LINN Energy LLC (NASDAQOTH:LINEQ) and LinnCo LLC (UNKNOWN:LNCO.DL) announced after markets closed on Monday the replacement of longtime CFO Kolja Rockov. It's a move that might seem like its out of the blue, but actually isn't totally unexpected as he's made several recent missteps both in guiding the company as well as managing his own personal finances. He's being replaced by David Rottino, the company's EVP of business development and chief accounting officer . Here's why this change is necessary and what it means for investors.
A wild ride
After holding the job for more than a decade, the announcement that Rockov is stepping down is very interesting, to say the least. According to the company's press release, he is leaving to pursue other opportunities and that "this mutually agreed departure is not related to any disagreement with the Company's policies or practices." That said, there is good reason to speculate that this was a bit of a forced exit.
Rockov made multiple missteps over the past year that hurt both himself and the company due to what in hindsight were aggressive moves. For example, he was mentioned in a Wall Street Journal article this past January on the pain that's spreading across the oil patch. The article detailed that Rockov was forced to sell half his stake in LINN due to a margin call. He'd pledged LINN's units as a collateral for a loan and was forced to sell 230,900 of them at an average price of $9.46 per unit. That $2.2 million sale price came after units crashed 72% in the prior year. Even more recently, social media rumors began to swirl that Rockov was facing personal financial troubles. Obviously, his borrowings came back to bite him.
Those personal financial troubles aside, Rockov has gotten LINN Energy and LinnCo into their own financial troubles as he wasn't as conservative as he should have been. For example, after LinnCo acquired Berry Petroleum in late 2013, it did not immediately hedge 100% of its production several years in advance as it typically does with acquisitions. One of the reasons, according to Rockov, was that the company wanted to be "opportunistic" when hedging, but that opportunity never arose before oil prices crashed. Moreover, he used the company's credit facility to buy back some of Berry's bonds that were part of a change of control agreement, fully intending to go to the capital markets to term out the debt later, but good terms weren't found before the market crashed.
Those recent blunders aside, Rockov accomplished a lot during his tenure and LINN credits his "vision in leading the formation of our sector with LINN's IPO in 2006." Also, he was instrumental in finding the capital the company needed to grow from a small private company into one of the largest independent oil and gas companies in the country. He also created LinnCo, and recently lined up private funding for both drilling and acquisitions by signing deals with private equity funds to create DrillCo and AcquisitionCo. Having said all that, he leaves LINN Energy underhedged and overexposed on the debt side, which is quite a mess for his successor to clean up.
A transition toward stability?
Rockov's replacement certainly has the experience to lead LINN and LinnCo as Rottino has overseen the company's accounting since 2008 and has 20 years' experience within the industry. Furthermore, his recent assignments have included leading the company's portfolio transformation over the past two years that has seen LINN sell and trade higher decline assets and replace them with much more stable production. These moves have really helped the company to cut back on capex spending as it hasn't needed to invest as much money to overcome the natural decline rate of its wells.
Hopefully, his focus on bringing stability to LINN Energy's production base will translate to more stability from its finances. It's no small task as the company still has a mountain of debt even after buying back more than $750 million in bonds since the start of the year. However,it has a large asset base, decent liquidity, and solid cash flow so he has some tools to work with to right the ship.
After a number of miscalculations over the past couple of years, LINN Energy is changing out its longtime CFO. It's a move that really needed to be made given the growing rumors surrounding Rockov's personal financial woes as well as the current financial state of LINN and LinnCo. The hope is that his replacement will bring as much stability to the company's finances as he brought to its production.