Linn Energy: A Bizarre Definition Of Distributable Cash Hides Actually Clapped Out Assets
The last post explained merely how bizarre the Definition of EBITDA/distributable cash is at Linn Energy. This bizarre Definition of EBITDA inwards my persuasion allows a zany together with unsustainable aeroplane of distributions to live paid together with thence attracts investors.
This stock is sold on the yield.
I intend yous should purchase shares on the underlying assets together with non a running yield.
So it is worth looking at what the underlying assets are.
Here from the last 10-K is a disclosure on the pose out of productive wells owned:
The previous yr the total was non dramatically dissimilar - this from the 10-K for the yr ended 2010:
They would convey averaged most 3,170 internet productive gas wells together with 3,520 internet productive crude oil wells. The average total productive wells would convey averaged most 6,700.
And hither from the aeroplane 10-K is the average daily production.
They produced 175,000 Mcf/d of natural gas together with 21,500 barrels of crude oil per solar daytime amongst some other 10,800 barrels of natural gas liquids.
The total gas equivalent is 369,000 Mcf/d of natural gas.
Lets hit some division. The crude oil wells create 21,500 barrels of crude oil per solar daytime from an average of 3,520 wells. This is an average of six barrels per day.
There are going to live an awful lot of wells that create less than ii barrels per day.
The gas wells create 175,000 Mcf/d of natural gas from 3,170 wells. This industrial plant out at 55 Mcf/d inwards gas. At a $3 gas toll these wells are producing - teach this - $165 inwards natural gas per day. Presumably these wells are also declining...
Fortunately they also create 10,800 barrels of natural gas liquids per day. That is 3.4 barrels of liquids (at most $45 a barrel every bit an estimate).
I convey a few questions of management:
Question 1
How many of the much-vaunted wells create less than $100 gross revenue per day? Oh, that $100 needs to live earlier hedging!
Question 2
How many wells were nigh downwards or went out of production inwards each of the concluding 5 years because the current rates were together with so depression the wells became non-economic?
Question 3
What is the correct aeroplane of maintenance uppercase expenditure for wells amongst current rates this low? How does this aeroplane of maintenance uppercase expenditure differ from the maintenance uppercase expenditure used for calculating distributable amounts?
High valuations for clapped-out assets
This companionship sports a premium valuation for very old and very run-down-low-production wells.
I believe this premium valuation is because people run into the (high together with attractive) dividends non the (clapped-out) underlying assets.
The fact that the dividends are - at to the lowest degree inwards business office produced past times fiscal applied scientific discipline non cash current (as per the concluding post) is every bit good the point. This companionship buys together with manages clapped out crude oil together with gas properties together with maintains a perception of property backing. After all the MLP is issuing large numbers of units together with they are selling both dividends together with the perception of property backing. Telling a skillful flush most run-down assets is necessary.
The long term time to come of Linn Energy: Who would ordinarily ain the wells?
These wells are valuable. H5N1 good flowing iii barrels per solar daytime all the same generates $70-100 grand a yr of gross revenue. There is exclusively a small-scale fraction of that left subsequently production taxes together with maintenance. Someone has to fuel together with hold the nodding-donkey crude oil ticker subsequently all. And somebody has to drive the truck about to collect the oil.
This is gritty work. Apart from anything these fields are laden amongst environmental problems - because typically the ticker is pulling upwards a barrel of crude oil together with 50 barrels of common salt H2O per day. The common salt H2O needs to live disposed of. And the crude oil collected together with spills dealt with.
So yous are nether no illusions this what a typical unit of measurement producing ane barrel per solar daytime (and 150 barrels of common salt water) looks similar cheque out this video from You Tube.
What yous ain if yous ain Linn Energy is simple. It is thousands of these things.
But lets teach dorsum to the natural possessor of this well. I know the guy. Sun burnt but would live far more sun burnt without the hat. H5N1 pick-up truck. Dog together with a shot-gun inwards the back. Political views good to the correct of mine.
You convey to admire this guy - he is a self-reliant private who industrial plant without much corporate overhead. Has nobody to blame when the electrical motor burns out than himself. And he industrial plant hard. Real hard.*
This assets owned past times Linn Energy are non ordinarily the classify of property owned past times a fourteen billion dollar firm valuation listed entity. They are owned past times the red-necked, gun-toting self-reliant private who industrial plant difficult together with does non take away heed getting his hands dirty.
