Tuesday, March 31, 2015

Oil Glut Doesnt Mean U.S. Running Out of Crude Storage Capacity

Although the U.S. rig count has fallen dramatically, reaching the lowest level since April 2011, domestic crude output continues to soar. At last count, total US crude stocks stood at 468 million barrels, according to the International Energy Agency (IEA) report issued on March 13.

Seizing the theme that petroleum production from conventional and shale deposits has yet to show signs of a slowdown, the collective media narrative portends an apocalyptic future where “U.S. oil glut will fill storage” – leading to a classic Econ 101 supply-demand model where the price of crude collapses to $10 to $20 a barrel.

The IEA says the principal storage hub in Cushing, Ohlahoma held 49.2 million barrels by end-February, equating to 70% of total working storage capacity at the nation’s largest hub.

Given ballooning crude stocks, is America truly running out of places to store all this crude?

Contrary to the vatic utterances by headline seeking “talking heads,” we are not running out of storage capacity – and E&P companies will not be forced to sell crude at give-away prices.

In “The Truth about U.S. Crude Storage,” a percipient Robert Rapier, managing editor at Energy Trends Insider, reminds us that Cushing isn’t the only place crude oil is stored:

“If Cushing continues to fill, oil producers will start looking at some (of those) other areas to store their crude. And with 200 million barrels still available, oil producers could continue to add a million barrels a week for nearly 4 years before crude oil storage is actually full,” says Rapier.

Tuesday, March 17, 2015

Linn Energy's Price Decline to Accelerate

Attracted to Linn Energy’s (LINE-$10.93) turnaround potential (share price is off 62.5% from its 52-week high) and 11.2% payout ($1.25 dividend/share)? Think again.

In only one of the last four years has LINE been able to cover fixed charges, including dividend payments: Earnings were insufficient to cover fixed charges by approximately $457 million and $696 million for the year ended 2014 and 2013, respectively.

Like operating profits, asset valuations could prove illusory, too. LINE has spent more than $30 billion to acquire working and royalty interests in producing U.S. basins holding total proved reserves of 7.2 Tcfe, allegedly worth an estimated $12.5 billion in (discounted) future cash flows. Allegedly because the calculus driving this valuation assumes natural gas and oil prices of $4.35 MMBtu and $95.27 per barrel.

Given the precipitous decline in commodity prices, investors should expect further massive “non-cash” impairment charges – which could hinder LINE’s ability to finance future capital needs:  buried under $10.3 billion in debt, the company has “limited unpledged assets” to put up as collateral for needed borrowings.

New drilling programs to be funded with capital from Blackstone will do little to clean up LINE’s anemic balance sheet and liquidity issues: Assuming constant capital spending and distributions over the next three years, analysts estimate net debt to EBITDAX ratios could increase to 6.8x by year end and up to 7.1x by year-ending 2016 (as higher priced hedges roll off and cash flow declines).

If LINE is to survive, look for that 11 percent dividend yield to vanish like the value of its hydrocarbon assets.