So, is Linn Energy (LINE) the future?
Today we see what happens when you have stretched yourself thin: you cut your distribution by 57%, you cut your capital expenditures by 53%, but you also team up with the credit arm of Blackstone's capital division to be able to continuing to find more oil.
You have to do that because your decline rate is 15% and while you have hedges for all of your natural gas and a lot of your oil, you have to fund the future program if you have any chance to maintain that payout.
I think Linn's one of the worst-case scenarios, but there are plenty out there to come. But the fact that the stock's not down shows the pressure this group has been under for weeks now and mitigates the disaster somewhat. For the non-mlps without distribution, I think you can expect similar exploration cuts and credit lines to keep companies alive. But they will only work for so long at these low oil prices.
Linn's game plan will cause a lot of handwringing for those who are going to discuss how hard hit the oil patch will be during this period. I think that we must always remember that the handful of states impacted is very small and the upside of this dramatic decline in oil is pretty unfathomable while it lasts.
I say "while it lasts" because, to me, the key number here is how quickly the existing wells are running out. That's the deal with shale wells. They don't last long and you get about 50% of the production from a shale well its first year and it is all downhill from that.
Compare that with Gulf wells that have about 30 years' worth of life and you know why companies like Exxon (XOM) and Chevron (CVX) love the big projects. They have to think that far out.
Linn had given many hope that it, too, had snared some long-lived properties when it bought Berry two years ago. That deal now seems like any number of deals that Linn has made, which just seem to keep them one step ahead of the posse. It all seemed to work pretty well when they had numerous hedges on, but that's no longer the case.
So, get used to the possibility of this Linn downside scenario for others. But also recall that if the rate of oil decline is 15% then there's a smaller window to U.S. production growth than many think and the decline in the oil price -- once unthinkable and now gospel -- may not last as long as conventional wisdom now holds.