A fairly standard oil-and-gas valuation metric is the price per flowing barrel for oil and gas.
Oil at $100,000 per daily flowing barrel is considered high end - but some transactions happen at higher prices when there are further development opportunities in the field and the oil is light, sweet crude.
Flowing gas (per BTU) is typically worth about half flowing oil. [Use a conversion that 6 Mcf of gas is equivalent to about 1 barrel of oil]. So lets call this $50,000 per flowing barrel equivalent.
Natural gas liquids trade at about half the price of oil - and so a flowing barrel should be worth about half a flowing barrel of oil. Also lets call this $50,000 per flowing barrel equivalent.
These are fairly standard metrics and any oil and gas analyst should be able to confirm that I am not rigging the numbers here.
Linn Energy per flowing barrel
Here - from the last form 10-Q is the average daily production of Linn Energy for the last quarter by different types of hydrocarbon:
Three Months Ended
Average daily production:
Natural gas (MMcf/d)
The increase is not driven by field development but by buying almost $2.5 billion in new assets.
Using the metrics above:
- The gas production is worth 409,000*$50,000/6 = $3.41 billion.
- The oil production is worth 30,800*$100,000 = 3.08 billion and
- The NGL production is worth 31,400*$50,000= 1.59 billion
The last 10-Q also showed LINN as having debt of $6.84 billion in debt. So the equity would be worth 1.24 billion.
There were 199 million units outstanding as per the last 10Q. This gives an equity valuation of $6.22 per unit - a fair bit lower than the current price of $36.65 per unit. Longs can expect an 80 percent loss on their units using these valuations.
My view is that Linn Energy's gas and oil fields are pretty clapped out - and worth considerably less than the above metrics. The average well flows about 6 barrels per day! [My personal view: the debt will be impaired.]
However even at a full price this MLP is worth under $7 per unit.
To be fair though - this company has purchased a lot of in-the-money options and its option position is valuable. The value of those is about $900 million - which is almost $4 more per unit.
To get anything like the price targets of the bullish analysts are putting on it you need to think these clapped out assets are worth $200,000 per flowing barrel.
I know, I know you object: MLPs are not valued on their underlying assets. They are valued on their yield.
And they are. Until the yield stops.