J.P. Morgan: Time To Sell Linn Energy Assets

In a report published Friday, JP Morgan analyst Gabriel J Daoud downgraded the ratings on Linn Energy LLC LINE and LinnCo LLC LNCO from Neutral to Underperform. The price targets of both were reduced from $8 to $5. The analyst cited the lack of visibility into distribution resumption as the reason for the downward revisions. "LINE enjoyed a solid 2Q15 from an operational standpoint. Production topped JPM and Street expectations while handily trumping the midpoint of guidance by 60mmcfe/d," analyst Gabriel Daoud wrote. Linn Energy recorded better-than-expected cost savings, with LOE per Boe down ~21 percent sequentially, following a ~15 percent q/q decline in the previous quarter. Daoud added, however, that the market seemed to be focusing on the "forthcoming suspension of the common distribution," rather than on the company's operational achievements. Linn Energy's units were down ~26 percent, with the management indicating that about $450mm in annual distributions would instead be used to improve the balance sheet. Daoud considers this "a prudent and likely necessary decision." In the report JP Morgan noted, "With the "will they cut the distribution again?" headwind now removed and the worst case scenario upon us, the question moving forward becomes "how long before the common distribution resumes?"" Daoud pointed out that the "path to recovery" could be "rocky and lengthened" in case a low commodity price environment persisted. "Given the majority of MLP investors remain income orientated and the selling pressure that likely ensues from income oriented funds, we move to an Underweight rating and $5 YE15 PT with no obvious valuation support given the lack of yield," the report added.