A Closer Look at LINN Energy LLC’s First-Quarter Results

  

Photo credit: LINN Energy.

LINN Energy (LINE +0.00%) and LinnCo (NASDAQ: LNCO) on Thursday reported solid first-quarter results. LINN exceeded the upper end of its production guidance, though it did experience a small $3 million shortfall in cash flow available to pay its distribution. Overall, it was a pretty quiet quarter for the company, which is about what we expected.

What went right?
The highlight for LINN Energy investors this past quarter was production, which averaged 1,104 MMcfe/d. This was 39% higher than last year's first quarter and above the company's guidance range of 1,070-1,100 MMcfe/d. A combination of better than expected well results from the company's capital program and efficient management of base assets yielded the production gains on the quarter.

A bulk of the company's production growth came from the LinnCo-led acquisition of Berry Petroleum. As the following chart shows, LINN saw strong production growth in all four regions where it had overlap with Berry Petroleum.

Source: LINN Energy press release.

LINN Energy's drilling program also contributed to its production boost. LINN is actively drilling in the Permian Basin, where it completed its first operated horizontal well in the Wolfcamp B interval. The two other areas of strength were the Uinta Basin in the Rockies, where production was up 13% from last quarter, and the Diatomite and New Steam Floods assets in California, which delivered 9% growth over last quarter. Overall, LINN Energy expects its capital program to fuel organic growth of 3%-4% this year. 

The one area of weakness was the midcontinent region, where production declined 7% over last year's first quarter. LINN Energy's focus on optimizing its capital program meant the company spent less money in the region. That meant it wasn't able to overcome the natural decline of its wells in the zone. However, the focus on oilier growth in California, the Rockies, and the Permian Basin should yield better long-term results for the company as a whole.

What went wrong?
While LINN Energy's production beat its own guidance, the company fell about $3 million short of its projection for cash available to cover its distribution. Transportation expenses had an impact here. LINN Energy paid $46 million, or $0.46 per Mcfe, to transport its oil and gas from production basins to market centers. This was up from $27 million, or $0.38 per Mcfe, from last year's first quarter. This was a case in which higher natural-gas prices actually hurt the company as it cost more to fuel the compressors to move the oil and gas out of the Rockies, Hugoton Basin and the midcontinent regions.

Photo credit: LINN Energy.

Expenses were higher across the board as the addition of Berry Petroleum's higher-margin oil assets increased LINN's operating expenses. LINN Energy now sees total operating expenses being higher for the full year. That, when combined with lower natural-gas liquids prices and higher oil differentials, is causing the company to lower its 2014 guidance for cash available to pay its distribution. LINN Energy now sees a $17 million shortfall this year, when it had earlier projected $12 million in excess cash flow.

Investor takeaway
Overall, it was a solid quarter for LINN Energy. The company remains on track to meet its full-year production guidance. The only area of concern is the looming shortfall in cash flow to cover the distribution. However, given that the company is seeing strong interest in its Midland Basin acreage, it could end up making a deal that will reverse the cash flow problem. LINN Energy and LinnCo both remain solid long-term income producers that should keep fueling large monthly dividends and distributions to investors for years to come.