Upstream energy company, LINN Energy, LLC (LINE) provided an outlook on its 2015 capital spending and distribution. The company also announced an oil and gas development deal with GSO Capital Partners LP. LINN Energy stock gained over 12% on the NYSE.
Capital Budget & Distribution 2015
LINN Energy expects 2015 capital spending of around $730 million, a substantial reduction of 53% from $1.55 billion in 2014. The reduction in budget follows the assumption that crude oil price will be significantly lower than last year.
The company expects annual production of 1,110–1,235 million cubic feet equivalent per day. The total production will comprise 54% natural gas, 32% oil and 14% natural gas liquids.
Moreover, the company and its affiliate LinnCo, LLC (LNCO) announced a cut in its annual payouts. The distribution for LINN and dividend for LinnCo has been lowered to $1.25 per unit/share from the prior level of $2.90.
LINN Energy added that it intends to fund its 2015 capital spending and distribution payments using cash from operations. The company anticipates a coverage ratio of 1.18x at the proposed distribution payout rate and capital budget.
The GSO Deal
In a separate development, LINN Energy stated that it has signed a non-binding letter of intent with GSO Capital Partners LP, the credit arm of the The Blackstone Group L.P. (BX), which will finance oil and natural gas development activities.
Per the contract, GSO has agreed to invest about $500 million for five years to fund the development ventures of LINN Energy in locations provided by the company. GSO will finance the new wells drilled under the contract and will assume an 85% working interest in them till they reach an internal rate of return (“IRR”) of 15%. On reaching the desired IRR, GSO’s stake will be reduced to just 5% while LINN Energy will hold the remaining 95% stake in the wells.
This strategic move will allow LINN Energy to increase production and cash flow without burdening itself with higher capital investments.
Hedging Update
LINN Energy stated that it has hedged almost 100% natural gas production for 2015, 2016 and 2017. Also, the company has hedged 70% of 2015 and 65% of 2016 oil production.
Zacks Rank & Other Stock Picks
LINN Energy currently carries a Zacks Rank #3 (Hold).
A better-ranked stock from the same industry, Atlas Resource Partners, L.P. (ARP), holds a Zacks Rank #2 (Buy).
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