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Linn Energy, LLC (NASDAQ:LINE)

Q1 2013 Earnings Call

April 25, 2013 11:00 AM ET

Executives

Clay Jeansonne – VP, IR

Mark Ellis – Chairman and CEO

Kolja Rockov – EVP and CFO

Arden Walker – EVP and COO

Analysts

Ethan Bellamy – Baird

Kevin Smith – Raymond James

Ted Durbin – Goldman Sachs

Praneeth Satish – Wells Fargo

David Amoss – Howard Weil

Boris Pialloux – National Securities

Jeff Robertson – Barclays

Eric Anderson – Hartford Financial

Abhi Sinha – Bank of America

Operator

Good morning, ladies and gentlemen, and welcome to the First Quarter 2013 LINN Energy Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)

I would now like to introduce your host for today’s program, Mr. Clay Jeansonne, Vice President of Investor Relations and Public Relations. Please go ahead, sir.

Clay Jeansonne

Thank you for joining our first quarter 2013 Earnings Conference Call. In a moment, I’ll introduce Mark Ellis, our Chairman, President and Chief Executive Officer. But I first need to provide you with a disclosure regarding forward-looking statements that may be made during this call the statements describing our beliefs, goals, plans, strategies, expectations, projections, forecasts and assumptions of forward-looking statements.

Please note that the company’s actual results may differ from those anticipated by such forward-looking statements for a variety of reasons, many of which are beyond our control. Additional information concerning such risk factors relating to our business, prospects and results is available in the company’s filings with the SEC, including our Form 10-Q for the quarter ended March 31, 2013, which we file later today and any other public filings and press releases.

Additionally, during the course of today’s discussions, management will refer to adjusted EBITDA as an important metric for evaluating the company’s performance. Please note that adjusted EBITDA is a non-GAAP financial measure which is reconciled to its most directly comparable GAAP measure in the earnings press release issued this morning.

Supplemental financial and operational information, including the company’s statement of operations, selected balance sheet data and guidance table has been posted to LINN Energy’s website at www.linnenergy.com in the Investor Relations Center, under Presentations.

Following management’s prepared remarks, we’ll take your questions. I’ll now turn the call over to Mark Ellis, LINN’s, Chairman, President and CEO.

Mark Ellis

Thanks, Clay. And good morning. Joining us today from Kolja Rockov, Executive Vice President and Chief Financial Officer, and Arden Walker, Executive Vice President, Chief Operating Officer.

Let me begin by discussing the first quarter operational results. Production volumes were negatively impacted by weather, infrastructure curtailments and ethane rejection. In February and March, our assets in the Mid-Continent experienced severe winter weather which caused significant shut-ins and program delays.

In addition, infrastructure curtailments in the Permian Basin resulted in lower than expected production volumes caused by shut-ins and high line pressures. Production volumes from the Jonah Field were negatively affected by ethane rejection due to depressed price of ethane. We believe ethane rejection in the Jonah Field will reduce full-year production volumes by approximately 10 million cubic feet equivalent per day.

In the Granite Wash, LINN continues to focus on developing high-return liquids-rich opportunities. The company has successfully drilled a total of 28 wells in the Hogshooter interval on acreage located in Wheeler County, Texas. Several of the recently drilled Texas Hogshooter wells have underperformed our expectations. Therefore, we have shifted our Hogshooter development to focus on Mayfield area of Western Oklahoma.

To-date, the company has participated in four Hogshooter wells in Oklahoma, which has outperformed our expectation with an average IP rate of approximately 3,375 barrels of oil equivalent per day, comprised of approximately 72% liquids. LINN currently has four rigs targeting the Western Oklahoma portion of the play where the company owns approximately 25,000 net acres and maintains a sizable inventory of approximately 60 Hogshooter locations.

LINN has a lower average working interest in the Oklahoma portion of the Granite Wash when compared to its Texas portion. Therefore, the company anticipates spending less capital in 2013 compared to 2012. We are encouraged by early results from the numerous shallower oil-bearing intervals in Oklahoma and believe our inventory of Hogshooter and other oily zone opportunities will continue to expand as additional wells are completed.

