Energy Business

Did Linn Give Away the Farm in Its Secondary Offering?

Drilling rig
Source: Thinkstock
Independent oil and gas producer Linn Energy LLC (NYSE: LINE) said Tuesday morning that it had priced a secondary offering of 16 million units at $11.79 per unit and expects to receive about $181 million in net proceeds. The underwriters have a 30-day option on an additional 2.4 million units, and if the option is fully exercised net proceeds would total about $208 million.

Raymond James, Bank of America Merrill Lynch, Barclays Capital, Citigroup, Credit Suisse, JPMorgan, Morgan Stanley and RBC Capital Markets acted as joint book-running managers for the offering.

Linn’s units closed at $12.41 on Monday night and traded down as low as $11.01 Tuesday morning. The units have traded near $33 at their high point in July of last year, before energy prices collapsed.

In January Linn cut its capital expenditure (capex) budget by 53% to $730 million and dropped its annual payout from $2.90 per unit to $1.25. At the time the company said it would fund its 2015 capital spending from internally generated cash flow.

In February the company cut capex again, to $520 million. When Linn reported first-quarter results in late April, it said it now expects a “modest decline” in 2015 production as it focuses on prices that can generate a return in the current low-price environment. It plans to “balance cash flow and spending” and “intends to fund its total oil and natural gas capital program, in addition to interest expense and distributions to unitholders, from net cash provided by operating activities.”

In the first quarter, net cash from operations totaled about $375 million, of which $105 million was distributed to unitholders. Of the remaining $270 million, $183 was assigned to development (capex) and $120 million represented adjustments to working capital. Including other costs, the shortfall in net cash from operations totaled $37 million.

That shortfall could be made up by more borrowing, but Linn apparently decided to issue more shares instead. Investors expressed their displeasure Tuesday as they had traded more than 11 million shares and pushed the stock down by about 9.7%, at $11.21 shortly before noon. The stock’s 52-week range is $9.05 to $32.74. The consensus target price on the stock was $11.79 (coincidence?) before the secondary offering was announced.

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