Management expected to fill that hole by increasing liquids production in the back half of 2013. Excluding the NGL problem, they almost got that done. Linn boosted oil revenue almost $17 million in Q2. Unfortunately, gas revenue receded some $6 million and NGL revenues fell over $20 million linked quarter (numbers are estimated off daily production and pricing averages.). Linn patched its Texas Hogshooter problem, only to encounter a new one at an inopportune time.
Is relief on the horizon?
Signs are that the problem will persist. Oneok Partners LP (NYSE:OKS) operates one of the largest NGL midstream operations in the US, serving the mid-con and Rockies region. That’s Linn’s sweet spot. ONEOK lost about a fifth of its market cap since earlier in the year on the same sticky issue. A recent S&P downgrade of ONEOK debt highlights the severity of the problem.
On its quarterly call, Oneok Partners LP (NYSE:OKS) management suggested that ethane rejection will persist longer than it originally forecast, lasting well into 2014 and perhaps even 2015, albeit at lower levels. Bakken rejection may subside earlier in 2014, but mid-con and Rockies rejection could extend into 2015. That’s bad news for Linn’s NGL revenue shortfall given Linn’s operating footprint.
On the plus side, ONEOK expects deflated propane prices to increase, helping it through this rough patch. ONEOK can divert its underutilized ethane transport capacity to propane, offsetting some of the revenue drop. Propane price increases would be good news for Linn as well, helping to partially buoy NGL prices. Regardless, ethane rejection should continue to pressure NGL production levels well into 2014 and perhaps, 2015 if ONEOK is correct. That should concern LINE and LinnCo LLC (NASDAQ:LNCO) holders.
The furor over Linn’s accounting is certainly a factor in LINE and LinnCo LLC (NASDAQ:LNCO) weakness. Conservative investors will sometimes exhibit weak hands when confronted by these kinds of issues. The numbers are usually more critical, though. Linn’s real problem is an operational problem. Absent the Berry Petroleum Company (NYSE:BRY) acquisition, Linn’s up against a poor pricing trend in NGLs that’s justifiably squeezing shares.
Since relief from that NGL issue does not appear to be on the horizon, the best road forward is to boost oil production. First quarter attempts failed as the Hogshooter came up lame in Texas. In Q2, just as the Hogshooter came through strongly in Oklahoma, weakening NGL prices wore another hole in Linn’s pocket. For now, I remain cautiously long. The Berry acquisition is dominating the news, but keeping a close eye on Linn’s drilling program in the back half of the year could be just as critical.
The article Weak Prices Have This Hedged Producer Over the Barrel originally appeared on Fool.com and is written by Peter Horn.
Peter Horn owns LINE units. The Motley Fool recommends ONEOK Partners, L.P..
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