Linn Does It Again

Is this the perfect MLP? LINN Energy (LINE) reported the following second quarter 2014 results:

• Increased average daily production 2.4 percent to approximately 1,131 MMcfe/d for the second quarter 2014, compared to 1,104 MMcfe/d for the first quarter 2014;
• Increased oil, natural gas and NGL sales 98 percent to approximately $968 million for the second quarter 2014, compared to $488 million for the second quarter 2013;
• Generated net cash provided by operating activities of approximately $481 million for the second quarter 2014, compared to $227 million for the second quarter 2013;
• Distributions paid to unitholders of approximately $241 million for the second quarter 2014, compared to $170 million for the second quarter 2013;
• Excess of net cash of approximately $32 million for the second quarter 2014, compared to a shortfall of net cash of approximately $18 million for the second quarter 2013 (see Schedule 1, footnote 6); and
• Net loss of approximately $208 million, or $0.64 per unit, for the second quarter 2014, which includes non-cash losses related to changes in fair value of unsettled commodity derivatives, including the reduction of put option premium value over time, of approximately $393 million, or $1.20 per unit.

"LINN's capital program and efficient management of our base assets continue to deliver positive results as evidenced by production growth that exceeded the high end of our guidance range," said Mark E. Ellis, Chairman, President and Chief Executive Officer. "Additionally, we announced several important transactions that are consistent with our strategy of lowering the Company's capital intensity and overall decline rate. All of these transactions are expected to increase LINN's cash available for distribution. Finally, we are very pleased that the U.S. District Court dismissed the securities class action lawsuit with prejudice, and believe that the Court's ruling supports our position that the lawsuit was without merit."

LINN Energy highlights the following significant events:
• Announced Exxon Mobil trade: Agreed to trade approximately 2.0 MBoe/d of production and 25,000 net acres in the Midland Basin for approximately 85 MMcfe/d of production with an approximate six percent base decline, total reserves of approximately 700 Bcfe and 500,000 net acres in the Hugoton Basin;
• Announced Devon assets acquisition: Agreement to acquire assets in five U.S. operating areas for a contract price of $2.3 billion which includes approximately 275 MMcfe/d of production with an approximate 14 percent base decline rate, total proved reserves of 1.3 1.5 Tcfe, and 900,000 net acres. The Company anticipates the acquisition will close in the third quarter 2014, subject to closing conditions;
• Announced the planned Mid-Continent assets sale: Planned sale of 147,000 net acres with production of approximately 225 MMcfe/d for June 2014 in the Texas Panhandle and western Oklahoma that includes the Granite Wash and Cleveland plays;
• Announced Pioneer assets acquisition: Agreement to acquire Pioneer's Hugoton Basin properties for a contract price of $340 million which includes approximately 40 MMcfe/d of production with an approximate six percent base decline rate, total proved reserves of 340 Bcfe and 235,000 net acres. The Company anticipates the acquisition will close in the third quarter 2014, subject to closing conditions;
•Announced Anadarko Basin acreage sale: Agreement to sell approximately 26,000 undeveloped acres in the STACK play of the Anadarko Basin for a purchase price of approximately $90 million, subject to closing price adjustments. The Company anticipates the sale will close in the fourth quarter 2014, subject to closing conditions;
• Completion of all announced transactions, including the intent to sell the Mid-Continent assets and sale or trade of the remaining Midland Basin assets, is expected to reduce LINN's capital expenditure run rate by an additional $300 million to $400 million and lower the Company's estimated annual decline rate to approximately 15 percent; and
•The U.S. District Court for the Southern District of New York dismissed, with prejudice, the securities class action litigation originally filed in July 2013 against the Company, certain officers and directors, and certain underwriters of LinnCo's IPO.

Operational Highlights

During the second quarter 2014, LINN's production grew organically by approximately 2.4 percent to 1,131 MMcfe/d and exceeded the high end of the Company's guidance range. Second quarter production was comprised of approximately 44% natural gas, or 493 MMcf/d; 39% oil, or 75 MBbls/d; and 17% NGL, or 32 MBbls/d. Better than expected results were driven by outperformance from the Company's California and Hugoton Basin assets, which grew nine and five percent, respectively, compared to first quarter 2014 results.

The following table provides additional production detail from each of the Company's operating regions.


Average daily
production (MMcfe/d):

Three Months Ended
June 30, 2014




Mid-Continent

297

Rockies

278



California

172


Permian Basin

169



Hugoton Basin

151



Michigan/Illinois

33



East Texas

31



Total

1,131



Mid-Continent:

Second quarter 2014 production in the Mid-Continent region averaged approximately 297 MMcfe/d. LINN is currently operating four rigs in the region, three of which are primarily targeting oil intervals in the Granite Wash, while one rig remains focused on liquids-rich opportunities in the Cleveland play located in the northern Texas Panhandle. During the second quarter 2014, LINN completed a horizontal Lansing interval well in Wheeler County, Texas that had a 30-day rate of 2,243 Bbls/d and 2.5 MMcf/d. The Company believes this well is indicative of the high quality of inventory in the area. On June 30, 2014, the Company announced plans to sell its position in the Granite Wash and Cleveland plays located in the Texas Panhandle and western Oklahoma which consists of approximately 147,000 net acres. These assets produced an average of approximately 225 MMcfe/d for June 2014, 50 percent of which is natural gas, 30 percent oil, and 20 percent NGL.

