The Shopping Spree Continues
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Linn Energy (NASDAQ: LINE) recently made to two separate announcements that would seem to indicate that they are taking their strategy to a whole new level. Linn is a different kind of oil and gas company as their LLC structure gives them MLP like characteristics. Because of this they focus on purchasing older producing fields and work to make them more productive while retuning the bulk of the cash to shareholders in the form of distributions. Their recent deals continue this strategy but as their corporate credit card is getting stretched they are giving investors something new to consider.
In the first transaction they announced they were buying properties in the Jonah Field of Wyoming from BP (NYSE: BP) for $1.025 billion. In the deal they are acquiring 750 producing wells and more than 12,500 net acres. The field should produce about 145 MMcfe/d of liquids-rich natural gas yielding $160 million in EBITDA making it immediately accretive to distributable cash flow per unit. They have a low decline rate of ~14% and proved reserves of about 730 Bcfe. These are excellent MLP type assets and as is their strategy to ensure cash flow, they’ve hedged out 100% of the production through 2017. With the deal they’ve also acquired 650 future drilling locations for a 1.2 Tcfe of resource potential to add to their organic growth opportunities.
This acquisition marks Linn’s second deal in Wyoming this year as they signed a $600 enhanced oil recovery joint venture agreement with Anadarko (NYSE: APC) just two months ago. Linn’s been very balanced in acquiring assets this year. The Jonah Field is 27% liquids and 73% natural gas while the Salt Creek venture was 100% oil. In earlier deals they acquired a smaller asset that was 97% natural gas and a much larger asset with a 37% NGL to 63% natural gas mix. Through all the additions they’ve maintained a balanced portfolio of 45% oil and NGLs to 55% natural gas which they’ve hedged out well into the future. I like the balance at Linn, both in terms of their asset portfolio and in their hedging portfolio which ensures the safety of their distributions.
Their latest buy marks the second time this year that Linn’s handed BP more than a billion dollars to acquire producing properties. Back in February they paid $1.2 billion to acquire 2,400 producing wells with very similar production and growth characteristics. Linn has now spent $3 billion on acquisitions this year which is a tidy sum for a company with an enterprise value of $13.1 billion. They are planning to ask lenders to expand their current bank facility by a billion dollars to $3 billion.
In an attempt to access additional equity capital to fuel their growth strategy, Linn announced that they are filing an IPO for LinnCo. The company has selected to be taxed as a corporation meaning its future shareholders will receive a 1099 instead of the K-1 that Linn Energy shareholders currently receive. The new company will have no assets or operations other than owning units of Linn Energy that they are planning to acquire in an equal number to the LinnCo shares they are selling in the offering. Linn energy will use their proceeds to finance their acquisition strategy, repay debt and pay the expenses of the offering. I like the deal on the surface because it will give investors access to Linn who were either unable to invest in the MLP business or were turned off by the K-1 and related tax issues.
Energy companies and especially MLP’s are known for their creative equity raises. Chesapeake Energy (NYSE: CHK) for example has IPO’d both a mid-stream company and a royalty trust while Kinder Morgan (NYSE: KMI) has a publically traded management company and two pipeline partnerships as part of the four ways you can invest in their businesses. Investors need to be aware of what they are investing in and make sure they buy the best fit for their investment goals. For me, Linn Energy is an excellent income position for my portfolio and while the K-1 is a pain, the distributions are worth it. Other’s mileage may vary and the new LinnCo might be a better portfolio fit. I continue to like the management and the strategy at Linn and believe they will continue to reward long term investors no matter how you choose to invest.
latimerburned owns shares of Linn Energy, LLC. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.