This has not been a good year for investors in leading upstream oil and gas master limited partnership LINN Energy LLC (NASDAQOTH:LINEQ) and its affiliate LinnCo (UNKNOWN:LNCO.DL). LINN's unit price is down more than 43% year to date while LinnCo's stock is down 45% as a weakening oil market sent both plunging. Both could be in for another drop if the company reports less than spectacular second-quarter results on Thursday. Here's what to watch when LINN Energy and LinnCo report.
Results versus guidance
LINN Energy is expecting to produce 1,100-1,220 MMcfe/d during the second quarter. That would be roughly flat with both last quarter and last year's second quarter, when the company's production averaged 1,201 MMcfe/d and 1,131 MMcfe/d, respectively. That said, investors would prefer for the company to be producing at or above the high end of its guidance. What we want to focus on is any negative impact on production from weather-related or third-party pipeline disruptions.
The other number to keep an eye on here is LINN Energy's distributable cash flow. The company projects a shortfall of about $20 million in the quarter. However, LINN expects to make up that shortfall later this year as it is projecting a cash flow surplus of $63 million in 2015. What investors should watch is whether there are any changes to this full-year guidance. There's a real concern that this could be in the cards as oil and gas prices have been very weak over the past few weeks and that weakness could have an impact on the company's ability to produce excess cash flow for the year.
Big news items
Earlier this month, LINN Energy announced that it had finally finalized three key transactions. Two of those deals finalized the company's private capital funding deals, while the other announcement was the sale of some acreage in the Permian Basin. As a result of these transactions, LINN Energy now has quite a war chest to make acquisitions and fund new wells. Any announcement from the company that it has found a good use for these funds could move the stock on Thursday.
Another potential area where the company might have some news is in regards to its capital structure. Given the persistent weakness of oil and gas prices, there's growing concern among analysts and investors around LINN Energy's balance sheet and liquidity. This is due to the fact that its balance sheet had nearly $11 billion in outstanding debt while its liquidity has fallen from $2.2 billion to start the year to $1.5 billion at the end of last quarter as a result of its credit facility's borrowing capacity being reduced.
LINN has taken some steps to improve both as it recently issued $181 million in units to buy back $184 million of its senior notes at a discounted cost of just $165 million while it also sold the non-core acreage in the Permian Basin for $281 million. Furthermore, the company also finalized the aforementioned private capital agreements, which boosts its off-balance sheet liquidity. That said, investors would like to see more action to shore up its balance sheet and an announcement that it is making progress on this front, such as a large asset sale, could lead to a rebound in the unit price.
Given the recent weakness in oil and gas prices, the second quarter could be weaker than expected as it's quite possible that LINN Energy will report a steeper-than-expected shortfall in distributable cash flow. That said, investors should focus on the company's longer-term outlook for cash flow and any moves it's making to use its off balance sheet capital to boost fund growth that will bolster its cash flow. Also, any news on moves the company is making to reduce its debt would be welcomed as investors' greatest fear at the moment is that LINN's large debt load will be its undoing if commodity prices remain weak for a couple more years.
Matt DiLallo owns shares of LinnCo. and LINN Energy. 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.