Earlier this month, we signed a purchase and sale agreement to sell our minority non-operating interest in the Panther assets located in Western Oklahoma. LINN owned a 40% interest in the Panther assets, which included tag-along rights in the event of a sale. Originally, we evaluated a potential acquisition of the remaining interest and becoming the operator of the assets. Since acquiring the assets in 2011, production has met our expectations, but capital costs were running higher than expected which have challenged relative returns. Taking this into consideration, we had a value in mind that was exceeded by the winning bidder and ultimately turned us into a seller instead of a buyer.

In addition, remaining with a 40% non-operated position with a new operator that plans on doubling rig activity did not seen attractive either.

We feel strongly that we can reallocate the sale proceeds to a more efficient use either in our capital program or an acquisition that will add more long-term value to LINN.

Now, due to the Panther divestiture, as well as a shift to lower working interest in oil development in Oklahoma, the company anticipates reducing its 2013 capital budget by approximately $50 million. After closing the Berry merger, the company plans to not only evaluate the proper pace of capital spending, but also reallocating capital within the combined company.

Including ethane rejection, lower capital spending plans and removal of the Panther volumes, in the second half of the year, production is still expected to grow by nearly 10% in 2013.

The company continues to excel in driving down operating cost over a majority of its regions. During the first quarter, LINN reduced its lease operating expenses 26% to $1.24 per Mcfe compared to $1.67 per Mcfe for the first quarter of 2012.

LINN continues to see favorable results from the focus on base optimization efforts and operating expense reductions, particularly in the Hugoton Basin and Jonah Field.

Now let me update you on the pending merger with Berry Petroleum. As most of you know, on February 21, we announced a landmark transaction to acquire all of Berry’s shares outstanding for a total consideration of approximately $4.3 billion. This groundbreaking transaction represents the first ever acquisition of a public C-Corp by an upstream LLC or MLP and adds significant size and scale to LINN Energy. Most importantly, the pending Berry transaction adheres to our core strategy of acquiring mature, long life, low decline assets.

The transaction increases LINN’s current proved reserves by approximately 1.7 Tcfe, or 34%. Pro forma’d for the transaction, LINN will now be the seventh largest public MLP/LLC and the 11th largest domestic independent oil and natural gas company in the country.

Now, LINN has already begun the pre-integration process to ensure a smooth and timely transition upon closing. Shortly after shareholder approval, we expect to integrate Berry’s accounting systems as well as create two new divisional offices in Bakersfield, California and Denver, Colorado. The Bakersfield office will continue to manage Berry’s California assets, while the Denver office will be responsible for Berry’s Uinta and Piceance properties.

Integration is a core competency of LINN. We excel at quickly integrating acquired assets and introducing new employees to our culture, and I fully expect that our team will be up for the challenge.

Now, the regulatory process regarding the announced merger is on track and progressing as anticipated. We have already received approval under the Hart-Scott-Rodino Act and have filed for a FERC approval. On March 22, we filed our Form S-4 with the US Securities and Exchange Commission. We are currently awaiting initial comments from the SEC and expect to close the transaction on or before July 1 of this year.

I want to close by taking a moment to thank all of our employees at LINN, including our future employees at Berry, for the energy they’ve put into making us one of the largest and most successful E&P companies in the country. Our workforce is dedicated to our future performance and integral to our success. I am excited to see what we can accomplish together in 2013.

I will now turn the call over to Kolja for his financial update.

Kolja Rockov

Thanks, Mark. I would like to address the following topics in my discussion today. First quarter financial results, 2013 full-year outlook, our new monthly distribution policy, an update on the pending Berry merger, and recently amended and restated credit facility.

For the first quarter of 2013, the company increased adjusted EBITDA by 18% to $356 million compared to $302 million during the previous year. On a per unit basis, our distributable cash flow was $0.64 per unit for the first quarter, which resulted in a distribution coverage ratio of 0.88. Adjusted net income for the first quarter of 2013 was $0.16 per unit.

While first quarter financial results were lower than expected, we still expect coverage to continue to increase throughout the year. We project coverage to average approximately 1.07 for the second half of 2013, assuming six month contribution from Berry and including the 6.2% distribution increase which we intend to recommend to the Board of Directors following closing of the transaction.

Our updated guidance includes the recent decline in oil prices and the Panther divestiture, but does not include potential accretion from any additional asset or C-Corp acquisitions as we are excited about the acquisition environment going forward into 2013.

