Jim Cramer's recent column on Linn Energy (LINE) got me thinking: Is this truly the way forward for U.S. exploration and production companies? Will private capital be the new financing for distressed producers in what was once a shale oil boom but now looking more like a shale oil bust? It certainly doesn't bode well for investment in the space.
The deal that Linn made with Steve Schwarzman's Blackstone Group (BX) is a desperation deal with the devil -- one that will allow Linn to survive, but not thrive. If this is the way forward for U.S. E&Ps, we want to be with the vultures and not in shale oil right now.
Look at how bad things needed to get for Linn to agree with Blackstone on this horrible deal. Faced with a desperate need to cut capital expenditures for 2015 by one half and a further need to trim the distribution equally, Linn was facing a complete disaster in new completions and production moving through 2015 and into 2016, despite being nearly 70% hedged through the year.
Jim is precisely right: The decay rate for shale wells doesn't allow much leeway on the schedule for new drilling and new production growth in the small and midcap independent players. Linn, along with several dozen others in the same pickle, will now have to make the "playing chicken" call of either selling one's asset base for peanuts, or standing pat and hoping for a quick rally of oil prices in the second half of 2015.
If the hope is on a rally, don't bet on it. Sure, Linn was desperate, but it needed to be. I've isolated five reasons for the black swan dive in oil prices, all gone into great length in my upcoming e-book. And of the five -- the U.S. dollar, emerging markets and European growth, Saudi Arabia and OPEC, U.S. overproduction and the collapse of the "endless bid" from investment banks -- only one of them looks likely to reverse itself in 2015. Oil prices are a bleak-looking prospect.
What do I mean by peanuts? I mean the deal that Blackstone made, adding $500 million for development of quality Linn assets for 85% of the output. That's a roasting. That's what desperation will get you from private capital bloodsuckers like Blackstone, who are now scouring the overleveraged players in the E&P space looking for opportunity.
That's where we should be investing our money: with the bloodsuckers. So, in the energy space for 2015, I have a much more resounding recommendation of Blackstone and a continued cautious outlook on all the other E&Ps that will be forced to find bad deals like Linn's. The names include Halcon Resources (HK), Goodrich Petroleum (GDP), SandRidge (SD), Oasis (OAS), Northern Oil and Gas (NOG) and perhaps even Whiting Petroleum (WLL).
And those are just the ones with tasty enough assets to attract some attention. The others are even worse off.
