LINN Energy, LLC LINE
("LINN" or the "Company") and LinnCo, LLC LNCO ("LinnCo") announced
today that LINN's Board of Directors has approved a 2015 budget which includes
a 53% reduction in oil and natural gas capital expenditures to $730 million,
from approximately $1.55 billion in 2014, and a reduction of the LINN
distribution and LinnCo dividend to $1.25 per unit or share, from the previous
level of $2.90 per unit or share, on an annualized basis. LINN expects to fund
its total 2015 oil and natural gas capital program, along with the
distribution, from internally generated cash flow.
"After careful consideration, LINN's senior management proposed and the Board
of Directors approved a 2015 budget that contemplates a significantly lower
current crude oil price than in 2014. In order to solidify the Company's
financial position and regain a useful cost of capital, we have reduced the
oil and natural gas capital budget and distribution while balancing cash flow
and spending," said Mark E. Ellis, Chairman, President and Chief Executive
Officer.
Alliance with GSO Capital Partners
In addition, LINN announced that it has signed a non-binding letter of intent
with private capital investor GSO Capital Partners LP ("GSO"), the credit
platform of The Blackstone Group L.P. BX ("Blackstone"), to fund oil
and natural gas development (the "DrillCo Agreement"). Subject to final
documentation, funds managed by GSO and its affiliates have agreed to commit
up to $500 million with 5-year availability to fund drilling programs on
locations provided by LINN. Subject to adjustments depending on asset
characteristics and return expectations, GSO will fund 100% of the costs
associated with new wells drilled under the DrillCo Agreement and is expected
to receive an 85% working interest in these wells until it achieves a 15%
internal rate of return on annual groupings of wells, while LINN is expected
to receive a 15% carried working interest during this period. Upon reaching
the internal rate of return target, GSO's interest will be reduced to 5%,
while LINN's will increase to 95%.
"We are extremely pleased to announce a new strategic initiative today
designed to allow LINN to be an active developer of assets with growth capital
funded from a new financial partnership with GSO," said Mr. Ellis. "This
agreement creates a dynamic alliance, combining world-class expertise from a
highly respected investor with LINN's ability to acquire and develop oil and
natural gas assets."
Dwight Scott, Senior Managing Director of GSO Capital, commented, "We are
excited to partner with LINN as it continues to grow its business. LINN is a
leading operator with an exceptional undeveloped asset base, which is expected
to generate significant value for the partnership."
Strategic advantages for LINN:
* Allows LINN to develop assets without increasing capital intensity;
* Potential to add a steady and growing cash flow stream with no capital
requirement;
* Increases LINN's long term ability to fund all oil and natural gas
development capital and the distribution from internally generated cash
flow;
* Mitigates drilling risk;
* Potentially broadens acquisition universe; and
* Upon meeting the return hurdle, provides incremental low decline
production growth for LINN.
2015 Oil and Natural Gas Capital Budget
LINN has approved a budget for 2015 which includes a 53% reduction in oil and
natural gas capital expenditures to $730 million, from approximately $1.55
billion in 2014. The Company expects to fund its 2015 oil and natural gas
capital program, along with the distribution, from internally generated cash
flow. Key 2015 budget assumptions include:
* Average annual production of 1,110 – 1,235 MMcfe/d
* 54% natural gas;
* 32% oil;
* 14% NGL;
* Overall decline rate of ~15%;
* Unhedged NYMEX oil price of $60 per Bbl;
* Unhedged NYMEX natural gas price of $3.50 per Mcf;
* NGL realization of 39% of NYMEX oil price, or approximately $23.40 per
Bbl;
* Annualized distribution of $1.25 per unit;
* Does not consider potential upside associated with capital cost
improvement as a result of low commodity prices;
* No assumed positive impact from acquisitions or the DrillCo Agreement; and
* Expected coverage ratio of 1.18x. LINN defines coverage ratio as net cash
provided by operating activities after discretionary adjustments
considered by the Board of Directors, divided by total distributions to
unitholders.
"After transforming the Company's asset base in 2014 toward a significantly
lower overall decline rate, we were able to materially reduce capital in a
lower commodity price environment but still expect projected cash flow to
increase quarter over quarter during the course of 2015. Our budget projects a
1.18x coverage ratio at the new annualized distribution rate of $1.25 per unit
with $730 million of oil and natural gas capital," said Mr. Ellis.