Earlier this week, LINN and LinnCo announced their quarterly distribution and dividends respectively for the first quarter 2013. LinnCo announced a cash dividend for the first fiscal quarter 2013 of $0.725 per unit, or $2.90 per share on an annualized basis, which is approximately 2% higher than LinnCo’s fourth quarter dividend. This increase represents our beliefs that based on current assumptions LinnCo will pay no cash taxes during 2013.

Additionally, LINN Energy announced a quarterly distribution of $0.725 per unit or $2.90 per unit on an annualized basis.

As many of you already saw this morning, both LINN and LinnCo’s Board of Directors approved changing our current quarterly distribution policy to a monthly distribution policy for both our unitholders at LINN and shareholders at LinnCo.

Monthly distributions and dividends will begin with the company’s second quarter payments and, subject to board declaration, the first cash payment is scheduled for this July.

I encourage everyone to view our press release published earlier this morning regarding our new monthly distribution policy and detailed expected payment schedule, which can be found on our website.

Now turning to the pending Berry transaction announced earlier this year, a significant positive from the Berry merger is that this transaction will be 100% equity financed, which will result in a material improvement in LINN’s debt metrics. Assuming a July 1 closing, we expect LINN’s net debt to adjusted EBITDA for the second half of the year to be approximately 3.5 times. In addition, we expect our greatly expanded size to also be viewed as a credit positive.

As previously discussed, we are partnering with Berry to hedge a portion of the production associated with the transaction. For 2013 and 2014, production from the Berry acquisition has been hedged approximately 90% for the second half of 2013 and 86% for the full year 2014 at prices above $90 per barrel.

I’m pleased to announce that we renewed our credit facility in April. Consistent with our annual practices, we extended the maturity by another year through April 2018 to maintain a five-year facility. In addition, we increased the size of the facility from $3 billion to $4 billion, which provides significant liquidity going forward. As of March 31, LINN had approximately $2.9 billion available on its revolver pro forma for the increased facility size and pending $220 million Panther divestiture.

Asset coverage remained strong with a $4 billion facility against a borrowing base of $4.5 billion, which does not include the value associated with the Berry assets. We believe the pro forma borrowing base will be approximately $6 billion after the Berry transaction closes. We also increased the number of lenders in our facility from 35 to 41, which include the highest rated and most respected financial institutions in the world.

LINN also has one of the largest and most diversified hedging groups in the industry with more than 25 counterparties all A-rated or better. LINN hedges exclusively with participants in its credit facility.

In closing, I would like to reiterate our goal of consolidating mature, long life assets that we have demonstrated throughout our company’s history. In just the past 16 months LINN has announced $7.2 billion in acquisitions, which have a weighted average decline rate of approximately 13%.

These are the kind of long life, low decline assets which will deliver consistent results to our investors. We continue to anticipate a very active year for acquisitions during 2013 and we are very enthusiastic about both asset and C-Corp acquisition opportunities.

Going forward, we feel that LinnCo has provided LINN with the financial flexibility to merge in a tax efficient way with both private and public C-Corps. Within its first five months of being a public company, LinnCo has already provided a significant example of the value it can create for investors with the pending acquisition of Berry Petroleum. We believe this will be a repeatable process as LINN continues on its goals of consolidating mature assets across the United States.

I will now turn the call over to the operator for questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) Our first question from the line of Ethan Bellamy from Baird. Your question, please.

Ethan Bellamy – Baird

Hey, guys, good morning. Two questions. First, on the Hogshooter, how did those wells underperform? Were they too gassy, not enough production? Can you be any more specific there?

Mark Ellis

Actually, it’s just total IP rates, initial IP rates were lower than anticipated. As far as the mix, Arden, you want to talk about the mix that we find?

Arden Walker

Yeah. The mix between oil and gas really wasn’t a lot different on the last group of wells we drilled. Keep in mind, I think the last call, we talked about testing some other zones. We had three independent Hogshooter intervals that we were actually doing some testing in. Most of our best wells have been in what we call the B zone, the center zone. The upper zone, the lower zone have been lower performers. We think the reservoir rock is just a little less capable of delivering the rates that we need for economics out there. So that’s the big driver is those other two zones just haven’t performed as well.

Ethan Bellamy – Baird

Okay. Thank you. And, Kolja, with respect to the disparity between where LINN and LinnCo and Berry are trading, I’m not sure you can talk about Berry given the merger – if you can, great, but could you maybe talk about what you think are the drivers between how LINN and LinnCo are trading so differently?

