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.
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