Wednesday, May 20, 2009
(Cont'd from above)...

Jim (cont'd):   


Jim: Mr. Linn, welcome to Mad Money...

Mr. Linn: Hi Jim. A great big Booyah from Houston...

Jim: Massive Booyah right back at you, plus the Astros... How did you know? How did you know to hedge, when everyone else told you it was going to the sky?

Mr. Linn: Well Jim... Our business plan... we are very, very disciplined... when we make acquisitions, when we grow our production... we go into the market at that point and time, and hedge our production. We're not speculators, but we were criticized early on for hedging at $80, in $100 oil... when oil went to $140, and gas went to $12... But that's our business plan, to be disciplined hedgers... We buy long-life reserves that have a low decline rate, we drill development wells, and we hedge our production.

Jim: If you had to look at 2012, would you be a buyer of natural gas futures? Now, actually, you make natural gas... but do you think $4 bucks is just absurdly low for a fuel that you hedged at $8 just a year ago?

Mr. Linn: Our long-term outlook for 2012 and beyond is bullish... We believe that, with the Obama administration, and a push to a green environment, natural gas has to play an important role as a bridge fuel in the future before we find the alternative energy sources we're all looking for. Natural gas is abundant, it's clean-burning, and I think overall it's going to be a good, bullish play, especially since we're not drilling as many natural gas wells as we had been in the past. So we think now is not the time, at this point, to lock in $4 prices, but we think the price should rally in 2010 and probably 2011.

Jim: Alright Mike, but let me give you two objections to that thesis... and I agree with you... I just always like to challenge my thesis... The first Obama... you know, Ron Emmanuel, Chief of Staff, indicated that natural gas should be on the agenda, but Obama has said nothing about it so far... And the second is, gigantic liquified natural gas (LNG) is supposed to be coming in from offshore over the next few years, keeping prices down. How do you defeat those two pieces of logic?

Mr. Linn: What's interesting is... I'll take the second one first... The LNG imports... even if they were to ramp up from 3 BCF a day to 6 BCF a day, as they're projected in 2012, still will not be able to make up for the lack of gas that we are developing with the current drilling activity. So, in a sense, if it does ramp up to 6 BCF a day, and takes part of the market share of 10-15%, then LNG will be essentially the margin price of gas. The interesting thing though is that LNG comes from a group of countries that are the same group of countries that deliver us oil and OPEC... So I don't believe that they would sit back and say, well let it just flood into the market...

Jim: All right, but how about the Obama issue? Everybody is telling me... all the natural gas stocks are up today, and everyone says, listen, there is an agenda here... he is going to come out for natural gas. You know that this man has not said word one about natural gas as a green fuel yet.

Mr. Linn: Yes, but he should, and he has to... because, when you have wind turbine farms, natural gas is your backup power. Solar... natural gas is your backup power. It's 50% cleaner than coal, and it's 60-70% cleaner than diesel fuel, in terms of particulate matter coming out of the tailpipe... so it does play a role and it's abundant and it's low in carbon... It is a carbon, but its low emissions will help us get to that next step.

Jim: I totally agree. I just keep waiting... keep waiting. Now Michael, a lot of people call in on the Lightning Round... One of the reasons we wanted you on is because, in the Lightning Round, we probably get more questions about your stock than anyone... and I'm always concerned, when I see a yield that is so outsized versus the rest of the market, and just in the bond market, but actually all other MLPs (master limited partnerships)... it raises a red flag to me. How do I assuage... how do I feel more comfortable with the fact that your yield is so much bigger than everybody else's?

Mr. Linn: Well, what we look at is, we have 1.7 TCF of gas in the ground... of proved developed reserves... that are produced over 21 years. So, if you take the reserves for our stock price, we believe we are undervalued. Number two... we have a disciplined approach, Jim. We only drill development wells. We have a 21-year reserve life, and we hedge our production. Third, we now have, we believe, liquidity to take advantage of some other companies that might not have hedged in 2009 or 2010... to be able to buy production at these prices, which are very attractive.

Jim: You know, I keep waiting for the consolidation... I know Anadarko just did an offering... they really didn't need to... they had a decent balance sheet... Everyone tells me it's around the corner. I have not seen anyone make a move yet in this consolidation.

Mr. Linn: There have been some data rooms opened and some companies have sold some assets, but this third quarter, you're going to see a lot more come on the market, because their bank facilities are going to be stressed... and a lot of companies... only 23% of companies are hedged in 2010. A lot are still running their 2009 hedging model... but, in 2010, something's going to happen...

Jim: Alright, well, what do I say to people that call in, and say, look, I know you say all the time, Jim, that the MLPs (master limited partnerships)... they change... they cut... I mean, if you did Prudhoe Bay or Permian Basin, they cut the dividend. Is Michael going to cut the dividend anytime soon? It would seem to me that that wouldn't make any sense that you should cut it anytime soon, given your hedging situation.

Mr. Linn: No. We don't plan on cutting our dividend anytime soon, for the simple fact that we have strong hedged positions over the next couple of years... and the fact that we do other things that Prudhoe didn't do and that other companies did... We don't drill short-life reserve wells. We don't drill high-risk wells. We drill... as I used to say, we put car doors on Chevys... I might say we put car doors on Toyotas today... We don't drill fancy things. It's not exotic, and we have long-life reserves with low decline rates.

Jim: Boy, I've got to tell you Michael... you certainly have convinced me. And I'm so glad you came on... because I have to tell you, as someone who sits here and answers questions rapidly, I look at that yield and I want it... I want it real bad. I want it more than Kinder Morgan... I want it more than Enterprise Production... But, until you came on... frankly, I was scared. I'm not scared anymore. Michael Linn, chairman and CEO of Linn Energy, LLC (LINE)... thank you for coming on Mad Money.

Mr. Linn: Thank you, Jim.

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