Thursday is a day investors in Linn Energy LLC (NASDAQOTH:LINEQ) and LinnCo LLC (UNKNOWN:LNCO.DL)might want to circle on their calendars. The company is expected to report fourth-quarter results that morning and to provide an update to its outlook for 2015. The report could have a significant impact on the stock. Here are three areas in particular worth watching given their potential to drive the stock price on Thursday.
Look at how results measured up to guidance
When Linn Energy reported its third-quarter results in November the company also provided guidance for the fourth quarter. A weak outlook and tumbling oil prices are largely responsible for the company's units falling 44% since that report was issued.
Investors aren't expecting a whole lot when Linn reports this week. That said, we still want to see how the company performed relative to its own guidance.
The first thing investors will want to check out is production, which is expected to be 1,350 MMcfe/d to 1,405 MMcfe/d for the quarter. Ideally, the company would hit the top end of the guidance range. However, that range assumed the closing of the sale of its Granite Wash acreage, as well as a Midland Basin trade. The sale closed in mid-December and the trade was consummated in November, so investors will want to see what, if any, impact these closing dates had on production before reacting to any numbers outside of that guidance range.
The other guidance number to look for is the company's distributable cash flow, which Linn Energy expected to be $147 million in the quarter, or a shortfall of $94 million. This number could get quite messy as LINN was expected to send $45 million of that distributable cash flow to the buyer of its Granite Wash assets; depending on the closing date, as well as that asset's performance, that number could be vastly different than expectations. For example, if wells drilled during the quarter outperformed expectations it could result in higher cash flow needing to go to the buyer. On the other hand, because the closing date was so late in the quarter the actual cash flow could have differed materially from expectations due to the dramatic drop in the price of oil. Suffice it to say, the actual distrbutable cash flow impact might not match up with the original expectation of a $45 million impact, which is why investors need to take a look at this impact.
Adding to the mess is the crash of commodity prices in the quarter. The company expected to realize about $80 per barrel of oil and $35 per barrel of NGLs for its unhedged volumes, which of course didn't happen. In short, the company is expected to deliver a less than stellar distributable cash flow number in the fourth quarter. However, investors will need to decipher what portion of that is related to the company's portfolio reshuffle before making any judgments.
Look for changes in the outlook
The collapse of oil prices last quarter left Linn Energy with no choice but to reset its expectations for 2015. That included slashing its capital spending and its distribution in early January. At the time, Linn provided guidance that included production of 1,110 MMcfe/d to 1,235 MMcfe/d in 2015. The company also issued the following guidance table for its distribution coverage ratio.
We'll want to look Thursday for any changes to the company's outlook now that we're a month and a half deeper into 2015 -- particularly considering that Linn based its midpoint guidance on a $60 per barrel oil price for 2015, and we haven't seen that price for quite a while.
That downside to oil prices aside, look for whether the company sees any upside to its guidance, especially on the cost side. As that chart notes, a 5% reduction in lease operating expenses and transportation would have a huge impact on the company's coverage ratio, as would a 5% reduction in capital costs. There's actual real upside potential here, as oil and gas producers such as Linn are demanding that oil-field service companies lower prices; we'd like to see the company report that it anticipates these costs to fall.
Look for an update on financing
Finally, look for an update on financing, as Linn has a number of deals in the works. For one, it was pursuing a deal with GSO Capital Partners on a $500 million drilling venture, which we'd like to see is now signed. The company also hinted it was pursuing a similar venture for acquisitions, and we'd like to see this become a reality as well. Lastly, the company had at least one more Midland Basin trade or sale to complete, which we'd want to see closed. Moving forward with these financing vehicles and asset sales would place Linn Energy in a better position to grow without loading down its balance sheet with more debt.
Linn Energy should have a lot to say on Thursday. The company had a busy quarter as it closed its Granite Wash sale and another one of its Midland Basin trades. The crashing price of oil in the quarter forced the company to make changes heading into 2015. Hopefully it has an even better grasp on what to expect in 2015 and can deliver some good news to investors this week.
Matt DiLallo owns shares of Linn Co, LLC and Linn Energy, LLC. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.