Linn Energy, LLC has announced financial and operating results for the three and six months ended June 30, 2008 and its outlook for the remainder of the year. The Company highlights the following:
• Record average production of 223.6 million cubic feet of natural gas equivalent per day (MMcfe/d) compared to mid-point guidance of 220.0 MMcfe/d;
• Lease operating expense of $1.44 per thousand cubic feet of natural gas equivalent (Mcfe) compared to guidance of $1.45 per Mcfe;
• Record adjusted EBITDA of $162.1 million compared to guidance of $136.0 million;
• Record distribution coverage ratio of 1.57x compared to guidance of 1.23x;
• Increased projected distribution coverage ratio of 1.27x for 2008 compared to guidance of 1.18x;
• Commodity hedge restructuring; and
• Completed $256 million senior notes offering, sale of Appalachian Basin assets for a contract price of $600 million and announced the sale of the Verden assets for a contract price of $185 million, which provide increased financial flexibility.
"Second quarter 2008 proved to be another record setting quarter for Linn Energy," said Michael C. Linn, Chairman and Chief Executive Officer. "The Company posted the highest production rates, adjusted EBITDA and distributable cash flow in its history. In addition to our strong quarterly results, we have taken several steps to continue to improve our balance sheet. With our recent bond offering, sale of Appalachian Basin assets and the pending sale of the Verden assets, we will have significantly strengthened our financial flexibility to pursue growth through continued successful drilling and acquisitions."
Second Quarter 2008 Results (Comparative Results for First Quarter 2008 Reflect Continuing Operations)
During the second quarter 2008, Linn Energy generated adjusted EBITDA (a non-GAAP financial measure) of $162.1 million compared to $127.3 million for the first quarter 2008. The Company's distribution coverage ratio was 1.57x for the quarter, compared to guidance of 1.23x. Adjusted EBITDA is the primary 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 net income is provided in this release (see Schedule 1). The most significant reconciling items between net income to adjusted EBITDA are interest expense and non-cash items including the change in fair value of derivatives and depreciation, depletion and amortization.
Average production was 223.6 MMcfe/d for the second quarter 2008, compared to 195.6 MMcfe/d for the first quarter 2008. The increase in production volumes was primarily attributable to acquisition and drilling activities. Realized prices per barrel (Bbl) for oil and NGL production were $81.10 and $70.55, respectively, for the second quarter 2008, compared to $74.98 and $65.84 per Bbl for the first quarter 2008. Realized prices for natural gas were $9.92 per thousand cubic feet (Mcf) for the second quarter 2008, compared to $8.22 per Mcf for the first quarter 2008. Lease operating expense was $1.44 per Mcfe for the second quarter 2008, compared to mid-point guidance of $1.45 per Mcfe.
Oil, natural gas and NGL revenues were $255.6 million for the second quarter 2008, compared to $175.9 million for the first quarter 2008. The increase in oil, natural gas and NGL revenues was primarily attributable to acquisition and drilling activities and higher realized commodity prices.
The Company utilizes commodity and interest rate hedging to capture cash flow margin and reduce cash flow volatility. Due to the significant increase in commodity prices during the second quarter, the Company reported a loss on derivatives from oil and gas hedges of approximately $870.8 million for the quarter, including $773.4 million of non-cash change in fair value of hedge positions covering anticipated future production through 2014. In addition to the loss on oil and gas derivatives, the Company also reported a non-cash gain on interest rate hedges of $35.8 million during the second quarter 2008. Non-cash losses or gains do not affect adjusted EBITDA, cash flow from operations or the Company's ability to pay its cash distributions.
For the second quarter 2008, the Company reported a net loss from continuing operations of $725.4 million, or $6.35 per unit, which includes a non-cash loss of $773.4 million, or $6.76 per unit, from the change in fair value of commodity hedges covering future production, a non-cash gain of $35.8 million, or $0.31 per unit, on interest rate hedges and a realized loss of $68.2 million, or $0.60 per unit, from hedge cancellations. Excluding these items, adjusted net income from continuing operations for the second quarter 2008 would have been $80.4 million, or $0.70 per unit. Adjusted net income from continuing operations is a non-GAAP financial measure and a reconciliation of adjusted net income from continuing operations to net income from continuing operations is provided in this release (see Schedule 2). Adjusted net income is presented because the excluded items affect the comparability of operating results from period to period.
Operational Update
In the Mid-Continent region, during the second quarter 2008 the Company operated a total of 10 drilling rigs and completed 49 wells with a 100% success rate. In the Texas Panhandle Granite Wash area of the Mid-Continent region, five rigs drilled 10 wells during the quarter, and for the first six months the Company completed 21 wells. In the Frye Ranch and Stiles Ranch areas of the Texas Panhandle, 11 wells were completed with initial production rates that averaged 2.8 MMcfe/d during the first six months of 2008. In the Buffalo Wallow and Dyco areas, nine wells were completed during the first half of 2008 with initial production rates that averaged 2.0 MMcfe/d. The Company anticipates drilling 26 wells in the Texas Panhandle Granite Wash area during the remainder of 2008. Drilling continues to progress in the Twin Channel joint venture area, where the Company has elected to participate in 20 wells to date with funds provided by its partner. Average initial production for the first 10 wells that have been completed has been approximately 2.2 MMcfe/d. The Company's Granite Wash drilling program results continue to exceed expectations.
In the shallow Texas Panhandle Brown Dolomite formation of the Mid-Continent region, the Company operated four rigs and drilled 34 wells during the quarter, and for the first six months 78 wells were completed with a 100% success rate. The Company plans to drill approximately 22 additional wells in this region during the remainder of 2008.
In the Naval Reserve Unit, the Company has completed 35 water flood reactivation projects that returned non-producing and injector wells back to active service resulting in a production increase of approximately 100 barrels of oil per day. During the first six months of 2008, the Company drilled 16 wells in the Osage Hominy Unit to the Okesa formation and eight wells are currently being completed. The Company is also permitting 15 wells to begin development of the Chat formation in Osage County, Oklahoma.
Sale of Appalachian Basin and Verden Assets
On July 1, 2008, the Company completed the sale of its interests in oil and gas properties located in the Appalachian Basin to XTO Energy, Inc. for a contract price of $600 million, subject to closing adjustments. The Company used net proceeds from the sale to reduce indebtedness. The assets include approximately 197 Bcfe of proved reserves at December 31, 2007, with production of approximately 25 MMcfe/d.
In addition, on June 3, 2008, the Company entered into an agreement to sell certain of its assets in the Verden area in Oklahoma to Laredo Petroleum, Inc. for a contract price of $185 million, subject to closing adjustments. The Company plans to use net proceeds from the sale to reduce indebtedness. The Verden assets include approximately 50,000 net acres and 45 Bcfe of proved reserves at December 31, 2007, with production of approximately 12 MMcfe/d.
Cash Distributions
In July 2008, 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 second quarter 2008. The distribution will be paid on August 14, 2008 to unitholders of record as of the close of business on August 7, 2008.