Exploration & Production | Quarterly / Earnings Reports | Second Quarter (2Q) Update | Deals - Acquisition, Mergers, Divestitures
LINN Tags 'Better than Expected' Results in 2Q; Dishes on Deals
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LINN Energy, LLC and LinnCo, LLC reported financial and operating results for the three months ended June 30, 2014, and the Company's outlook for the remainder of 2014.
Highlights:
- Increased average daily production 2.4 percent to approximately 1,131 MMcfe/d for the second quarter 2014, compared to 1,104 MMcfe/d for the first quarter 2014;
- Increased oil, natural gas and NGL sales 98 percent to approximately $968 million for the second quarter 2014, compared to $488 million for the second quarter 2013;
- Generated net cash provided by operating activities of approximately $481 million for the second quarter 2014, compared to $227 million for the second quarter 2013;
- Distributions paid to unitholders of approximately $241 million for the second quarter 2014, compared to $170 million for the second quarter 2013;
- Excess of net cash of approximately $32 million for the second quarter 2014, compared to a shortfall of net cash of approximately $18 million for the second quarter 2013 (see Schedule 1, footnote 6); and
- Net loss of approximately $208 million, or $0.64 per unit, for the second quarter 2014, which includes non-cash losses related to changes in fair value of unsettled commodity derivatives, including the reduction of put option premium value over time, of approximately $393 million, or $1.20 per unit.
Mark E. Ellis, Chairman, President and Chief Executive Officer, commented: "LINN's capital program and efficient management of our base assets continue to deliver positive results as evidenced by production growth that exceeded the high end of our guidance range. Additionally, we announced several important transactions that are consistent with our strategy of lowering the Company's capital intensity and overall decline rate. All of these transactions are expected to increase LINN's cash available for distribution. Finally, we are very pleased that the U.S. District Court dismissed the securities class action lawsuit with prejudice, and believe that the Court's ruling supports our position that the lawsuit was without merit."
Significant Events:
- Announced Exxon Mobil trade: Agreed to trade approximately 2.0 MBoe/d of production and 25,000 net acres in the Midland Basin for approximately 85 MMcfe/d of production with an approximate six percent base decline, total reserves of approximately 700 Bcfe and 500,000 net acres in the Hugoton Basin;
- Announced Devon assets acquisition: Agreement to acquire assets in five U.S. operating areas for a contract price of $2.3 billion which includes approximately 275 MMcfe/d of production with an approximate 14 percent base decline rate, total proved reserves of 1.3 -- 1.5 Tcfe, and 900,000 net acres. The Company anticipates the acquisition will close in the third quarter 2014, subject to closing conditions;
- Announced the planned Mid-Continent assets sale: Planned sale of 147,000 net acres with production of approximately 225 MMcfe/d for June 2014 in the Texas Panhandle and western Oklahoma that includes the Granite Wash and Cleveland plays;
- Announced Pioneer assets acquisition: Agreement to acquire Pioneer's Hugoton Basin properties for a contract price of $340 million which includes approximately 40 MMcfe/d of production with an approximate six percent base decline rate, total proved reserves of 340 Bcfe and 235,000 net acres. The Company anticipates the acquisition will close in the third quarter 2014, subject to closing conditions;
- Announced Anadarko Basin acreage sale: Agreement to sell approximately 26,000 undeveloped acres in the STACK play of the Anadarko Basin for a purchase price of approximately $90 million, subject to closing price adjustments. The Company anticipates the sale will close in the fourth quarter 2014, subject to closing conditions;
- Completion of all announced transactions, including the intent to sell the Mid-Continent assets and sale or trade of the remaining Midland Basin assets, is expected to reduce LINN's capital expenditure run rate by an additional $300 million to $400 million and lower the Company's estimated annual decline rate to approximately 15 percent; and
- The U.S. District Court for the Southern District of New York dismissed, with prejudice, the securities class action litigation originally filed in July 2013 against the Company, certain officers and directors, and certain underwriters of LinnCo's IPO.
