Despite being battered by a weak oil market LINN Energy LLC (OTC:LINEQ) and affiliate LinnCo LLC (UNKNOWN:LNCO.DL) reported decent results before the market opened this morning. Oil and gas production was up despite a dramatic cut in capex while distributable cash flow was expectedly weak due to lower prices. Overall, the company is muddling through the downturn as it gets its business rightsized so that it can return to growth mode once conditions improve.
Drilling down into the numbers
LINN's oil and gas production averaged 1,201 MMcfe/d during the first quarter. That was up 2% from the first quarter of last year despite a 65% drop in capital spending. Further, production was in the middle of the company's own guidance range of 1,120-1,240 MMcfe/d.
Despite the solid production LINN's cash flow from that production was down substantially due to lower commodity prices. During the first quarter of last year the weighted average commodity price LINN received for its production, before factoring in oil and gas hedges, was $5.23/mcf for gas, $92.95/barrel for oil and $39.85/barrel for NGLs. Those prices fell off the table over the past year, leading LINN's weighted average to plunge to $2.94/mcf for gas, $41.65/barrel for oil and $16.69/barrel for NGLs. These prices were a bit below LINN's expectations for average prices for its unhedged production as it planned on $3.50 gas, $60 oil and $23.40 for NGLs.
Because oil and gas prices were weaker than expected, the company ended up with a $37.1 million short fall on distributable cash flow. However, the company did have a $120.3 million working capital adjustment, which if not made this quarter would have resulted in excess cash flow of $83.2 million. So, don't get too worried by the shortfall this quarter.
Outside of producing and selling oil and gas LINN Energy was fairly active during the quarter as it signed two very important strategic initiatives. Back in January the company announced it had signed the DrillCo agreement with GSO Capital Partners, which could provide it with $500 million in funding for oil and gas development for five years. Then, in March, the company secured a $1 billion equity investment from Quantum Energy Partners to form AcqCo. That deal provided the company with up to $2.5 billion in acquisition funding. Both deals provide the company access to private, off-balance sheet capital to grow both through the drill bit and via acquisitions so that it can take advantage of opportunities that emerge during the downturn.
In addition to that, LINN Energy also provided an update on its oil and gas hedges. The company entered into additional swap agreements at $58 per barrel of oil to lock in up to 80% of the company's oil production for 2015 at an average price of $91 per barrel. This will help insulate the company's cash flow if oil prices experience another big drop in 2015.
A look ahead
LINN Energy provided guidance for the rest of 2015, which assumes the company doesn't acquire or divest any additional oil and gas properties this year. The company expects its production to be in a range of 1,100 to 1,220 MMcfe/d for the second quarter, which is expected to result in another small shortfall of $20 million in distributable cash flow.
However, the company expects to generate a lot more cash flow in the second half of the year as its capital spending program was first half weighted. This is why for the full-year LINN expects production to be 1,100-1,200 MMcfe/d, but that production is expected to result in about $63 million in excess cash flow. This assumes the commodity prices don't tank again and that the company can achieve its desired cost savings.
Overall, LINN's first-quarter results were adequate and about as expected considering the current market environment. The company spent much of the quarter setting itself up to grow despite weak commodity prices as it lined up $1.5 billion in outside funding to drive future growth. While the company isn't out of the woods just yet, it's working through its issues as it waits for better commodity pricing to return.