By Daniel Gilbert
Linn Energy LLC and Breitburn Energy Partners LP , the two
largest U.S. energy producers by revenue operating as partnerships,
slashed shareholder payouts and capital spending in moves that
could pressure rivals to take similar steps.
Houston-based Linn's aggressive maneuvers to shore up its
balance sheet on Friday marked the first time it has cut its payout
since going public. Breitburn followed suit with a 50% cut; it
temporarily suspended its payout in 2009. By curtailing cash
payments to shareholders, the drillers can raise money more cheaply
and could have an advantage in making acquisitions, said industry
executives.
Linn is the largest energy producer set up to pay available cash
to shareholders and avoid corporate taxes. On a day that crude oil
prices sunk to $52.69 a barrel, the lowest level in more than five
years, investors sent Linn's stock up 12%. Breitburn shares rose 9%
and rival partnership Vanguard Natural Resources LLC, which didn't
announce cuts, gained 11.6%.
Linn cut its dividend-like payment to $1.25 a share for 2015,
down from $2.90 a share last year, to weather oil prices it expects
to hover around $60 a barrel. The company also said it would spend
$730 million to drill new wells this year, down 53% from last
year.
The cuts quelled uncertainty about how Linn could keep up its
payouts, which some analysts said weren't sustainable without
piling on more debt. Its shares fell 69% in the last six months of
2014. Lower payouts will save the company about $550 million this
year based on shares outstanding as of Sept. 30.
"In order to solidify the company's financial position and
regain useful cost of capital, we have reduced the oil and natural
gas capital budget and distribution while balancing cash flow and
spending," said Mark Ellis, Linn's chief executive.
Breitburn cited a similar rationale, calling its cuts
"difficult."
Linn has led energy producers set up to pay available cash to
their shareholders, commonly structured as master limited
partnerships. It posted about $2.8 billion in revenue through the
first nine months of 2014.
But the shareholder payouts have become harder to sustain as
crude prices recently plunged 50% from their summer peak and
natural-gas prices sunk to their lowest levels in two years. Linn,
Breitburn and Vanguard have been hit harder than traditional energy
companies as investors anticipated cuts to the payouts that made
their shares attractive.
Even before oil prices fell, Linn early last year drew on its
credit line to pay shareholders.
"They're doing something drastic now in order to fight another
day," said Richard Robert, Vanguard's finance chief, calling the
move "prudent."
While the market reaction won't influence Vanguard's decision
whether to cut its payouts, Mr. Robert said it is reassuring.
"Should that ultimately be the prudent thing for us to do, at least
you sleep a little better at night," he said.
Linn also disclosed a deal with GSO Capital Partners LP, the
credit arm of Blackstone Group LP, which will provide up to $500
million for drilling in exchange for an 85% stake in the profits.
After GSO makes a 15% return on the wells, its interest will
decline to 5% and Linn will reap 95% of profits.
Linn touted the deal as an inexpensive way of adding new oil and
gas production, and said it was looking for another such deal to
help pay for acquisitions.
Energy-producing partnerships favor buying known oil fields over
the riskier business of prospecting for new ones. By hedging oil
and gas output, they can mitigate price swings and make steady
payouts to investors. Linn projects its hedges will cover about 70%
of this year's oil production.
Alison Sider contributed to this article.
Write to Daniel Gilbert at daniel.gilbert@wsj.com
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