Now that LINN's first-quarter results are out, showing another mediocre performance given the costs of the acquisition, it's clear that investors will need to be patient while LINN works though its many issues.
Stuck in neutral
On the surface, LINN's quarterly performance looks really good. Average daily production soared 39% to 1,104 MM cubic feet equivalent per day. Furthermore, cash from operations jumped 30% to $434 million versus the first quarter of 2013. Those numbers look fantastic, but almost all of LINN's growth was achieved through its asset acquisitions. Organic production is far less impressive. LINN expects organic production growth of just 3% to 4% in 2014.
LINN is also displaying a concerning trend of not covering its distribution with enough cash. Last year, LINN distributed $4.6 million more to investors than it generated in net cash provided by operating activities after discretionary adjustments, which include things like legal expenses and reductions for oil and gas development costs.
Unfortunately, this persisted in the first quarter as well. LINN once again came up short on covering its distribution with cash from operations. It had a $3 million shortfall of cash from operating activities after distributions and adjustments. Although, if you're looking for a silver lining, this was a much better performance than the $20 million shortfall in the first quarter of last year.
Investors getting the silent treatment
LINN's first quarter was more or less as expected. Unfortunately, it's pretty clear that the increased bid for the Berry assets has made the deal much less accretive than management had initially hoped. Fortunately, LINN still has an ace up its sleeve in the form of its Midland Basin position. But the company hasn't had much in the way of updates on what it plans to do with its prized asset.
Management has a few viable options at its disposal, which include an outright sale, an asset swap, or a full-fledged drilling program. However, for the past few quarters, management hasn't done much other than state the obvious. In the most recent quarterly earnings report, President and CEO Mark E. Ellis only said:
[W]e are pleased by the level of interest expressed in our Midland Basin properties and believe our position represents a tremendous amount of potential value for our unitholders. We are diligently evaluating a number of strategic options in order to fully maximize its value.
On the conference call with analysts, the CEO provided a little bit of color on the subject by saying the company would prefer a trade, most likely through a like-kind exchange. In addition, the company is leaning against taking on joint venture partners. Instead, management is hoping for a trade opportunity or a cash sale, and assured analysts it would announce something as soon as possible.
Patience is a virtue
Without a firm announcement, investors can really only wait and see what happens. The Midland position represents a potential gold mine for LINN and is perhaps the best hope to restore upward momentum. Completing the Berry deal was a very difficult process that is not proving to be as beneficial to unitholders as management probably would have liked.
In the meantime, investors are at least getting paid well to wait. LINN's double-digit distribution is likely not in doubt, but that could change if the company can't start covering it with operating cash flow. While I'm fairly confident a distribution cut is not a distinct possibility, it does appear that a distribution increase is probably not likely for some time, at least not until the Midland position gets monetized.
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