LINN Energy (LLC, Financial) founded its business in 2003 for acquiring, developing and maximizing cash flow from a growing portfolio of high-quality capital assets in Oil and Natural gas basins in the U.S. They strategically provide for retention of long term cash flow through put options, swap contracts and collars.
Their acquisitions are based on a proper evaluation of operational efficiencies, operational cycle trends, development costs, envisaged useful life and cash flow estimates.
They enter into low risk drilling contracts in different compatible geographies to supplement the production volumes depending on factors like Capital budget, well cost, envisaged production and estimated recoverable reserves.
Oil slump and its impact on oil-producing majors
Brent crude price has come down to $58 per barrel, OPEC decided to utilize this opportunity to let it fall below $40 before deciding on cutting production in order to gain a competitive edge over U.S. and Russia. Due to future perceptions on energy demand oil price slump has taken place. The impact has caught up with Exxon Mobil (XOM, Financial) & Chevron Oil’s (CVX, Financial) profits also. While Chevron announced 27% dip in profit in its Quarterly earnings, British Petroleum (BP, Financial) reported decrease of 18%, while Exxon Mobil managed to beat its previous year’s record posting 8.07 billion $ a share, an increase by 1.79 billion over previous year’s third-quarter earnings due to increase in downstream business by 73% & chemicals by 17%. Companies like ConocoPhillips (COP, Financial) cut down on its capital expenditures for the next fiscal envisaging a drop in revenues.
Another interpretation of this slump is the mismatch between reduced global demand forecasts for energy or oil vis a vis surplus shale output from countries like U.S.
LINN’s business volumes vs. Brent Crude price movements
Fluctuations in crude price movements bear no relationship to LINN Energy’s revenues from Oil and Gas operations as can be seen from the graph below:
LINN‘s production (Oil & Gas alone) for YTD Sept. 30, 2014 was $2,844,185,000.
Concerns:
US Securities & Exchange Commission has issued a letter dated Aug. 30, 2012, to LINN Energy citing reasons that the company is operating as an investment company without registering with the Commission under the 1940 Act.
Conclusions
Financial difficulties are expected in respect of shale gas ops and projects if oil prices drop to $55 and below. LINN energy claims to have hedged itself against such unfavorable price variances given its strategy to hedge their forecasted production against fluctuations in price variations. But in the event of a continuing unfavourable global market trend , their position could take a delicate turn & their capital spends($1.5 billion for 2014) may have to be reduced in drilling and oil exploration since production may have to b curtailed on the face of a declining global demand. LINN energy could follow the Exxon Mobil example of focussing on target driven business volumes with hedged contracts.
