Image source: LINN Energy LLC. 

While oil and gas prices were quite volatile during the third quarter, with oil down more than 20%, LINN Energy's (NASDAQOTH:LINEQ) results were about what was expected. That's largely due to the fact that LINN, along with affiliate LinnCo (UNKNOWN:LNCO.DL), announced preliminary results about a week ago, so investors knew what to expect. That said, LINN still made solid progress during the quarter toward the goal of reducing costs and improving its balance sheet so that it can survive in a world where oil is no longer in the triple digits.

1. All things considered, the numbers were high-end
LINN Energy's production averaged 1,198 MMcfe/d for the quarter, which was right in the middle of its guidance range of 1,130 to 1,220 MMcfe/d. Though it is worth noting that production is down from the 1,245 MMcfe/d it average in the year-ago quarter, which is the result of asset sales and reduced investment.

The other important number to note was excess cash flow, which at $111 million was well above its guidance from last quarter when it only expected to generate $14 million in excess cash flow during the third quarter. Furthermore, the company is on pace to generate $295 million in excess cash flow this year, which is well above the $201 million from its prior guidance. This excess cash flow is crucial to the company because it can be used to bolster its liquidity, which is getting tighter given the continued volatility in oil prices. 

2. Costs continue to decline
One of the primary reasons LINN Energy was able to generate so much excess cash flow is because of the significant cost savings it has been able to capture this year. Its lease operating costs are now down 20% year over year to $1.40 per Mcfe and well below the $1.66 per Mcfe from its guidance. This is helping to offset some of the pressure weak oil and gas prices are putting on its margins.

Capex costs, likewise, are coming in well under expectations. The company now expects to spend $470 million this year, which is $60 million less than its budget. What this means is that LINN doesn't need to invest quite as much to keep its production flat for the year.

Overall, the company has reduced its costs by roughly $300 million on an annualized basis.

3. More balance sheet improvements could be on the way
One of the cost reductions that I've yet to mention is interest costs savings. After buying back $783 million of its outstanding senior notes for just $557 million in cash, LINN has reduced its annual interest costs by $54 million. That's a dual benefit to the company because it means that it has less recurring cash outflows as well as less debt weighing down its balance sheet. 

It's quite possible that both numbers could fall even further. In its earnings release, LINN noted that it is focused on improving its balance sheet, reducing interest expense, and improving liquidity, and to that end, it is "currently evaluating several strategies" to achieve these three objectives. This suggests that there could be further announcements regarding steps LINN Energy is taking to improve its balance sheet, which could include additional senior note repurchases.

Investor takeaway
There are three things LINN Energy and LinnCo investors need to know about what happened during the third quarter. First, operationally everything was on target, if not better than expected. In addition, its costs are coming down more than expected, which is enabling it to generate a lot more excess cash flow. And finally, it is working on additional improvements to its balance sheet. What this suggests is that while LINN and LinnCo aren't in the clear just yet, they also aren't in any immediate danger of going bankrupt. That said, the outcome here is still quite binary, with higher oil prices being the key to for the long-term sustainability of both LINN and LinnCo.

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.