Kolja Rockov

Yeah. I mean, obviously this is just a guess on my part, because it’s very hard to be definitive about it, but I think it’s just continuing evidence of the fact that we believe that the broader institutional non-retailer market demand for yield is more significant than that in the MLP space, and that was one of the main drivers of completing the LinnCo IPO in the first place. So as it continues to gain traction, it continues to trade very well. Both of them are trading well. And I think that is my best guess as to the disparity between LINN and LinnCo.

With respect to Berry, it continues to move up significantly. The spread there is, I guess, it’s pretty wide, but it’s still up substantially from where it was when we announced the transaction. And you have a unique situation here where an acquiring entity has paid a pretty decent premium to a company and their share price has gone up significantly. So that’s kind of unique all the way around. But all in all, we’re very pleased with the performance of all three securities.

Ethan Bellamy – Baird

But you don’t see any reason why the merger with Berry would be – wouldn’t close or wouldn’t be on track?

Kolja Rockov

None whatsoever. Like I said, it’s up substantially from where we agreed to a price and announced the transaction. So we’re still very, very confident.

Ethan Bellamy – Baird

Okay. Thank you.

Mark Ellis

Okay. Thanks, Ethan.

Operator

Thank you. Our next question comes from the line of Kevin Smith from Raymond James. Your question, please.

Kevin Smith – Raymond James

Hi, good morning gentlemen.

Mark Ellis

Good morning, Kevin.

Kevin Smith – Raymond James

Would you mind talking a little bit about the variability seen in the Hogshooter and the Mayfield area? Has there been a lot? I think we only have one or two well results to reference there.

Arden Walker

Yeah. Kevin, we actually have four wells producing out there. There is some variability. Probably not quite as much variability in Oklahoma so far that what we’ve seen in the Texas Panhandle. The zone appears to be a little thicker, a little bit more – a little bit better reservoir quality on the Oklahoma side. So that’s really the reason we kind of shifted towards Oklahoma. We like the returns and we like the potential over there a little bit better than the remaining inventory we have in the Texas side at this point.

Kevin Smith – Raymond James

And sorry, remind me, what’s your working interest in the Oklahoma stuff versus the Texas Panhandle on average?

Arden Walker

Yeah. We do have lower interests in Oklahoma. We tend to average on the order of 25% working interest in Oklahoma, whereas on the Texas side, we were more like 60% working interest. So the rigs that we have drilling in Oklahoma now are putting out about half as many net wells, if you will. So that’s one of the downsides to moving to Oklahoma, but we do like the returns over there better, so we think it’s the right place to be.

Kevin Smith – Raymond James

Okay. And then just one last question. At what gas price does it -do you guys think it makes sense to start looking at the Britt and Carr again and possibly the Atoka?

Arden Walker

Yeah. The economics are – the economics look really good at $5 plus. Even in the current price environment, there are some wells over there that still make good economics. But we do have better returns in the oil, so that’s where we’re kind of focusing right now.

Kevin Smith – Raymond James

Okay, perfect. Thanks.

Mark Ellis

Thanks, Kevin.

Operator

Thank you. Our next question comes from the line of Ted Durbin from Goldman Sachs. Your question, please.

Ted Durbin – Goldman Sachs

Thanks. Yeah, just coming back on the Mayfield stuff, it sounded like, I think you said the first well was 5,400 and now the average of the four has been about 3,400. So I guess I’m just wondering how we should think about IPs on average for the – I think you said that you have about 60 locations going forward.

Arden Walker

That’s right. And the type curve we’re using starts at around 1,650 barrels of oil a day and a fair amount of gas. So you could almost think of the components a third, a third, a third in terms of the production stream out there.

Ted Durbin – Goldman Sachs

Between oil, gas and NGLs?

Arden Walker

Correct.

Ted Durbin – Goldman Sachs

Got it. That’s great. And then just on the change in the production guidance here, it looks like it’s around 48 MMcfe, 50 MMcfe a day. You said 10 MMcfe is ethane rejection. What’s the sort of breakdown between the rest of it, whether it’s the Panther sale or whatnot?

