This is yet another phenomenal deal for Linn that’s immediately accretive to distributable cash flow and will result in significant growth in distributions later this year. About three-quarters of the output from the Jonah field properties is natural gas with the remainder primarily consisting of natural gas liquids (NGLs).
At first blush, that heavy gas focus might appear to be a problem since natural gas continues to trade well under $3 per million British thermal units. However, Linn isn’t betting on a rise in near-term gas prices. Instead, the company was able to buy these properties at dirt-cheap prices and hedge 100 percent of its expected oil and natural gas output over the next six years. That means that Linn has effectively locked in a fixed profit margin on the output from this acquisition over a period of six years, with no exposure to near-term commodity price volatility.
Linn also announced that it has filed with the U.S. Securities and Exchange Commission to list a new company called LinnCo later this year. LinnCo has elected to be taxed as a corporation rather than a partnership like Linn Energy (LINE).
LinnCo won’t be an operating company or own any assets, but all proceeds from the offering of this stock will be used to buy units of Linn Energy, which means the deal won’t be dilutive to current unitholders.
Please note that this deal is not a spin-off and current Linn shareholders will not receive units of LinnCo when it comes public.
Because LinnCo is taxed as a corporation, it will pay ordinary qualified dividends and send out a standard form 1099 to investors at tax time rather than the K-1 partnership form that Linn Energy sends out to shareholders.
That feature will make LinnCo attractive to certain classes of investors. For example, some foreign and institutional investors face tax complications from receiving distributions rather than qualified dividends; LinnCo will allow these investors to buy Linn while avoiding K-1 tax filings.
Individual investors who purchase partnerships such as Linn inside an Individual Retirement Account or 401(k) can face additional complications at tax time because some of the distributions paid constitute unrelated business taxable income. LinnCo will be subject to U.S. corporate tax but could be an attractive alternative for those wishing to buy Linn in tax-advantaged accounts.
The deal will help Linn Energy unitholders because it offers yet another avenue for Linn to raise capital to take advantage of acquisition opportunities.
LinnCo represents an innovative transaction that’s likely to be copied by other master limited partnerships (MLPs) and limited liability companies (LLCs) as a means of raising capital from investors unwilling or unable to invest in partnerships. You can learn more about Linn Energy as well as several other prospective MLPs by checking out my free report, Best MLPs to Own Now.