN Energy produced $71 million in excess cash flow for the quarter, which was a surprising bounty given that the company was expected to have a shortfall of $20 million for the quarter. The biggest driver here, aside from the higher than expected production, was a vast improvement in expenses. Overall, the company was able to reduce its lease operating expenses by 18% year over year.

The company expects these cost reductions to continue as LINN is reducing its full-year operating expense outlook by 6%, which will drive further improvement in cash flow. Overall, the company is expecting to pull a total of $225 million out of its overall cost structure as a result of interest savings and expense reductions.

Investor takeaway
There’s no way to sugarcoat things: The distribution and dividend cuts from LINN Energy and LinnCo sting. But given the persistent weakness in oil and gas prices it’s really the right move for the company to make until there’s a bit more clarity on prices. On a more positive note, the company did make significant progress on debt reduction and its operational results were actually quite good. That being said, LINN Energy and LinnCo have a lot of work to do considering the abundance of debt and no distributions to give investors a reason to keep holding.

For investors looking to limit risk, here’s a list of U.S. shale-oil producers with market values of at least $50 million and share prices above a dollar as of Friday’s close with the highest ratios of debt to equity:

Company Ticker Debt – most recent quarter-end ($mil) Total equity ($mil) Debt/ equity Total return – November Total return – YTD
Ultra Petroleum Corp. UPL,-6.55% $3,426.000 $5.198 65,910% -13% -8%
Midstates Petroleum Co. MPO,-0.38% 1,669.150 $334.277 499% -23% -65%
Memorial Resource Development Corp. MRD,-0.32% $2,111.800 $436.278 484% -20% N/A
Isramco Inc. ISRL,-2.55% $112.712 $26.740 422% 7% 10%
Jones Energy Inc. Class A JONE,-5.25% $770.000 $182.937 421% -18% -30%
Exco Resources Inc. XCO,-9.85% $1,549.439 $427.042 363% -4% -43%
PetroQuest Energy Inc. PQ,-2.80% $422.500 $130.059 325% -21% -14%
Goodrich Petroleum Corp. GDP,-5.20% $609.464 $214.587 284% -27% -64%
Linn Energy LLC LINE,-25.93% $12,310.146 $4,932.133 250% -26% -35%
Halcon Resources Corp. HK,-2.91% $3,533.852 $1,517.866 233% -27% -41%
Total returns assume dividends are reinvested. Source: FactSet

Memorial Resource Development Corp. completed its initial offering in June, priced at $19 a share, for a total return of 14% through Friday’s close at $21.60.

Morgan Stanley Oil Warning: The Crash / Glut Continues

Morgan Stanley has been pretty pessimistic about oil prices in 2015,

drawing comparisons to the some of the worst oil slumps of the past three decades. The current downturn could even rival the iconic price crash of 1986, analysts had warned—but definitely no worse.

This week, a revision: It could be much worse

Until recently, confidence in a strong recovery for oil prices—and oil companies—had been pretty high, wrote analysts including Martijn Rats and Haythem Rashed, in a report to investors yesterday. That confidence was based on four premises, they said, and only three have proven true.

1. Demand will rise: Check 

In theory: The crash in prices that started a year ago should stimulate demand. Cheap oil means cheaper manufacturing, cheaper shipping, more summer road trips.

In practice: Despite a softening Chinese economy, global demand has indeed surged by about 1.6 million barrels a day over last year’s average, according to the report.

2. Spending on new oil will fall: Check 

In theory: Lower oil prices should force energy companies to cut spending on new oil supplies, and the cost of drilling and pumping should decline.

In practice: Sure enough, since October the number of rigs actively drilling for new oil around the world has declined by about 42 percent. More than 70,000 oil workers have lost their jobs globally, and in 2015 alone listed oil companies have cut about $129 billion in capital expenditures.

3. Stock prices remain low: Check 

In theory: While oil markets rebalance themselves, stock prices of oil companies should remain cheap, setting the stage for a strong rebound.

In practice: Yep. The oil majors are trading near 35-year lows, using two different methods of valuation.

