The company announced that it will invest $730 million in capital spending in 2015, a drop of 53% from the 2014 total of about $1.55 billion. The company will also reduce its annual payout per common unit from $2.90 to $1.25. Its LinnCo LLC (NASDAQ: LNCO) subsidiary will cut its annual dividend payout by similar amounts.
Linn expects to fund its 2015 capital spending and its shareholder payouts from “internally generated cash flow.” Borrowing more, while probably not impossible, would be costly. Linn’s long-term debt at the end of the third quarter totaled $11 billion, and the share price is well below the company’s book value. Linn’s market cap as of Wednesday’s close was $3.36 billion.
Linn has signed a letter of intent with private equity firm GSO Capital Partners, the credit platform of Blackstone Group L.P. (NYSE: BX), for a five-year, $500 million drilling fund under which GSO will fund the entire cost of a new well in exchange for an 85% working interest in the wells until GSO achieves a 15% internal rate of return on annual well groupings. Once GSO reaches the 15% rate, the credit firm’s participation in the wells drops to 5% and Linn’s increases to 95%.
The company’s capital budget assumes an average NYMEX price per barrel for West Texas Intermediate (WTI) of $60 and a NYMEX natural gas price of $3.50 per thousand cubic feet. Linn also projects a coverage ratio of 1.18x, based on its lowered distributions.
Linn said that the decrease in capital spending is due in part (about 50%) to lower commodity prices and in part (the other 50%) to divestitures of properties in west Texas. The company said it will focus on “lower-risk development and optimization projects” in California, Colorado, North Dakota, east Texas and Louisiana.
Linn’s common units traded down more than 11% in Friday’s premarket at $8.99, below the 52-week range of $9.17 to $34.08. The consensus price target from 12 analysts is $18.25.
LinnCo’s shares traded down nearly 12% Friday morning, at $9.15 in a 52-week range of $8.58 to $33.12. The consensus price target on the shares from 10 analysts is $20.43.