LINN Energy announced its operating and financial results for the three months ended March 31, 2010, and its outlook for the remainder of 2010.
The Company reported the following significant operational and financial achievements during the first quarter:
The Company reported the following strategic acquisition and capital market achievements:
"We had an outstanding start to the year and again delivered strong operational and financial results that exceeded our performance targets. In the first quarter alone, we announced an acquisition that marks our entry into a new operating area in Michigan's Antrim Shale, and another that strengthens our foothold in the Permian Basin," said Mark E. Ellis, President and Chief Executive Officer. "We completed successful equity and senior notes offerings, extended the maturity of our credit facility, and recently announced our 17th consecutive quarterly distribution to our unitholders. Additionally, we enhanced our hedge portfolio, which provides more certainty to our cash flow and supports future distributions."
Mr. Ellis continued, "During the first quarter we also executed a successful capital program that included reaching total depth on our first operated horizontal well in the Granite Wash ahead of schedule and below our estimated costs. The Granite Wash area is one of the most economic conventional plays in the United States and will continue to be a significant component of our organic growth strategy."
LINN increased its 2010 capital program to approximately $200 million to reflect additional capital expenditures associated with developing properties acquired by the Company in recent and pending acquisitions. Approximately half of the Company's capital program will be allocated primarily to oil-focused drilling, 26 percent will be allocated to drilling horizontal Granite Wash wells and 22 percent to workover, recompletion and optimization projects. The Company plans to drill more than 170 wells and complete more than 400 workover, recompletion and optimization projects during 2010.
In March 2010, LINN's first operated horizontal well in the Granite Wash area, the McMahon 22-2H, was drilled and cased within 36 days, which was ahead of schedule and below estimated costs. The Company will soon begin completion operations, including a ten-stage fracture stimulation process, and anticipates testing in late May 2010. The Company expects to increase its operated rig count to two during the third quarter 2010 to execute the balance of its 2010 Granite Wash drilling program, which includes seven operated and three non-operated wells.
LINN drilled 13 wells during the first quarter 2010. The Company currently has four operated rigs running: one in the Texas Panhandle Granite Wash horizontal play, one in the Permian Basin, one in Louisiana and one in the Tuttle field located in the Mid-Continent.
"We are pleased by the market's confidence in LINN's strategy. As a result, we were recently able to raise $1.7 billion in capital, positioning us to finance future growth opportunities that fit our strategy as they become available," said Kolja Rockov, LINN Energy's Executive Vice President and Chief Financial Officer. "To sustain future cash flow, we have hedged approximately 90 percent of our current pro forma production levels at attractive prices through 2013."
LINN accessed the capital markets through public equity and private senior notes offerings that provided combined net proceeds of approximately $1.7 billion. The Company completed a $431 million public equity offering in March 2010 and completed a $1.3 billion private senior notes offering in April 2010. These transactions position the Company with the financial flexibility to continue pursuing its strategy to grow through acquisitions.
LINN also entered into an amended five-year $1.5 billion senior secured credit facility with an initial borrowing base of $1.375 billion during the second quarter 2010. The credit facility covenants were substantially unchanged, and the maturity was extended from August 2012 to April 2015.
In addition, the Company recently increased its commodity hedge positions. At current expected future production levels, pro forma for the recently announced acquisitions and assuming the expected second quarter closing dates, the Company is approximately 90 percent hedged on an equivalent basis through 2013, and approximately 32 percent hedged for 2014 and 2015 (see Schedule 10).
During the first quarter, the Company closed its previously announced acquisition of oil and natural gas properties in the Permian and Anadarko Basins. This acquisition added approximately 100 proved infill development and low-risk optimization projects, expected net production of 1,700 Boe/d (approximately 73 percent liquids) and proved reserves of more than 12 MMBoe (approximately 80 percent liquids and 80 percent proved developed), with a 6 percent decline rate and a reserve life of approximately 20 years.
On March 29, 2010, the Company announced a bolt-on acquisition of oil and natural gas properties in the Permian Basin for a contract price of $305 million, subject to closing conditions. This acquisition includes approximately 120 proved low-risk infill drilling and optimization opportunities and expected net production of approximately 2,800 Boe/d (more than 75 percent oil), as well as proved reserves of approximately 18 MMBoe (approximately 71 percent oil), with a reserve life of approximately 17 years. The Company anticipates that this acquisition will close May 27, 2010, and will double reserves and production in the Permian Basin. In less than six months, this core operating region was established through three acquisitions.