4. Oil supply will drop: Uh-oh 

In theory: With strong demand for oil and less money for drilling and exploration, the global oil glut should diminish. Let the recovery commence.

In practice: The opposite has happened. While U.S. production has leveled off since June, OPEC has taken up the role of market spoiler.

OPEC Production Surges in 2015

Source: Morgan Stanley Research, Bloomberg

For now, Morgan Stanley is sticking with its original thesis that prices will improve, largely because OPEC doesn’t have much more spare capacity to fill and because oil stocks have already been hammered.

But another possibility is that the supply of new oil coming from outside the U.S. may continue to increase as sanctions against Iran dissolve and if the situation in Libya improves, the Morgan Stanley analysts said. U.S. production could also rise again. A recovery is less certain than it once was, and the slump could last for three years or more—”far worse than in 1986.”

“In that case,” they wrote, “there would be little in history that could be a guide” for what’s to come.

Park your oil profits offshore http://www.youroffshoremoney.com

Barron’s Energy Review : A Whole Lot of Shorting Going On

Chesapeake Energy: A Whole Lot of Shorting Going On

Sterne Agee CRT’s Tim Rezvan is feeling bullish about Chesapeake Energy (CHK), which he upgraded on June 29. One of the reasons: The latest short interest data. He explains:

Daniel Acker/Bloomberg News

Largest Increases in Short Interest Among Coverage Names:PetroQuest Energy (PQ), Cheasapeake, Noble Energy(NBL). The largest increase in short interest came from PetroQuest Energy, which had a 16.1% increase to 7.2 million shares (11.0% of shares outstanding, 5.0 days to cover). Other large increases were seen in Chesapeake Energy, which had a 14.1% increase to 185 million shares (27.8% of shares outstanding, 8.1 days to cover), and Noble Energy, which had a 10.3% increase to 17.9 million shares (4.6% of shares outstanding, 4.1 days to cover).

June 30 Data Likely Represents Peak of Bear Case Fervor for Chesapeake Shares. Our June 29 upgrade of Chesapeake shares to Buy from Underperform reflected what we believed was oversold conditions, and month-end short interest data validates this thesis. Short interest in Chesapeake shares increased 14% to 185 million shares from mid-June to the end of June (+163% from the end of February). We expect profit-taking from shorts to provide further support to Chesapeake shares into 2Q earnings

Here’s a chart of the short interest in Chesapeake, which as the analysts note is just massive:

Shares of Chesapeake Energy have tumbled 3.4% to $10.98 at 9:57 a.m. today, while Noble Energy has fallen 0.3% to $38.94, and Petroquest Energy has gained 1.7% to $1.75.

Read more on protecting your assets at http://www.youroffshoremoney.com

Saudi Arabia Opens Production Taps

Saudi Arabia told OPEC it raised oil production to a record as the organization forecast stronger demand for its members’ crude in 2016.

The world’s biggest oil exporter pumped 10.564 million barrels a day in June, exceeding a previous record set in 1980, according to data the kingdom submitted to the Organization of Petroleum Exporting Countries. The group sees “a more balanced market” in 2016 as demand for its crude strengths and supply elsewhere falters.

Source: Bloomberg

OPEC said it expects expanding oil consumption to outpace diminished output growth from rival producers such as U.S. shale drillers, whittling away a supply glut. The strategy is taking time to have an impact, with crude prices remaining 46 percent below year-ago levels and annual U.S. production forecast to reach a 45-year high.

“Saudi Arabia is still pursuing a market-share strategy,” Torbjoern Kjus, an analyst at DNB ASA in Oslo, said by phone. “They need more oil domestically for air conditioning in the summer, so they could choose to either produce more or reduce exports. Clearly they choose to produce more.”

Brent crude futures fell 1.7 percent to $57.70 a barrel at 1:24 p.m. local time on the London-based ICE Futures Europe exchange, extending a 2.6 percent loss last week.

Market Balancing

“Momentum in the global economy, especially in the emerging markets, would contribute further to oil demand growth in the coming year,” OPEC’s Vienna-based research department said Monday in its monthly market report.

