This year has been good for Linn Energy (LINE, Financial) investors, as the stock has plunged over 15%; however, investors shouldn't lose hope and buy the drop. The company is making some interesting moves that should reap long-term benefits, which is why I think investors should consider adding Linn to their portfolios. Let's take a look at the reasons that can drive Linn higher.
Shrewd initiatives
Linn Energy LLC’s recent most acquisition of Devon Energy for $2.3 billion has proved to be very beneficial. This will be the company’s largest purchase since last year when it acquired Berry Petroleum for $4.3 billion and brought the company a few losses. In order to make this deal, Linn has to sell its Granite Wash assets.
Under this deal, Linn will swap 230 million cubic feet of gas equivalent per day, of liquids-rich, higher margin, but higher decline Granite Wash production for 275 million cubic feet of lower margin, lower decline natural gas production. This also includes a swap of its 70,000 net acre position in the Granite Wash Play in exchange for Linn 896,000 dry-gas producing acres in five different locations.
It seems awkward that Linn is trading its oil assets for the gas assets while it is very well known that oil offers much higher returns than gas. But, Linn currently focuses on lowering its overall decline rate, maximizing the cash flow and return that cash flow to shareholders. The maintenance capex that the company needs to maintain production levels in its oil field comes from the distributable cash flow. The lower the decline rates, the lower will be the maintenance capex. The decline rate of the Devon acreage is 14%, much lower than the Granite Wash production.
Linn Energy has been looking for assets that are high producers in order to trade its Midland Basin assets. This quest was fulfilled when the company announced a deal with the oil giant ExxonMobil (XOM, Financial). This would benefit the company in many ways by lowering the costs, increasing cash flow as well as production, and also maintaining its more than 10% yield. This deal is also beneficial for both the companies.
In this deal, Linn swaps 25,000 net acres of its Midland Basin properties, which currently produces 2,000 barrels per day, with ExxonMobil’s 500,000 net acres of Hugoton field in Kansas that consists of gas reserves worth 700 billion cubic feet of gas, and currently produce 85 million cubic feet per day of natural gas.
Linn benefits as its reserves will rise up 9.4% while its total gas production goes up by 18%. It gets a decline rate of 6% and approximately $30-40 million of distributable cash flow. This deal also earned the company the East Goldsmith field, which is an enhanced oil recovery project consisting of 24 million barrels of reserves and uses CO2 injection to increase well pressure, thus resulting in super low decline and high-margin oil production.
Linn Energy also got the Jayhawk gas plant, a 450 million cubic feet per day processing facility which also is located in the Hugoton basin and has started processing the company’s gas. It is already 44% utilized while Linn plans on achieving much higher utilization rates, synergistic cost savings, and higher margins on this gas production.
After all these benefits, the company still retains 30,000 net acres of its Midland Basin that produces 15,000 barrels per day, and this is what interests the investors. The company scores well on all fronts and grounds.
Conclusion
Although Linn Energy alone holds a very good position in the market, it’s MLP with Linn Co. has also grown into the largest upstream MLP in America as it enjoys a 2,500% enterprise value increase and a 4% CGAR growth in just eight years. Linn Energy’s strong growth plan, consistently good accretive acquisitions, better yield, low decline rates and very solid estimates have all contributed to its success as an industry and it proves to be the best option for both long and short term investors.