Mark Ellis

Yeah, Ted. If you look at the full year, you’re right on the range; it’s about – a reduction of about 48 MMcfe a day on the full-year guidance. About 15 MMcfe of that’s Panther. It comes out starting the last month I think in the second quarter and goes through the second half of the year. So that’s a piece of it. We see the lower working interest in oil being about 10 MMcfe a day impact for the year as we’ve moved into Oklahoma. Jonah continues in ethane rejection, so it’s around 10 MMcfe for the rest of the year. And the other is just – the other adjustment is adjustments we’ve made just anticipating any other potential ethane rejection moves or potential other infrastructure issues we may have as we look out the rest of the year.

Ted Durbin – Goldman Sachs

Got it. That’s helpful. And then maybe just a kind of a bigger picture question, and this is just kind of looking at what you have in the S-4 for the Berry deal. But if we look at what you projected for DCF per unit for 2013, 2014 and 2015, it was pretty flat, kind of flat 2014 versus 2013 than just a little growth in 2015. And I guess, what’s driving all that? Is that just hedges rolling off? Is that still what you’re seeing here given the little bit lower guidance this year? Maybe just talk through those projections in there.

Kolja Rockov

Yeah. I’ll comment on that. I think you see a little bit of hedge prices going down year-over-year and I think the growth is still obviously there and the coverage looks very, very strong, and it’s another thing that I think, when we close the transaction, we really need to re-look at all of that and recast it. But at this point in time, we felt like that was the best look going forward. And I think ultimately we do – would like to cut our capital a little bit as the combined company. So I think we’re just trying to be conservative there.

Mark Ellis

Yeah, Ted, let me say this. That’s not a fully optimized program going forward, and that’s taking their model and our model and putting the two organizations together. Obviously, once we get those assets and those people become our employees, we get a chance to really look at the future opportunities that we have and really high-grade the inventory, high-grade the capital investments going forward. So it’s not fully optimized.

Ted Durbin – Goldman Sachs

Okay. Thanks. That’s it for me.

Mark Ellis

You bet. Thank you.

Operator

Thank you. Our next question comes from the line of Praneeth Satish from Wells Fargo. Your question, please.

Praneeth Satish – Wells Fargo

Thanks. I was just wondering if you could expand a little bit on the line pressure issues that you’re experiencing in the Permian, maybe quantify that, and also whether you see any relief coming on the midstream side in the future.

Mark Ellis

Yeah, the problem we’re running into out there is, as most operators are, is you’ve got pretty mature systems and a lot of people putting a lot of effort out there in trying to grow their assets. So we’re overrunning a little bit of the gathering systems and the processing capabilities. There are a number of announced expansions and are in progress.

We don’t anticipate a whole lot of recovery there until the second half of this year, but we are starting – we are anticipating some relief in the second half of the year. So we’ve kind of pulled back our capital program there, we’re running less rigs in the Permian than we did last year at this same time. And we’re also trying to focus on where the best place is to develop in the Permian because they’re – the western side of that play seems to be better from an infrastructure standpoint than the eastern side. So we’re looking at ways of redirecting our effort there as well.

So we anticipate that they will make the appropriate adjustments and we’ll be able to get some constraints off. But we’re seeing higher line pressures really put some back-pressure on our wells and you keep from seeing the full potential of the work that we’ve done.

Praneeth Satish – Wells Fargo

Okay. And then just one more from me. I was wondering if you could provide how much EBITDA the Panther assets were generating.

Kolja Rockov

Yeah, I mean, I’m not going to get into those specifics, but I will tell you that if you just take out the volumes and the cash flow and do not redeploy the proceeds, you’re talking about a coverage delta of maybe 0.05. So we look forward to putting that back in the system with an asset that we feel is more appropriate for our model.

Praneeth Satish – Wells Fargo

Okay, great. Thanks.

Mark Ellis

You bet. Thank you.

Operator

Thank you. Our next question comes from the line of David Amoss from Howard Weil. Your question, please.

David Amoss – Howard Weil

Good morning, guys.

Mark Ellis

Morning, David.

Kolja Rockov

Hi. Good morning.

David Amoss – Howard Weil

Mark or Arden, do you guys have an early EUR estimate for the Oklahoma Hogshooter based on that early type curve?

Arden Walker

Yeah, the numbers are in the 250,000 barrels kind of range. Probably the low end is 220,000 barrels on the wells we’ve seen so far. The high end is closer to 300,000 barrels. So that’s the range we’re seeing today. It is early though and we’ve only had those wells on for a few months, at best.

