By Sarfaraz A. Khan
NEW YORK (TheStreet) -- Linn Energy (LINE) is the largest oil and gas producer that's structured to resemble a master limited partnership, or MLP. But it has meaningful exposure to commodity price risks, unlike a vast majority of other MLPs. With the dropping price of oil, that could be a problem for the stock.
According to a research report emailed to TheStreet by Goldman Sachs spokesperson Leslie Shribman, most MLPs that operate in oil and gas transportation, gathering and processing have a fee-based business as well as hedged positions when there is commodity exposure. Thanks to these two factors, such companies will be insulated against commodity price declines, said the report, prepared by the investment bank's energy analysts. But Linn is not one of those companies.
Linn Energy is directly engaged in exploration and production of hydrocarbons. Because of that, Linn faces "downside risks" from weakness in commodity prices, said Goldman Sachs analyst Ted Durbin in a research report sent to TheStreet.
Last week, WTI oil officially slumped into a bear market, joining Brent crude. Both have fallen by more than 20% from their highest levels in June. By Friday, the oil futures of WTI and Brent crudes settled at $85.51 and $89.78 a barrel respectively. This drop has come on the back of weakness in demand, particularly from China, and increasing supplies from the U.S. and OPEC as well as discounted prices from Saudi Arabia, Iran and Kuwait as the Middle Eastern nations vie for a greater market share.
The deteriorating pricing environment hit oil and gas producers hard last week. Linn Energy and Anadarko Petroleum (APC) were among the companies with the biggest drops -- more than 11%. Overall, Linn Energy's shares are down 22.6% for the year to date as of Monday at 1 p.m.
Meanwhile, Linn Energy has been building hedge positions to protect itself from the falling oil and gas prices. During a presentation in September, the company said that almost 100% of its expected natural gas production is hedged through 2017. As for oil, the company has hedged nearly all of its production for this year and up to 60% through 2016. Consequently, the company said its cash flows are better protected from oil and gas price uncertainty than its C-corporation and MLP competitors.
As per Durbin's projections, Linn Energy cash distributions per unit will remain flat this year at $2.90, as compared to last year, but will gradually grow to $3.12 by 2018. However, other analysts have said that the dip in commodity prices may delay Linn Energy's growth of distributions paid to unit-holders.
On a positive note, Linn Energy's ongoing asset sales and acquisition program could support distribution growth in the challenging commodity pricing environment. Linn Energy has been readjusting its portfolio of assets by buying, selling and swapping properties in order to reduce its capital intensity and decline rates (the rate at which oil and gas production from wells starts to drop after touching peak levels over a period of time), as well as to improve its ability to grow the cash available for distribution to investors.
In June, Linn Energy acquired natural-gas-focused properties from Devon Energy (DVN) for $2.3 billion, following the massive $4.9 billion merger with Berry Petroleum. The company has also swapped assets with Exxon Mobil (XOM) , through which Linn Energy expanded its interest in California, Kansas and Oklahoma. Earlier this month, Linn Energy sold $2.3 billion in assets in Texas and Oklahoma to fund the Devon Energy purchase. Linn has also earmarked an additional 6,600 acres for sale in Texas which, as per analyst's estimates, could be valued at around $750 million.
These measures, Linn said, will reduce its capital expenditure by up to $400 million and won't have any major negative impact on the operating cash flows.
Goldman Sachs has issued a neutral rating on Linn Energy with a twelve-month price target of $33.
Linn Energy did not immediately respond to email and phone messages from TheStreetrequesting comment.