Demand for the group’s crude will climb in 2016 by 900,000 barrels a day to average 30.1 million a day, according to the report. That’s still about 1.2 million less than the group estimated it pumped in June.

Even though the market will theoretically be more balanced next year, “you still have to deal with the legacy of oversupply in 2014 to 2015,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London. Global markets remain “massively oversupplied,” the International Energy Agency said on July 13.

Three-Year Peak

OPEC’s 12 members raised production by 283,200 barrels a day to a three-year high of 31.378 million a day last month, according to external estimates of output cited by the report. This data included a lower figure for Saudi production of 10.235 million barrels a day.

There was no total available for data submitted directly by OPEC members, because of omissions by Algeria, Libya and Venezuela.

Global oil demand will accelerate next year, to 1.34 million barrels a day, compared with 1.28 million in 2015, led by rising consumption in emerging economies, according to the report. Supply growth outside OPEC will slow to 300,000 barrels a day in 2016 from 860,000 a day this year with the gain concentrated in the U.S.

The International Energy Agency estimated demand would grow more slowly next year, with consumption expanding by 1.2 million barrels a day compared with 1.4 million in 2015, according to its monthly report July 10. The Paris-based adviser forecast no growth in non-OPEC supply next year.

World oil demand will average 93.9 million barrels a day in 2016, while non-OPEC supply will total 57.7 million barrels a day, according to the OPEC report.

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No Rapid Rebound for Oil Prices ( MorningStar Energy Forecast )

Energy: No Rapid Rebound for Oil Prices

The rapid decline in oil prices has created significant investment opportunities, but downside risk remains in the short term.
  • The United States has rapidly become the critical source of incremental supply for global oil markets, and growth has come overwhelmingly from unconventional drilling. The large increases in U.S. output did not upset global supply/demand balances over the past few years, largely because significant amounts of supply were disrupted by political/security issues (Libya and Iran, for example). But in 2014 the scales finally tipped: Combined with weakening demand and OPEC’s decision not to reduce its own production, major supply imbalances resulted that, as of today, have yet to dissipate.
  • In the current market environment of high costs and low oil prices, upstream firms face extremely challenged economics where new investment is not value-creative. Such conditions are not sustainable over the long term, however, and we expect the combination of rising oil prices and falling costs to provide significant relief in the coming years.
  • Despite our belief that tight oil has considerable running room from here, it can’t completely meet future global demand. The marginal barrel, therefore, will come from higher up the global cost curve. Our forecasts show that higher-quality deep-water projects will be the highest-cost source of supply needed during the rest of the decade. As a result of this meaningful move down the cost curve, our midcycle oil price forecast for Brent is $75 per barrel (WTI: $69/bbl), meaningfully below 2014 highs.
  • Although U.S. gas production is likely to slow in the near term as oil-directed drilling hits the brakes, the wealth of low-cost inventory in areas like the Marcellus points to continued growth through the end of this decade and beyond. Abundant supply is holding current prices low, but in the long run we anticipate relief from incremental demand from LNG exports as well as industry. Our midcycle U.S. natural gas price estimate is $4/mcf.

Given both its remaining growth potential and ability to scale up and down activity quickly, tight oil has effectively made the United States the world’s newest swing producer. Drastic spending cuts will lead to a meaningful decline in near-term production, but the strong economics of the major U.S. liquids plays means production will begin growing again as soon as oil prices recover.

David Meats is an equity analyst for Morningstar.

Based on our belief that U.S. unconventionals will continue to be able to meet 35%-40% of incremental new supply requirements in the coming years, we believe that additional volumes from high-cost resources such as oil sands mining and marginal deep-water will not be needed for the foreseeable future. This disruptive force that already has upended global crude markets isn’t going away anytime soon. U.S. shale once again is proving truly to be a game changer.

Meanwhile, demand tailwinds from exports and industrial consumption will help balance the domestic gas market eventually, but ongoing cost pressures from efficiency gains and excess services capacity–as well as the crowding out of higher-cost production by world-class resources such as the Marcellus Shale and associated volumes from oil-rich areas such as the Eagle Ford and Permian–are weighing on near-term prices. Even under these circumstances, however, undervalued, cost-advantaged investment opportunities remain.

