Here's the text of the ML LINE upgrade, for any one who's interested:
Upgrading to Buy: Proved NAV should set a floor
We are upgrading LINE to Buy from Neutral and establishing a $25/unit price objective.
Linn has dramatically underperformed the group as capital concerns for the sector
compounded with concerns over maintenance capex, asset integration, and its private
placement overhang. Following a meeting with management, we are increasingly
confident LINE has initiatives in place to address concerns and an inventory of low
cost projects to drive moderate growth as it transitions to a more conservative model.
Risk reward balance has turned decidedly positive
In the days prior to a major private placement lock up expiration (~49% of units o.s.),
LINE traded as low as $18.41 (13.7% yield). In our opinion, concern about the
overhang pushed valuations to unsustainable lows and the company’s proved only
NAV (~$22+/unit) should approximate floor valuation levels going forward. Therefore,
with a current yield of 11.2% and 100% of outstanding units freely tradable we believe
the risk reward balance for Linn units has turned decidedly positive.
Capex concerns justified, but near-term impact overblown
We continue to believe that estimates of maintenance capex should reflect the longterm
cost of maintaining reserves, not the near term cost of maintaining production
(LINE method). That said, at current levels we believe these factors are more than
adequately reflected in unit prices. In addition, we believe the company has a
sufficient inventory of low cost, high ROR workover, optimization, and PDNP projects
to support a transition to a more sustainable model over the next several years.
Long-reserve life provides flexibility in project selection
In addition to an inventory of low cost production adds, LINE has the longest reserve
life in our MLP group (18.3 PDP/P versus peer avg 15.7) which should provide some
leeway to develop higher production (and decline) projects without a severe negative
impact on overall decline rates. A key example is the company’s five rig program in
the Texas Panhandle Granite Wash play (1,300 locations, 10+ years of inventory). |