On March 22, 2010, the Company announced an acquisition of natural gas properties in the Antrim Shale of northern Michigan for a contract price of $330 million, subject to closing conditions. In addition to approximately 300 proved low-risk drilling and optimization opportunities, this acquisition is expected to add approximately 30 MMcfe/d net production and proved reserves of more than 266 Bcfe (85 percent proved developed), with a 6 percent decline rate and a reserve life of approximately 24 years. The Company anticipates that this acquisition will close April 30, 2010, and expects to continue developing this area into a new core operating region.
Pro Forma Reserve Overview
As of December 31, 2009, pro forma for recent and pending acquisitions, the Company estimates:
First Quarter 2010 Results
Production for the first quarter 2010 averaged 213 MMcfe/d, compared to mid-point guidance of 210 MMcfe/d. Production was positively impacted by the acquisition of properties in the Permian Basin during the first quarter 2010 and third quarter 2009.
Hedged realized average prices per Bbl for oil and NGL production were $102.39 and $45.51, respectively, for the first quarter 2010, compared to $103.62 and $31.71 per Bbl for the fourth quarter 2009. Hedged realized average prices for natural gas were $9.21 per Mcf for the first quarter 2010, compared to $8.97 per Mcf for the fourth quarter 2009. Oil, NGL and natural gas revenues were $149 million and hedge revenues were $63 million, for combined revenues (a non-GAAP financial measure) of $212 million for the first quarter 2010, compared to $206 million for the fourth quarter 2009.
Lease operating expenses for the first quarter 2010 were approximately $31 million, or $1.63 per Mcfe, compared to $32 million, or $1.63 per Mcfe, in the fourth quarter 2009. Taxes, other than income taxes, which consist primarily of production and ad valorem taxes, increased during the first quarter 2010 to $10 million, or $0.53 per Mcfe, compared to $6 million, or $0.31 per Mcfe, during the fourth quarter 2009, due primarily to higher commodity prices.
For the first quarter 2010, the Company's distribution coverage ratio was 1.26x, compared to 1.04x for the fourth quarter 2009. The Company generated adjusted EBITDA (a non-GAAP financial measure) of $152 million during the first quarter 2010, compared to $142 million for the fourth quarter 2009. Adjusted EBITDA is a measure used by Company management to evaluate cash flow and the Company's ability to sustain or increase distributions. A reconciliation of adjusted EBITDA to income from continuing operations is provided in this release (see Schedule 1). The most significant reconciling items are interest expense and noncash items, including the change in fair value of derivatives and depreciation, depletion and amortization.
The Company utilizes commodity hedging to capture cash-flow margin and reduce cash-flow volatility. The Company reported a gain on derivatives from oil and natural gas hedges of approximately $96 million for the quarter. This includes $33 million of noncash gain from a change in fair value of hedge positions, due to the decrease in commodity prices, and realized hedge revenues of $63 million during the first quarter. Noncash gains or losses do not affect adjusted EBITDA, cash flow from operations or the Company's ability to pay cash distributions.
For the first quarter 2010, the Company reported income from continuing operations of $65 million, or $0.50 per unit, which includes a noncash gain of $33 million, or $0.26 per unit, from the change in fair value of hedges covering future production and a noncash loss of $15 million, or $0.12 per unit, on interest rate hedges. Excluding these items, adjusted net income for the first quarter 2010 was $47 million, or $0.36 per unit (see Schedule 2).
Adjusted net income from continuing operations is a non-GAAP financial measure, and a reconciliation of adjusted net income to income from continuing operations is provided in this release (see Schedule 2). Adjusted net income is presented as a measure of the Company's operational performance from oil and natural gas properties, prior to unrealized (gain) loss on derivatives, realized (gain) loss on canceled derivatives, impairment of goodwill and long-lived assets and (gain) loss on the sale of assets, net, because these items affect the comparability of operating results from period to period.
On April 27, 2010, the Company's Board of Directors declared a quarterly cash distribution of $0.63 per unit, or $2.52 per unit on an annualized basis, with respect to the first quarter 2010. The distribution will be paid on May 14, 2010, to unitholders of record as of the close of business on May 7, 2010.
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