Top Energy Sector Picks
Star Rating
Fair Value
Estimate
Economic
Moat
Fair Value
Uncertainty
Consider
Buying
Encana
$16
Narrow
Very High $8
ExxonMobil
$98
Wide
Low $78.40
Cabot Oil & Gas
$43
Narrow
High $25.80
Data as of June 22, 2015

Encana (ECA)
Encana is our top pick within the U.S. oil-focused exploration and production group. The company’s growth is underpinned by high-quality Permian and Eagle Ford acreage. The company has transformed dramatically in the past 12 months, with two major acquisitions and a string of divestitures and is emerging leaner and meaner. The company now has a footprint in several top-quality oil plays in the United States and Canada.

ExxonMobil (XOM)
We view ExxonMobil as offering the best combination of value, quality, and defensiveness. Exxon will see its portfolio mix shift to liquids pricing as gas volumes decline and as new oil and liquefied natural gas projects start production. The company historically set itself apart from the other majors as a superior capital allocator and operator, delivering higher returns on capital than its peers as a result.

Cabot Oil & Gas (COG)
On the gas side, Cabot controls more than a decade of highly productive, low-cost drilling inventory targeting the dry gas Marcellus Shale in Pennsylvania. Fully loaded cash break-even costs are less than $2.50 per mcf.

ADD UPDATE at close of market:

Each week we look at the level of crude oil located in U.S. storage tanks around the country, which offers a glimpse into the inner workings of production and consumption levels. After peaking earlier this spring, U.S. crude inventories have undergone successive weeks of drawdowns, indicating slowing production and higher demand from consumers. In Europe, however, the story is different. Crude storage is reaching a multi-year high at the trading hub of Amsterdam-Rotterdam-Antwerp, known as ARA. In fact, storage levels have spiked since the beginning of the year to 60.6 million barrels in June. European storage is growing so rapidly because a lot of oil coming from Africa is having trouble finding interested buyers, forcing it into storage.

Growing storage levels in the U.S. pushed down oil prices earlier this year, and the same could hold true for European storage. That points to a persistent glut in global oil markets, with production exceeding demand by around 2 million barrels per day according to IEA estimates. Even if some of that supply can get soaked up by extra demand, there is a lot of oil sitting idle in tanks right now. That means oil prices likely won’t jump in the near term because the markets will need to work through the excess sitting in storage first.

While inventories are drawing down in the U.S., a group of companies are proposingincreased storage along the U.S. Gulf Coast. Magellan Midstream Partners and LBC Tank Terminals are proposing a $95 million oil storage facility near Houston. The facility would be able to hold around 700,000 barrels of crude and would be connected to existing distribution infrastructure. If it moves forward, the site could be completed by 2017. Magellan’s project would greatly expand storage along the Gulf Coast, helping refiners access and store product.

In another major construction project along the Gulf Coast, Cheniere Energy (NYSE: LNG) announced that it would take on $5.8 billion in new debt to build a fifth LNG train at its Sabine Pass facility in Louisiana. Lining up financing is a crucial step before construction can begin. Cheniere hopes to further expand by building a sixth LNG train, but has not secured financing for that yet. The company expects to liquefy and ship its first load of LNG later this year when its first train finishes construction, kicking off a new era in which the U.S. becomes a natural gas exporter.

Cramer Rates Chesapeake Energy : SELL SELL SELL

Our favorite AVOID gets a celebrity endorsement:

Chesapeake Energy is an oil and natural gas company based in Oklahoma City with positions in the Eagle Ford, Utica, Granite Wash, Cleveland, Tonkawa, Mississippi Lime, and Niobrara unconventional liquids plays.

TheStreet Ratings team rates CHESAPEAKE ENERGY CORP as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

“We rate CHESAPEAKE ENERGY CORP (CHK) a SELL. This is driven by several weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company’s weaknesses can be seen in multiple areas, such as its deteriorating net income, disappointing return on equity, weak operating cash flow, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share.”

