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LINN Energy (NASDAQ: LINE ) and its affiliate LinnCo (NASDAQ: LNCO ) actually did report earnings on Oct. 28. The pair released a semi-cryptic press release on Oct. 25 stating that both companies "anticipated" that an earnings release would come on the 28th. With the numbers out, let's take a look.
Berry Petroleum merger update
LINN Energy only had one thing to say about its proposed merger with Berry Petroleum (UNKNOWN: BRY.DL2 ) . The company noted that it would file its sixth amended Form S-4 with the SEC before the end of the day, which it did indeed accomplish. The company just filed its fifth amended Form S-4 when Berry Petroleum reported earnings a few days ago.
It would seem that the end is finally drawing near for this drawn out merger. Any one of the three parties can walk away after Oct. 31. But after filing six amended S-4s it's not likely any company will simply walk away, it's not like there is a massive breakup fee holding the merger together. That said, the fact that LINN is holding off on the traditional quarterly conference call with analysts suggests that more news is pending.
Quick overview on the quarter
The Berry Petroleum merger drama aside, LINN produced a pretty solid quarter overall. Its daily production of 823 million cubic feet equivalent exceeded its expectations. After two straight misses, this is good to see.
The highlight on the quarter is the fact that LINN is reporting that it produced $2 million of net cash in excess of what it paid in distributions. One of the changes it made in how it reports earnings is to get away from MLP type metrics such as the distribution coverage ratio. The new accounting term that LINN Energy and LinnCo investors will want to familiarize themselves with is "Excess of net cash provided by operating activities after distributions to unitholders and discretionary adjustments considered by the Board of Directors," which is quite the mouthful. We'll keep it simple and just refer to this as LINN's leftovers, if any, each quarter.
The fact that LINN covered its distribution is important as it had been projecting a 5% shortfall. Looking ahead LINN doesn't expect any leftovers next quarter nor does it see any shortfall. For long-term investors this is important because it means that LINN can maintain its distribution even if the Berry Petroleum deal ends up dying.
LINN was able to exceed expectations for two main reasons. First, as previously mentioned it exceeded its production guidance. But the company also cut a lot of costs in the quarter. Total operating expenses fell by 7%, which provided a nice boost to that bottom line.
Despite no firm conclusion to the Berry Petroleum merge, LINN Energy and, by extension, LinnCo reported a pretty solid quarter. At this point LINN Energy has improved its operations to the point where it doesn't need to close the Berry Petroleum merger to cover its distribution to investors.
That said, because of the natural decline of an oil and gas well, LINN will always have to work hard to meet its obligations to investors. That's why the company's ability to either build or buy will continue to be a critical component of its business. This quarter's success can be attributed to its ability to "build" by growing its production organically. Bottom line is that LINN will always have to do something to keep its distribution both flowing and growing.
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