When this MLP runs out of cash to distribute it is probable to live dismantled together with the assets volition live sold to those those fine people amongst their politics, dogs together with shotguns. Assets similar these tend to discovery their natural owners.
In liquidation I seriously incertitude if in that place volition live anything similar plenty to brand whole the $7 billion owned to the banks together with other lenders. If yous are Linn Energy debt-holder beware.
Something substantial for the balance equity holders? Surely yous must live joking?
John
*Please empathize I am non mocking the natural possessor here. If my (non-existent) immature adult woman married him I would live pleased for her fifty-fifty if social conversation at Christmas dinner was awkward. I convey far to a greater extent than honour for that-type than I convey for many fiscal or CEO types...
This stock is sold on the yield.
I intend yous should purchase shares on the underlying assets together with non a running yield.
So it is worth looking at what the underlying assets are.
Here from the last 10-K is a disclosure on the pose out of productive wells owned:
Productive Wells
The next sets forth information relating to the productive wells inwards which the Company owned a working involvement every bit of December 31, 2011. Productive wells consist of producing wells together with wells capable of production, including wells awaiting pipeline or other connections to commence deliveries. “Gross” wells refers to the total pose out of producing wells inwards which the Company has an interest, together with “net” wells refers to the amount of its fractional working interests owned inwards gross wells. The pose out of wells below does non include to a greater extent than or less 2,500 productive wells inwards which the Company owns a royalty involvement only.
Natural Gas Wells | Oil Wells | Total Wells | ||||||||||||||||||||||
Gross | Net | Gross | Net | Gross | Net | |||||||||||||||||||
Operated (1) | 3,889 | 2,925 | 3,870 | 3,578 | 7,759 | 6,503 | ||||||||||||||||||
Nonoperated (2) | 1,843 | 369 | 1,628 | 207 | 3,471 | 576 | ||||||||||||||||||
| 5,732 | 3,294 | 5,498 | 3,785 | 11,230 | 7,079 | |||||||||||||||||||
(1) | The Company had 12 operated wells amongst multiple completions at December 31, 2011. |
(2) | The Company had no nonoperated wells amongst multiple completions at December 31, 2011. |
The previous yr the total was non dramatically dissimilar - this from the 10-K for the yr ended 2010:
Productive Wells
The next tabular array sets forth information relating to the productive wells inwards which the Company owned a working involvement every bit of December 31, 2010. Productive wells consist of producing wells together with wells capable of production, including wells awaiting pipeline or other connections to commence deliveries. “Gross” wells refers to the total pose out of producing wells inwards which the Company has an interest, together with “net” wells refers to the amount of its fractional working interests owned inwards gross wells. The pose out of wells below does non include to a greater extent than or less 2,700 productive wells inwards which the Company owns a royalty involvement only.
Natural Gas Wells | Oil Wells | Total Wells | ||||||||||||||||||||||
Gross | Net | Gross | Net | Gross | Net | |||||||||||||||||||
Operated (1) | 3,751 | 2,707 | 3,346 | 3,088 | 7,097 | 5,795 | ||||||||||||||||||
Nonoperated (2) | 1,717 | 342 | 1,572 | 175 | 3,289 | 517 | ||||||||||||||||||
| 5,468 | 3,049 | 4,918 | 3,263 | 10,386 | 6,312 | |||||||||||||||||||
(1) | Ten operated wells had multiple completions at December 31, 2010. |
(2) | Three nonoperated wells had multiple completions at December 31, 2010. |
They would convey averaged most 3,170 internet productive gas wells together with 3,520 internet productive crude oil wells. The average total productive wells would convey averaged most 6,700.
And hither from the aeroplane 10-K is the average daily production.
The next sets forth information regarding average daily production, average prices together with average costs for each of the periods indicated:
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Average daily production: | ||||||||||||
Natural gas (MMcf/d) | 175 | 137 | 125 | |||||||||
Oil (MBbls/d) | 21.5 | 13.1 | 9.0 | |||||||||
NGL (MBbls/d) | 10.8 | 8.3 | 6.5 | |||||||||
Total (MMcfe/d) | 369 | 265 | 218 | |||||||||
They produced 175,000 Mcf/d of natural gas together with 21,500 barrels of crude oil per solar daytime amongst some other 10,800 barrels of natural gas liquids.