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 979.8% when compared to the same quarter one year ago, falling from $425.00 million to -$3,739.00 million.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, CHESAPEAKE ENERGY CORP’s return on equity significantly trails that of both the industry average and the S&P 500.
  • Net operating cash flow has significantly decreased to $423.00 million or 67.23% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm’s growth is significantly lower.
  • Despite any intermediate fluctuations, we have only bad news to report on this stock’s performance over the last year: it has tumbled by 59.08%, worse than the S&P 500’s performance. Consistent with the plunge in the stock price, the company’s earnings per share are down 1159.25% compared to the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock’s sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
  • CHESAPEAKE ENERGY CORP has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, CHESAPEAKE ENERGY CORP increased its bottom line by earning $1.83 versus $0.68 in the prior year. For the next year, the market is expecting a contraction of 109.8% in earnings (-$0.18 versus $1.83).
  • You can view the full analysis from the report here: CHK Ratings Report

Offshore your Portfolio http://www.youroffshoremoney.com 

Energy Investors Cling To False Hopes : The Lost Decade

It has been a very challenging time for investors in the energy space, but we find their resiliency impressive, considering they have endured a decade of little to no returns.

Oil companies say there will be a price to pay — a much higher price — for all the cost cutting being done today to cope with the collapse in the crude market.

Investors haven’t made any money over the past decade with the S&P TSX Capped Energy Index gaining a paltry 0.3 per cent annually while the Canadian dollar-adjusted West Texas Intermediate oil price is up only 0.7 per cent per year. This compares to the S&P TSX Index that has gained just over seven per cent per year over the same period.

Even though it remained fairly flat over the past 10 years, the energy index has experienced tremendous volatility with an average standard deviation of 30 per cent, more than double the TSX’s 14 per cent.

It is doubtful that many investors rode out the entire period, instead we think they pulled the ripcord during some of the periods of excess volatility. It’s even worse for those who purchased at its recent peak in mid-2014.

Which is why we find it rather amazing that investors plowed a whopping $5.5 billion into the Canadian exploration and production sector through bought-deal equity financings in the first quarter, and an additional $1.4 billion raised so far this quarter.

Which is why we find it rather amazing that investors plowed a whopping $5.5 billion into the Canadian exploration and production sector through bought-deal equity financings in the first quarter, and an additional $1.4 billion raised so far this quarter.

FP0623_TotalReturns_C_JR

Looking Ahead

With regards to oil prices, we think there could more downside than upside on the horizon especially in this environment of a prolonged global supply-demand imbalance.

On the positive side, global oil demand has been improving and is up 1.2 per cent from last May. However, this may not be enough as global supply has exceeded demand for the past five quarters and could soon see the longest glut since 1985, according to financial news provider Bloomberg.

Not helping matters is OPEC production growth as the group aims to protect its market share against North American producers that have yet to curtail output despite the oil price being halved in the past year. Over the past four weeks the Lower 48 oil production has averaged 229,000 barrels a day higher than the previous four weeks.

With regard to Canadian oil producers, many companies have implied commodity prices at or near the forward curve and some a little bit higher such as Suncor Energy Inc. and Canadian Natural Resources Ltd.

 

We find this to be a useful exercise at times as a large divergence or disconnect either way can be indicative of a sector bottom like in mid-2012 or the peaks of early 2011 and mid-2014.

But today’s signals suggest more uncertainty and are creating a very challenging environment to make an investment decision in.

The bad news is that this may mean we have not yet seen the final capitulation usually needed before the start of a new bull cycle.  This is because high CAD-denominated forward prices, low interest rates and the large capital flow into the sector are providing an artificial sense of hope for marginal producers.

That said, there are still opportunities in the sector, but one has to work extra hard to mitigate the risks of uncertainty.

We continue to stay away from Alberta oil and gas producers as there is still way too much jurisdictional uncertainty. They could under perform like they did during the last royalty review and as a result have a higher cost of capital.

Instead, we look to own those well-funded, non-Alberta producers such as Crescent Point Energy Corp. that are looking to gain market share in this challenged environment.

Read more on protecting your portfolio and capital at hignnetworth.wordpress.com

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