Mark E. Ellis, Chairman, President, and CEO, Linn Energy
You started out as a petroleum engineering student and now have been the chief executive officer (CEO) of Linn Energy since 2010. How did you get to where you are today?
My dad was a petroleum engineer from Texas A&M University. I knew I wanted to pursue engineering, and A&M was the obvious choice. I would not say that when I graduated my goal was to be a CEO of a publicly traded company. Somewhere in that first 6–10 years, I realized I liked being in leadership and would like to develop a career to run a publicly traded company. With that in mind, I took a lot of rotational jobs in different functions to give me a breadth of understanding of the whole industry. Not only did I work in engineering, but also in marketing and transactional activities, so I could understand the business aspects of how assets fit within certain companies and strategies.
In how many companies have you worked so far in your career? What lessons did you take from them?
I have worked for five companies. You learn so much by going to different companies and really engaging in their cultures. You pick up on different leadership styles; different things that work in different organizations. At some point in your career, you try to take the best of all of them and create the culture that you think is the best culture for an organization. I realized that people are what make an organization run. You need great assets to be successful, but the assets do not run themselves—they are only as good as the people you have managing them.
To focus a group of people on a common outcome, it is critical to set strategic goals, and make sure the organization is aligned in achieving those goals, ensuring everyone understands how they add value to the organization and feels they are important to the organization. At Linn, we devote the time necessary to make sure that everyone understands where they add value. A lot of our time in leadership is spent doing face time out in the field. I visit every location in the organization at least once a year, and I try to have a personal connection with everyone. It is not easy to do, but I think it is important.
Based on your experience at those five companies, what leadership styles did you come to value?
There is no one that I would say is “the perfect leader; I want to emulate everything that person does,” but there are bits and pieces I have learned from every leader. There was one leader who was really good at engaging a workforce and another was really focused on prioritizing the right issues and not worrying too much about smaller issues. Another person was really good at setting context to align people toward a goal.
I really enjoy motivating people to achieve an outcome and then turning them loose and watching them achieve that outcome, while still holding them accountable for their results. That is what drives me.
What was a memorable moment for you as a young professional?
A critical turning point in my career was back in the mid-80s when a lot of engineers and geologists had a tough time finding jobs. I did a stint in marketing, which was pretty dynamic at the time. Don Clayton, chief operating officer of Burlington Resources at the time, sat down with me and redirected me back into the operating side. He felt that the true career path for me was not in marketing and convinced me to move back to operations. I could have spent the rest of my life in marketing, but that was a course correction that served me well. That was a defining moment for me. I got back to my roots, where I needed to be to develop the skill set I required to be a public company CEO.
What are you most proud of in your tenure as CEO of Linn Energy?
When I think of the things we have done at Linn—taking a company from a USD-700 million enterprise value to USD 15 billion, and taking an organization of fewer than than 100 people to 1,800 people over the course of about 8 years, while being recognized as one of the leading organizations to work for—I think that in and of itself is a great accomplishment.
People are notably the most important asset for Linn Energy. How do you foster a cohesive corporate culture in the midst of significant growth or consolidations coupled with the recent market downturn?
By being visible and communicative as a leader in the organization, and respecting all levels of the organization, from lease operator all the way up to the senior leadership team. You cannot over-communicate to your organization. Our leadership staff go out of their way to make sure that they communicate effectively in the organization. Linn’s employees understand at the beginning of a year what our expectations are for the year. We have several town hall meetings through the course of the year to make sure everyone understands where we are relative to those expectations.
When we have to do some realignment of our workforce, we try to make sure that we treat people with dignity and respect on how we go about doing that. We do not take those decisions lightly. The reorganization we did this year to redirect our technical resources back to Houston from Denver was not an easy decision, but we think it is the right decision. I hate going through that process, but it is important to show the organization a lot of respect throughout the process.
You have had success in attracting capital to fund future acquisitions. What strategies have you used to successfully attract this amount of capital?
If you look at our company, yes, we are in the exploration and production (E&P) space, but we are an upstream MLP [master limited partnership]. So the business model is considerably different. A lot of what fuels our growth is transactional activity. Every time we do a transaction we have to finance that transaction. Typically we have done transactions with equity and debt issuances simultaneously. For a long time, that worked exceptionally well but when the capital markets tightened up in 2012, we found it was difficult to do very large equity offerings overnight. So we created LinnCo, which is a new way of addressing larger pools of capital from institutional investors. Shortly after the announcement of LinnCo, we did the merger with Berry. So now we had a share that was more easily exchanged in doing mergers and acquisitions rather than just doing asset transactions. That opened up the spectrum of what we can do to fuel our growth.