The total gas equivalent is 369,000 Mcf/d of natural gas.
Lets hit some division. The crude oil wells create 21,500 barrels of crude oil per solar daytime from an average of 3,520 wells. This is an average of six barrels per day.
There are going to live an awful lot of wells that create less than ii barrels per day.
The gas wells create 175,000 Mcf/d of natural gas from 3,170 wells. This industrial plant out at 55 Mcf/d inwards gas. At a $3 gas toll these wells are producing - teach this - $165 inwards natural gas per day. Presumably these wells are also declining...
Fortunately they also create 10,800 barrels of natural gas liquids per day. That is 3.4 barrels of liquids (at most $45 a barrel every bit an estimate).
I convey a few questions of management:
Question 1
How many of the much-vaunted wells create less than $100 gross revenue per day? Oh, that $100 needs to live earlier hedging!
Question 2
How many wells were nigh downwards or went out of production inwards each of the concluding 5 years because the current rates were together with so depression the wells became non-economic?
Question 3
What is the correct aeroplane of maintenance uppercase expenditure for wells amongst current rates this low? How does this aeroplane of maintenance uppercase expenditure differ from the maintenance uppercase expenditure used for calculating distributable amounts?
High valuations for clapped-out assets
This companionship sports a premium valuation for very old and very run-down-low-production wells.
I believe this premium valuation is because people run into the (high together with attractive) dividends non the (clapped-out) underlying assets.
The fact that the dividends are - at to the lowest degree inwards business office produced past times fiscal applied scientific discipline non cash current (as per the concluding post) is every bit good the point. This companionship buys together with manages clapped out crude oil together with gas properties together with maintains a perception of property backing. After all the MLP is issuing large numbers of units together with they are selling both dividends together with the perception of property backing. Telling a skillful flush most run-down assets is necessary.
The long term time to come of Linn Energy: Who would ordinarily ain the wells?
These wells are valuable. H5N1 good flowing iii barrels per solar daytime all the same generates $70-100 grand a yr of gross revenue. There is exclusively a small-scale fraction of that left subsequently production taxes together with maintenance. Someone has to fuel together with hold the nodding-donkey crude oil ticker subsequently all. And somebody has to drive the truck about to collect the oil.
This is gritty work. Apart from anything these fields are laden amongst environmental problems - because typically the ticker is pulling upwards a barrel of crude oil together with 50 barrels of common salt H2O per day. The common salt H2O needs to live disposed of. And the crude oil collected together with spills dealt with.
So yous are nether no illusions this what a typical unit of measurement producing ane barrel per solar daytime (and 150 barrels of common salt water) looks similar cheque out this video from You Tube.
What yous ain if yous ain Linn Energy is simple. It is thousands of these things.
But lets teach dorsum to the natural possessor of this well. I know the guy. Sun burnt but would live far more sun burnt without the hat. H5N1 pick-up truck. Dog together with a shot-gun inwards the back. Political views good to the correct of mine.
You convey to admire this guy - he is a self-reliant private who industrial plant without much corporate overhead. Has nobody to blame when the electrical motor burns out than himself. And he industrial plant hard. Real hard.*
This assets owned past times Linn Energy are non ordinarily the classify of property owned past times a fourteen billion dollar firm valuation listed entity. They are owned past times the red-necked, gun-toting self-reliant private who industrial plant difficult together with does non take away heed getting his hands dirty.
When this MLP runs out of cash to distribute it is probable to live dismantled together with the assets volition live sold to those those fine people amongst their politics, dogs together with shotguns. Assets similar these tend to discovery their natural owners.
In liquidation I seriously incertitude if in that place volition live anything similar plenty to brand whole the $7 billion owned to the banks together with other lenders. If yous are Linn Energy debt-holder beware.
Something substantial for the balance equity holders? Surely yous must live joking?
John
*Please empathize I am non mocking the natural possessor here. If my (non-existent) immature adult woman married him I would live pleased for her fifty-fifty if social conversation at Christmas dinner was awkward. I convey far to a greater extent than honour for that-type than I convey for many fiscal or CEO types...
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