Rockies:

Second quarter 2014 production in the Rockies region averaged approximately 278 MMcfe/d. LINN's Rockies region consists of properties located in the Green River, Uinta, Williston and Piceance basins, as well as the Salt Creek Field in Wyoming. The Company continues to see strong returns from its capital programs in the Uinta and Williston Basins.

California:

Second quarter 2014 production in California increased nine percent from first quarter 2014 levels to approximately 29 Mboe/d, primarily as a result of exceptional production growth in the Diatomite of approximately 30 percent, which averaged approximately 9,400 Boe/d. LINN's mature California assets, which include South Midway-Sunset and Brea, also outperformed expectations with consistent production levels from the first quarter of 2014.

Permian Basin:

Production volumes in the Permian Basin region averaged 169 MMcfe/d for the second quarter 2014. Over half of this production comes from LINN's approximately 30,000 net acres in the prolific Midland Basin, and the Company continues to see strong interest in a trade or sale of these properties which are prospective for horizontal Wolfcamp drilling. In an effort to maximize value and further delineate the Company's position, LINN completed its first operated horizontal well in the basin during the second quarter which targeted the Wolfcamp B interval in Midland County. This well had a 24-hour IP rate of 1,158 Boe/d, 91 percent of which was oil and a 30-day rate of 1,017 Boe/d, 89 percent of which was oil. The Company has drilled a second operated horizontal well and is currently drilling its third well in the Midland Basin. LINN expects to complete these two wells in the third quarter 2014.

Following strategic alternatives for the Midland Basin, the Company's Permian assets will focus primarily in the Delaware and Central Basin platforms. These assets are comprised of mature, low-decline oil properties primarily consisting of waterfloods. The Company is generating attractive returns from its four rig program targeting the Wolfberry trend and three rig program targeting the Clearfork formation in the East Goldsmith Field. The Company believes further upside potential exists from future waterflood and CO2 opportunities in the East Goldsmith Field.

Hugoton Basin:

Production volumes in the Hugoton Basin region averaged approximately 151 MMcfe/d for the second quarter 2014 and continue to gradually increase as a result of the Company's one rig drilling program and optimization projects in the field. LINN continues to identify and implement these types of projects which require minimal capital spending. The Company will expand its production and inventory of low-risk, repeatable locations through the completion of the ExxonMobil trade and the recently announced acquisition from Pioneer. The ExxonMobil transaction is expected to close in the third quarter 2014 with an effective date of June 1, 2014. The Pioneer transaction is expected to close in the third quarter 2014 with an effective date of July 1, 2014. Pro forma for these transactions, LINN will become the largest producer in the field and will have pro forma net production in the basin of approximately 275 MMcfe/d and approximately 1.6 million net acres. The pro forma combined capacity of LINN's two natural gas processing plants will be approximately 690 MMcfe/d. Given this significant presence in the basin, the Company anticipates improving operational efficiencies.

Second Quarter 2014 Results

LINN increased production 45 percent to approximately 1,131 MMcfe/d for the second quarter 2014, compared to 780 MMcfe/d for the second quarter 2013. This increase in production is attributable to acquisitions completed in 2013 as well as the Company's capital program. Total revenues and other for the second quarter 2014 were approximately $597 million, compared to approximately $839 million for the second quarter 2013, which includes non-cash losses (gains) related to changes in fair value of unsettled commodity derivatives, including the reduction of put option premium value over time, of approximately $393 million and $(271) million, respectively.

Lease operating expenses for the second quarter 2014 were approximately $185 million, or $1.80 per Mcfe, compared to $84 million, or $1.18 per Mcfe, for the second quarter 2013. Transportation expenses for the second quarter 2014 were approximately $45 million, or $0.44 per Mcfe, compared to $29 million, or $0.41 per Mcfe, for the second quarter 2013. These year-over-year per Mcfe increases are primarily due to an increase in the Company's higher margin oil production. Taxes, other than income taxes, for the second quarter 2014 were approximately $69 million, or $0.67 per Mcfe, compared to $32 million, or $0.46 per Mcfe, for the second quarter 2013. The per Mcfe increase in taxes, other than income during the second quarter 2014 was primarily due to higher production volumes and commodity prices. General and administrative expenses for the second quarter 2014 were approximately $67 million, or $0.65 per Mcfe, compared to $46 million, or $0.65 per Mcfe, for the second quarter 2013, which includes approximately $9 million and $7 million, respectively, of noncash unit-based compensation expenses. Depreciation, depletion and amortization expenses for the second quarter 2014 were approximately $274 million, or $2.67 per Mcfe, compared to $199 million, or $2.80 per Mcfe, for the second quarter 2013. Interest expense, net of amounts capitalized for the second quarter 2014 were approximately $134 million, compared to $104 million for the second quarter 2013.

The Company reported a net loss of approximately $208 million, or $0.64 per unit, for the second quarter 2014, which includes non-cash losses related to changes in fair value of unsettled commodity derivatives, including the reduction of put option premium value over time, of approximately $393 million, or $1.20 per unit. This compares to net income of approximately $345 million, or $1.47 per unit, for the second quarter 2013, which includes non-cash gains related to changes in fair value of unsettled commodity derivatives, including the reduction of put option premium value over time, of approximately $271 million, or $1.15 per unit.

The Company fully covered its distribution and generated excess of net cash provided by operating activities after distributions to unitholders and discretionary adjustments of approximately $32 million compared to a shortfall of net cash of approximately $18 million for the second quarter 2013