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Can This State Be Blamed for LINN Energy's Bad News?

By Tyler Crowe - Apr 30, 2013 at 8:02AM

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Linn's toubles last quarter mostly took place in Texas. Who's to blame?

LINN Energy (LINEQ) had a "wait and see until we finish our Berry Petroleum (NYSE: BRY) acquisition" kind of quarter. While overall production jumped a very healthy 69% over last year, it just didn't quite meet what the company expected. Weather was part of the problem, but much of the company's woes came in one place: Texas. Does LINN have a problem with Texas' tea? Let's take a look at these pieces of bad news and see if the problems lie with LINN or the Lone Star State. 

Permian all plugged up
Although the news that takeaway capacity isn't quite up to snuff for many of the producing regions in the U.S., the Permian in particular has been suffering despite the region only producing at half the rate of its peak production back in 1973. LINN, and its operating arm LinnCo (NASDAQ: LNCO), stated that it has reduced the amount of rigs it has working in the region and has focused on the western side of the basin because of stronger infrastructure there. 

Based on the results from other Permian producers, this might be more of a LINN problem. Occidental Petroleum (OXY 2.55%), the largest producer in the Permian, recently reported that it was able to grow its Permian production by 10,000 barrels of oil equivalent per day year over year.  

Perhaps bigger players like Occidental were able to hog the limited takeaway capacity, but this won't be a good reason for slowed production very soon. Magellan Midstream Partners (MMP 0.27%) and DCP Midstream (NYSE: DCP) both have pipelines coming on line within the next couple of months that will have takeaway capacity of 225,000 and 350,000 barrels per day, respectively. Once these pipelines come on line, there should be much more room for LINN's production. 

Wilting production in Granite Wash
Probably news of more concern for LINN investors is its shift away from the Texas part of the Granite Wash region for greener pastures on the Oklahoma side of the play. According to statements from LINN CEO Mark Ellis, the Texas side of the Granite Wash has underperformed expectations, and the company sees better opportunities in its other holdings in the play. What is surprising about this is that LINN has only a 25% working interest in its Oklahoma operations compared to a 60% interest in the Texas side of the Wash. 

To compound the bad news, Core Laboratories (CLB 2.52%) CEO David Demshur has gone on the record saying several producers will probably slow production outside of what he calls the sweet spots (Bakken, Eagle Ford, and Niobrara) if oil were to go below $90 for a sustained period of time. Unfortunately, the Granite Wash is not one of those sweet spots. In fact, the only parts of LINN's holdings that fall within those sweet spots is 25,000 acres in the Bakken. If this proclamation were to come true, then the juice from LINN's assets might not be worth the squeeze. 

What a Fool believes
LINN has had a pretty impressive track record thus far at increasing overall production during the past couple of years, and has rewarded unitholders with some pretty hefty distributions. While there are a few stories worth watching, much of the company's future will be determined once the Berry Petroleum acquisition goes through. LINN's management has stated that it will be reevaluating the company's capital allocation program once these new assets are brought on line.

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Stocks Mentioned

Linn Energy, LLC Stock Quote
Linn Energy, LLC
Occidental Petroleum Corporation Stock Quote
Occidental Petroleum Corporation
$57.52 (2.55%) $1.43
Magellan Midstream Partners, L.P. Stock Quote
Magellan Midstream Partners, L.P.
$47.52 (0.27%) $0.13
Core Laboratories N.V. Stock Quote
Core Laboratories N.V.
$19.13 (2.52%) $0.47

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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