This year, we came up with another vehicle, AcquisitionCo, another way to partner with private equity to invest in assets. There is a lot of private equity that wants to get into the E&P space, and AcquisitionCo is designed to enable a private equity firm that wants to invest large sums of money in the industry and leverage the excess bandwidth of an existing E&P company that is a well-known acquirer of assets. That is what we brought to the table. We bring Linn, which has done USD 17–18 billion of transactions over the last 8 years. We know how to integrate assets and manage them effectively post-execution of a deal and closure, and we can leverage our technical skills to develop the assets for their benefit and for ours. It also allows us to buy assets, park them in AcquisitionCo for a period of time, develop them, then at the right time, drop them into Linn. It is a pretty neat way to do it.
What were the strategic drivers for Linn’s acquisitions and divestments over the last few years? What is your strategy going forward?
Our strategy is really growth through acquisitions, rather than through the drill bit. The premise is that the Lower 48 is the largest collection of mature assets anywhere in the world, and we saw a lot of companies were holding purely growth-oriented assets. All the stable, cash-generating, low-growth assets were undervalued in their portfolio. So we made a marketplace for those assets, and that has worked quite well. Early on, we were one of the few that were buying mature assets. Now, it is a very popular market, with a lot more competition, so we have to elevate our game to be more competitive. When completed, our company AcquisitionCo will allow us to look at assets earlier in their life cycle.
Has Linn Energy made any fundamental changes to the strategy to operate economically in this current price environment?
Our big portfolio move in 2014 was not driven off of price. We did not know we were going to have a commodity price change at the end of 2014. We know we cannot predict commodity price. That is why we hedge so far out in the future. Any time we buy an asset, we hedge it out for 5 years on the day of the purchase and sales agreement. We do not take price risk, because it is our objective to pay a distribution every month in which our investors expect stability. In 2014, because of our rapid pace of development in some areas, there was a lot of capital intensity and a base production decline of up to 27%. It took more and more capital to be able to sustain our production rate to generate the cash flow necessary to pay our distribution. We got out a little over our skis, so we made some strategic moves. We felt if we could trade those high-decline, capital-intensive assets for lower decline assets, we would be better served in the MLP space. And we did that. We took a company with a base decline of around 27% spending USD 1.5 billion/year, to a company with a base decline rate of 15% spending USD 520 million/year and essentially holding production flat. This portfolio change has significantly improved our ability to achieve our goal in 2015 to live within internally generated cash flow.
What are some reasons a company might consider divesting or acquiring an asset?
Companies acquire and divest assets mainly to change their portfolio mix to fit their strategy. We are a cash-flow driven company. We are valued on the ability to efficiently manage oil and gas assets, and return a lot of the cash flow to a shareholder in the form of a distribution. We acquire assets to grow our business, and generate more cash flow to pay that distribution. We do acquisitions regularly, and hopefully accretive ones. However, divestitures are harder for us to do. Any asset we sell that is generating cash flow reduces our ability to pay that distribution, unless you reinvest the proceeds from the sale of assets. So it is better for us if we trade, like we did in 2014, to change our portfolio.
What are the big steps after completing an acquisition?
When acquiring assets, a lot of people think you are done once the purchase and sale agreement is signed, but that is really when the work begins. Integrating an asset into our company after a sale is absolutely critical for us to be successful, having done as many transactions as we have done. There is a tremendous amount of time and effort that goes into this, and we have dedicated people for that, so it does not get overlooked. We get the assets onboarded as quickly as possible, and then we dedicate resources to it. The last thing you want to do is close a deal and then drop the ball. If you do not fuel the asset with people to manage it, you may not generate the performance you thought you would, and you kill the economics of the acquisition.
How has the recent downturn in commodity prices affected your outlook and strategy for acquisitions and divestitures?
We are always in the market. Ultimately, we are still looking for portfolio moves into slow-growth, mature assets. The acquisition market is a bit slow, because no one wants to sell at the bottom of the market.
How do you think the recent downturn will affect the corporate transaction market?
There has not been a tremendous amount of M&A in the market as a result of the fall of the commodity price. We do see more value in corporate transactions than in asset transactions at this time. There are companies out there that we look at on a regular basis and think of the future of our organization and how they would merge with us. We were very pleased with the Berry transaction, and may consider more mergers like that in the future.
Any advice to young professionals who may experience a merger, divestiture, or acquisition of their company in the future?
I encourage them to be open-minded about where they are working and to be flexible in the work environment. Be willing to take new challenges in different areas and be willing to move. The work/life balance is much more critical to young employees than it was when I was growing up. I do not think it is a bad thing, but I want to make sure they do not miss an opportunity. See different assets, different technologies, and do not be afraid to work in different functions in the industry. There is a learning experience in relocating, especially from a leadership perspective. You will see a new culture, new leadership styles, and start thinking about the culture you would want to create when leading people or an organization.