Operational Highlights
During the second quarter 2014, LINN's production grew organically by approximately 2.4 percent to 1,131 MMcfe/d and exceeded the high end of the Company's guidance range. Second quarter production was comprised of approximately 44% natural gas, or 493 MMcf/d; 39% oil, or 75 MBbls/d; and 17% NGL, or 32 MBbls/d. Better than expected results were driven by outperformance from the Company's California and Hugoton Basin assets, which grew nine and five percent, respectively, compared to first quarter 2014 results.
The following table provides additional production detail from each of the Company's operating regions.
LINN Energy LLC has updated its E&P activities, which can be found below:
LINN Details Granite Wash, Cleveland Results Ahead of Exit from Play
LINN to Become Largest Hugoton Producer; Details 2Q Deal, Results
LINN Completes First Operated HZ Wolfcamp Well in 2Q
Rockies
Second quarter 2014 production in the Rockies region averaged approximately 278 MMcfe/d. LINN's Rockies region consists of properties located in the Green River, Uinta, Williston and Piceance basins, as well as the Salt Creek Field in Wyoming. The Company continues to see strong returns from its capital programs in the Uinta and Williston Basins.
California
Second quarter 2014 production in California increased nine percent from first quarter 2014 levels to approximately 29 Mboe/d, primarily as a result of exceptional production growth in the Diatomite of approximately 30 percent, which averaged approximately 9,400 Boe/d. LINN's mature California assets, which include South Midway-Sunset and Brea, also outperformed expectations with consistent production levels from the first quarter of 2014.
Second Quarter 2014 Results
LINN increased production 45 percent to approximately 1,131 MMcfe/d for the second quarter 2014, compared to 780 MMcfe/d for the second quarter 2013. This increase in production is attributable to acquisitions completed in 2013 as well as the Company's capital program. Total revenues and other for the second quarter 2014 were approximately $597 million, compared to approximately $839 million for the second quarter 2013, which includes non-cash losses (gains) related to changes in fair value of unsettled commodity derivatives, including the reduction of put option premium value over time, of approximately $393 million and $(271) million, respectively.
Lease operating expenses for the second quarter 2014 were approximately $185 million, or $1.80 per Mcfe, compared to $84 million, or $1.18 per Mcfe, for the second quarter 2013. Transportation expenses for the second quarter 2014 were approximately $45 million, or $0.44 per Mcfe, compared to $29 million, or $0.41 per Mcfe, for the second quarter 2013. These year-over-year per Mcfe increases are primarily due to an increase in the Company's higher margin oil production. Taxes, other than income taxes, for the second quarter 2014 were approximately $69 million, or $0.67 per Mcfe, compared to $32 million, or $0.46 per Mcfe, for the second quarter 2013. The per Mcfe increase in taxes, other than income during the second quarter 2014 was primarily due to higher production volumes and commodity prices. General and administrative expenses for the second quarter 2014 were approximately $67 million, or $0.65 per Mcfe, compared to $46 million, or $0.65 per Mcfe, for the second quarter 2013, which includes approximately $9 million and $7 million, respectively, of noncash unit-based compensation expenses. Depreciation, depletion and amortization expenses for the second quarter 2014 were approximately $274 million, or $2.67 per Mcfe, compared to $199 million, or $2.80 per Mcfe, for the second quarter 2013. Interest expense, net of amounts capitalized for the second quarter 2014 were approximately $134 million, compared to $104 million for the second quarter 2013.
The Company reported a net loss of approximately $208 million, or $0.64 per unit, for the second quarter 2014, which includes non-cash losses related to changes in fair value of unsettled commodity derivatives, including the reduction of put option premium value over time, of approximately $393 million, or $1.20 per unit. This compares to net income of approximately $345 million, or $1.47 per unit, for the second quarter 2013, which includes non-cash gains related to changes in fair value of unsettled commodity derivatives, including the reduction of put option premium value over time, of approximately $271 million, or $1.15 per unit.
The Company fully covered its distribution and generated excess of net cash provided by operating activities after distributions to unitholders and discretionary adjustments of approximately $32 million compared to a shortfall of net cash of approximately $18 million for the second quarter 2013.