The Company's decrease in oil and natural gas capital is approximately half in
response to lower commodity prices and half as a result of the divestiture of
its higher decline Granite Wash assets and the majority of its Midland Basin
assets in the Permian Basin, as well as reduced investment in other areas
across its portfolio. Capital will be focused on lower-risk development and
optimization projects including steam flood enhancement and expansions in
California, natural gas drilling in the Jonah Field, Hugoton Basin and
Piceance Basin, non-operated drilling in the Williston Basin, as well as
Cotton Valley and Bossier development in East Texas and North Louisiana. A
significant portion of LINN's 2015 capital budget is dedicated to efficient
and lower-risk optimization, workover and recompletion opportunities on
existing oil and natural gas wells. Discretionary reductions for a portion of
oil and natural gas development costs are estimated to be approximately $640
million, or 88%, of LINN's 2015 oil and natural gas capital budget.
Hedging Update
The Company is hedged approximately 100 percent on expected natural gas
production in 2015, 2016 and 2017, net of expected natural gas consumption
related to its heavy oil operations in California. For expected oil
production, LINN is hedged approximately 70 percent in 2015 and approximately
65 percent in 2016. The Company has hedged natural gas differentials in
certain producing regions but has not hedged any of its exposure to oil
differentials. The Company does not directly hedge NGL volumes. As of year-end
2014, LINN's hedge book had an estimated mark-to-market value of approximately
$2 billion.
Liquidity Update
LINN has current liquidity of approximately $2.2 billion. In December 2014,
LINN and its wholly owned subsidiary Berry Petroleum Company, LLC ("Berry")
received unanimous approval from a combined total of 45 lenders to increase
LINN's borrowing base to $4.5 billion and reaffirm Berry's borrowing base at
$1.4 billion. The maximum credit amount under LINN's credit facility is $4.0
billion and the commitment amount under Berry's credit facility is $1.2
billion. The maturity date for the LINN and Berry credit facilities, along
with LINN's outstanding $500 million term loan, is April 2019.
Outlook for 2015
LINN believes its decreased 2015 capital budget, reduced distribution and
conservative projected coverage ratio, along with its significant hedge
portfolio, approximately $2.2 billion of liquidity and proposed strategic
alliance with GSO position the Company to regain its cost of capital advantage
in the marketplace. "Despite today's challenging commodity price environment,
we believe we are prepared to continue growing throughout 2015 and will look
to take advantage of acquisition opportunities in the current market," said
Mr. Ellis. "In addition, we are also in the process of potentially forming an
additional alliance with private capital sources similar to the DrillCo
Agreement with GSO but focused on acquisition funding. This potential new
partnership would give us access to acquisition funding in down markets and
diversify LINN away from traditional debt and equity capital markets."
Today's announcement should position LINN to deliver an attractive yield given
the current unit price and also position the Company for growth. The variables
listed below demonstrate the potential coverage ratio upside and downside
protection from the budgeted level of 1.18x given various scenarios:
* Oil prices between $50 - $95 produce coverage ratios between 0.95x – 1.98x
* NGL prices between $20 - $40 produce coverage ratios between 1.11x – 1.55x
* A 5% increase in production volumes produces a coverage ratio of 1.43x
* A 5% decrease in LOE and transportation expenses produces a coverage ratio
of 1.31x
* A 5% decrease in capital costs produces a coverage ratio of 1.27x
Conference Call and Webcast
Management will host a conference call on Monday, January 5, 2015, at 10 a.m.
Central (11 a.m. Eastern) to discuss today's announcements and its outlook for
2015. Prepared remarks by Mark E. Ellis, Chairman, President and Chief
Executive Officer, and Kolja Rockov, Executive Vice President and Chief
Financial Officer, will be followed by a question and answer session.
Supplemental slides have been posted to LINN's website at www.linnenergy.com.
Investors and analysts are invited to participate in the call by dialing (855)
319-4076, or (631) 887-3945 for international calls, using Conference ID:
60430279. Interested parties may also listen over the Internet at
www.linnenergy.com.
A replay of the call will be available on the Company's website or by phone
until 4:00 p.m. Central (5 p.m. Eastern), January 19, 2015. The number for the
replay is (855) 859-2056, or (404) 537-3406 for international calls, using
Conference ID: 60430279.
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