There was a lot of talk on LINN Energy LLC's (NASDAQOTH:LINEQ) third-quarter conference call about 2015. That's because most analysts, and investors for that matter, have already given up on 2014. The company really didn't give them much choice as fourth-quarter guidance was weak and really overshadowed the company's stronger than expected third-quarter results.
While the company refused to even provide a hint of 2015 guidance, the management team did have a lot to say about what to expect from the company in the future. Here are some of the most important quotes and notes from that call.
Houston, we might still have a problem
CEO Mark Ellis led the call and discussed the quarter's results. He then took some time to address the current weakness in commodity prices as well as the steps the company is taking to mitigate those effects on its business. He discussed the company's strong hedge book where 90%-100% of natural gas and 60%-70% of its oil production is hedged for next year. He then went on to talk about the investments the company is making to earn higher margins on its production as well as the opportunities the company has from becoming more optimized.
That being said, Ellis said one thing that certainly gives investors a reason to be nervous. Despite all of these steps the company is taking, it might not be enough, as he said:
Looking into next year, if lower commodity prices and wide differentials persist throughout the year, there would be an impact to our cash flow despite our conservative hedging strategy and diverse portfolio of assets.
Now, he didn't say how much that impact could be because the company isn't yet sure. It's working its way through the assets it has recently acquired and will put together a plan of action for 2015 and beyond. The hope is that the company will be able to figure out how to keep its cash flow high enough to maintain and grow its distribution over the long term.
However, if there was one theme that ran throughout the call it was that the management isn't worried about what's happening right now in the market. This is because the focus isn't on oil prices in the fourth-quarter, or even so much what energy prices will do next year. The company is making plans to keep LINN Energy moving forward while keeping the rest of the decade in mind. This is why Ellis reminded everyone that:
We took a long-term perspective to running the business and will not overreact to short-term volatility and commodity prices.
Part of this long-term perspective is knowing that the moves the company made in 2014 were not just made to juice short-term results. In fact, in the short term, the moves are part of the reason why the company's fourth-quarter guidance is a bit weaker. CFO Kolja Rockov pointed this out on the call by saying, "The remainder of the expected shortfall for the fourth-quarter is due to ... the near-term effects of shifting from higher decline assets to lower decline assets." However, he went on to say that the company made the moves because "we believe the long-term effect of the portfolio shift reverses significantly in the future."
Challenges and opportunities
Clearly, LINN Energy's management team is taking the very long-term view when it comes to its business. This is why it's looking at the current challenges with oil prices as potentially opening up an opportunity for the company to set itself up for an even stronger future. Rockov noted this by saying:
Lower oil prices and widening differentials have certainly made our business more challenging. However, we feel that we have numerous mitigating factors to help us partially offset the decline. All of the strategic alternatives we have recently completed within our portfolio provide Linn with a great deal of flexibility. The current environment of increased volatility could create buyback opportunities for LINN Energy, LinnCo LLC (UNKNOWN:LNCO.DL) and our bonds.
That last sentence is important because the weakness in oil prices has sent LINN Energy's units and LinnCo's stock down over the past few months. That's actually providing the company with the opportunity to use its $250 million buyback authorization to reduce the unit count. The company could buy back around 11 million units, which would save it about $30 million in future distribution payments. It's one of the many levers the company could pull so that it not only weathers the current storm in oil prices, but emerges out of the other end of the downturn as a stronger company.
It's critical that investors join LINN Energy's management team and take the long-term view. There will be bumps along the road. However, the company remains confident that its plan will yield a much stronger distribution that will be easier to grow in the future. While the weakness in oil prices will be a challenge over the short term, it could turn out to be an incredible long-term opportunity.