Guidance Update
LINN expects production for the third quarter 2014 to average between 1,210 to 1,260 MMcfe/d, and is increasing full-year 2014 production guidance to a range of 1,217 to 1,268 MMcfe/d from its previous range of 1,075 to 1,135 MMcfe/d. The Company expects to fully cover its distribution and generate excess of net cash provided by operating activities after distributions to unitholders and discretionary adjustments of approximately $63 million for the third quarter 2014 and $103 million for the full-year 2014. Guidance for the third and fourth quarters of 2014 includes results from the Mid-Continent assets which the Company plans to sell. In addition, third quarter 2014 guidance includes partial period impact from the pending trade with ExxonMobil and acquisitions from Devon and Pioneer.
Corporate Development Update
LINN has continued its focus on making accretive transactions while reducing the Company's capital intensity and increasing the efficiency of its portfolio. Below is an update on recent corporate development activity. Please see the Company's website for supplemental slides containing additional information.
LINN's strategic trade with ExxonMobil was announced in May 2014 and is expected to close in the third quarter 2014. The Hugoton Basin assets LINN expects to receive are producing approximately 85 MMcfe/d and are an ideal fit for an upstream MLP. In addition to a large, predictable inventory of low-risk drilling opportunities, these assets have a shallow base decline rate of approximately six percent.
Part of the Company's trade with ExxonMobil will include the divestiture of approximately 2.0 MBoe/d of production and approximately 25,000 net acres in the Midland Basin, primarily located in Midland, Martin, Upton and Glasscock Counties. LINN's remaining position in the Midland Basin consists of approximately 30,000 net acres and 15 Mboe/d of oil-weighted production, primarily located in Midland, Martin, Howard, Ector and Andrews Counties. The Company has received significant interest for a potential trade opportunity as well as the outright purchase of these assets. All options are expected to lower the Company's capital intensity and overall decline rate. LINN continues to believe its remaining position in the Midland Basin represents a tremendous amount of potential value for unitholders.
In June 2014, LINN announced the $2.3 billion acquisition of assets from Devon Energy located in five U.S. operating areas. These assets are currently producing approximately 275 MMcfe/d with a shallow base decline rate of approximately 14 percent. The asset package is comprised of approximately 900,000 net acres, and LINN has identified over 1,000 future drilling locations and 600 recompletion opportunities. Subject to satisfaction of closing conditions, this transaction is scheduled to close on August 30, 2014 with an effective date of April 1, 2014.
In conjunction with the announcement to acquire assets from Devon, LINN announced the planned sale of its position in the Granite Wash and Cleveland plays located over approximately 147,000 net acres in the Texas Panhandle and western Oklahoma. These assets produced an average of 225 MMcfe/d in June 2014, 50 percent of which is natural gas, 30 percent oil and 20 percent NGL. Also in the second quarter, LINN completed a horizontal Lansing well on this acreage that had a 30-day rate of 2,243 Bopd and 2.5 MMcfe/d. Since owning these assets, LINN has successfully tested and developed 17 horizontal intervals, including shallow oil, liquids-rich Granite Wash and deep Atoka natural gas. As a result of this delineation, the Company has catalogued 1,900 locations over its vast acreage position. To support this growth, LINN developed a substantial integrated network of infrastructure including midstream and water handling facilities which is capable of a much larger rig program. The sale of these assets is expected to be tax efficient and qualify for Section 1031 like-kind exchange tax treatment.
In August 2014, LINN announced the $340 million acquisition of Hugoton Basin assets from Pioneer. These assets are currently producing approximately 40 MMcfe/d with a shallow base decline rate of approximately six percent. The asset package is comprised of approximately 235,000 net acres and LINN has identified 180 future drilling locations and 150 recompletion opportunities. This transaction is scheduled to close in the third quarter 2014, subject to closing conditions, with an effective date of July 1, 2014. Pro forma for the ExxonMobil trade and the Pioneer acquisition, LINN will become the largest producer in the Hugoton field and will have pro forma net production in the basin of approximately 275 MMcfe/d.
In August 2014, LINN announced an agreement with a private party to sell its rights to the Woodford and Meramec horizons in the STACK play in approximately 26,000 undeveloped acres in the Anadarko Basin for a purchase price of approximately $90 million, subject to closing price adjustments. Subject to satisfaction of closing conditions, the transaction is expected to close in the fourth quarter of 2014 with an effective date of December 1, 2013.
