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Drilling Down Into Why LINN Energy Missed Its Production Guidance

By Matthew DiLallo - Apr 25, 2013 at 5:00PM

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Oil and gas production at LINN energy came in a little light. Let's drill down and see what happened.

LINN Energy ( LINEQ ), along with affiliate LinnCo (NASDAQ: LNCO), are out with first-quarter earnings. The report was below the company's guidance expectations, as production came in at 796 Million cubic feet equivalent per day, or MMcfe/d, against a guidance range of 810 MMcf/d to 845 MMcf/day for the quarter. Let's drill down a little deeper and see what happened.

Blame it on the weather
LINN pointed out that first-quarter production volumes were negatively affected by weather issues. Specifically, severe winter weather in February and March hit the company's operations in the Texas Panhandle, Oklahoma, and Kansas. This caused significant shut-ins and drilling delays for the company.

Weather in the Northern Hemisphere can have a temporary impact on exploration and production companies. Heavy snow can make it tough to move equipment, while frigid temperatures can also put a freeze on activity. The good news is that weather is a temporary issue, at least until next year, so there's no concern here for LINN investors.

Infrastructures issues
While LINN's weather problems are temporary in nature, its infrastructure issues can be a recurring theme not just for LINN but for the industry as a whole. In the first quarter, LINN faced two specific infrastructure issues that contributed to the production problems. First, infrastructure curtailments in the Permian Basin region resulted in lower production than expected, which was caused by shut-ins and high line pressures. This problem should sort itself out as more infrastructure comes online in the future.

Unfortunately, LINN's other infrastructure issue, ethane rejection at the Jonah Field it acquired from BP last year, could take longer to sort out. In this case, depressed ethane prices are expected to cost LINN approximately 10 MMcfe/d of production volume this year. Even with that lost volume, LINN still expects to organically grow production by 10% this year, so again, no real cause for concern.

Where's the gusher?
A final contributing factor to the production shortfall were the company's recently drilled Hogshooter wells in the Texas portion of the liquids-rich Granite Wash. Several of those recently drilled wells underperformed the company's expectations. It's not that the wells were too gassy; the overall initial production rates were lower than anticipated. 

Not all is lost, as there are several other intervals that can be tested on these acres in the future. In the meantime, LINN has moved its drilling program over to its Oklahoma acreage, which it expects will generate very favorable rates of return. One recently drilled Oklahoma well saw an average initial production rate of approximately 3,375 barrels of oil equivalent per day, producing 72% liquids. LINN has a lower working interest in these wells, so its capital costs won't be quite as high. However, that also means it will receive a lower portion of the wells' future production.

Foolish bottom line
From all appearances, these issues appear to be temporary in nature. Even the lower-performing Texas Hogshooter area could turn out to yield a decent return if drilled at different intervals. For the full year, LINN expects to have no problem maintaining its distribution, which will be heading higher once it closes its deal to buy Berry Petroleum. The bottom line is that this was still a solid quarter from LINN with continued progress throughout the year.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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