Ellis added: "Our corporate development and integration teams have been working extremely hard to execute our strategy and deliver long term value for unitholders. Each of these strategic initiatives has been driven by our goals of reducing capital intensity and the overall decline rate. At the beginning of the year, we reduced the pro forma LINN-Berry capital budgets by approximately $250 million. The planned sale of the Mid-Continent assets and realization of strategic alternatives for the Permian assets are expected to further reduce our capital expenditure run rate by an additional $300 million to $400 million and lower the Company's estimated annual decline rate to approximately 15 percent. The Company expects a robust level of transactional activity to continue in the second half of 2014."
Credit Facility Update
LINN amended its revolving credit facility in April 2014 to extend the maturity to five years, or April 2019. The number of lenders increased from 41 to 42. LINN's credit facility has a maximum commitment amount of $4.0 billion and the borrowing base under the credit facility remained unchanged at $4.5 billion. As of June 30, 2014, LINN had approximately $1.8 billion available under its revolving credit facility. The administrative agent for the credit facility is Wells Fargo Bank, and Royal Bank of Canada serves as the syndication agent. Barclays, Credit Agricole, Citi and The Royal Bank of Scotland serve as co-documentation agents. In April 2014, LINN also extended the maturity on its $500 million senior secured term loan to April 2019, consistent with the maturity of its revolving credit facility.
In addition, Berry, a wholly owned subsidiary of LINN, amended its revolving credit facility in April 2014 to extend the maturity to five years, or April 2019. The number of lenders increased from 38 to 40. Berry's credit facility has a maximum commitment amount of $1.2 billion and a borrowing base of $1.4 billion which have remained unchanged. At June 30, 2014, there was less than $1 million of borrowing capacity available, including outstanding letters of credit. Following these amendments, LINN's credit facility and term loan and Berry's credit facility have a maturity of April 2019.
Interim Financing
As previously announced, in June 2014, LINN secured $2.3 billion of committed interim financing for the acquisition of Devon assets, subject to final documentation. The joint lead arrangers for the financing were Scotiabank, Barclays, RBC Capital Markets and Wells Fargo. The transaction with Devon is subject to satisfactory completion of title and environmental due diligence, as well as the satisfaction of other closing conditions. The transaction is expected to close in the third quarter 2014 with an effective date of April 1, 2014.
Share Repurchase Authorization
LINN's Board of Directors has authorized the repurchase of up to $250 million LINN units and LinnCo's Board of Directors has authorized the repurchase of up to $250 million LinnCo shares. LINN or LinnCo may purchase units/shares from time to time on the open market or in negotiated purchases. In addition, LINN will purchase from LinnCo a number of LINN units equal to the number of shares LinnCo purchases in its repurchase program. The timing and amounts of any such repurchases will be at the discretion of management, subject to market conditions and other factors, and will be in accordance with applicable securities laws and other legal requirements. The repurchase programs do not obligate LINN or LinnCo to acquire any specific number of units/shares and may be discontinued at any time.
LINN also announced that its Board of Directors has authorized the issuance and sale of up to $500 million of its units from time to time under LINN's previously authorized ATM program. The Board of Directors of LinnCo has also authorized an ATM program for the issuance and sale of up to $500 million of its shares from time to time. In addition to LINN's ATM authorization, LINN will sell to LinnCo a number of units equal to the number of shares LinnCo sells in its ATM program. Sales of units/shares, if any, will be made through a sales agent by means of ordinary brokers' transactions, in block transactions, or as otherwise agreed with the agent and are subject to entering into equity distribution agreements and filing and effectiveness of the registration statements with respect to each program. LINN expects to use the net proceeds from any sale of the units/shares for general corporate purposes, which may include, among other things, capital expenditures, acquisitions and the repayment of debt.
Cash Distributions and Dividends
During the second quarter 2014, LINN paid three monthly cash distributions of $0.2416 per unit ($2.90 per unit on an annualized basis) on April 16, May 15 and June 12, 2014.
LinnCo paid three monthly cash dividends of $0.2416 per common share ($2.90 per share on an annualized basis) on April 17, May 16 and June 13, 2014.