David Amoss – Howard Weil

Okay. Thanks. That’s very helpful. And then on the maintenance CapEx this quarter, it looks like it trended towards the high end of that 25% to 30% of EBITDA range. Is that just a product of kind of the operational issues that you saw in the quarter or is that sort of what we should expect going forward?

Mark Ellis

No, I think that’s what you should expect going forward. I mean, obviously we’re a larger organization coming into this year. We’ve got more volume associated with it and so you’re seeing it step up a little bit. But at 25%, it’s hard to say quarter-over-quarter maintenance. I mean, it’s not a quarterly type analysis. It’s an annual type analysis, so... As we get more into more mature lower decline assets, I think you might see that come down as a percentage of EBITDA is where we’d like to see it over time.

David Amoss – Howard Weil

Okay. And then one more. Can you just kind of give us a general overview of how you’re viewing the M&A market today versus last quarter, any change there or is it just kind of the same deal flow and you guys’ appetite is the same?

Mark Ellis

Yeah. No, we’ve seen it pick up. Actually on the asset side, I think we mentioned in the last call it kind of got off to a slow start. We still felt like it would be a pretty robust year and that we’re actually starting to see that come to fruition where there is a number of things out there right now, and some pretty sizable things as well, that are in the marketplace, which is encouraging. And as you know, we continue to monitor the C-Corp side and look pretty hard there. So we think it’s a pretty good market.

David Amoss – Howard Weil

Okay. Thanks for the color. I really appreciate it.

Mark Ellis

You bet. Thanks.

Operator

Thank you. Our next question comes from the line of Boris Pialloux from National Securities. Your question, please.

Boris Pialloux – National Securities

Hi. Thanks for taking my questions. I had two quick questions. The first one is, you had a $57 million impairment. Where were the assets?

And second one is, Berry was going to develop a lot of – or spend a lot of CapEx in Uinta in Colorado. So what are your views on these type of basin?

Kolja Rockov

Boris, I’ll take the first question. With respect to the impairment, that is all due to the Panther sale. The Panther assets is, as you’ll recall, we bought for roughly the same prices as what we sold them for, and so that impairment is due to that difference. However, you have to take into account the cash flow that we received from the assets. So ultimately, that purchase and then that final sale was about a push in terms of what we spent and what we received. So that’s where that comes from.

Mark Ellis

Yeah. The second question as far as Berry’s capital investment program, I mean, we really can’t comment on their business right now. We obviously haven’t concluded a transaction with them. So it’s probably not our place to comment on what they were going to spend their money on and how they were going to invest their funds.

Boris Pialloux – National Securities

Okay. Thank you.

Mark Ellis

You bet.

Operator

Thank you. Our next question comes from the line of Jeff Robertson from Barclays. Your question, please.

Jeff Robertson – Barclays

Thanks. Mark, do any of the issues in the Texas Panhandle Hogshooter have any reserve implications? And did the performance on those wells in the sale of Panther have much of an impact on how you will think about maintenance capital?

Mark Ellis

Yeah, let me let Arden take that one, Jeff.

Arden Walker

Yeah. In terms of the reserves, due to the nature of the way we developed the Hogshooter out there, we developed a very tight area, a very focused area. So it’s not like we had a lot of PDs on the Hogshooter, we had hardly any PDs on the books at yearend from the Hogshooter. So there really won’t be any significant impact from the underperformance of those wells on reserves.

The flipside on the question on the Panther assets, I’m not...

Mark Ellis

Say that question again...

Arden Walker

The second half. I’m not sure I...

Jeff Robertson – Barclays

Moving capital out of – or moving capital over to Mayfield and also getting a little bit smaller in the Granite Wash, which has high natural declines on flush wells, does that have any impact on how you think about maintenance capital in terms of change in the – any kind of a material impact on the asset base?

Mark Ellis

No. I’d like to think, Jeff, going forward, when we look at the inventory set that Berry brings to play, I think they’re going to bring some pretty high quality properties and a pretty high quality inventory, and we’ll have to just reassess what the best maintenance projects are going forward. I know there are going to be some other optimization opportunities as well. So that always plays a key role in it.

And I would tell you that it’s about the Granite Wash. I mean, obviously we’ve said we had Texas Panhandle, we had 50 locations over there, we drilled some 28. The tail end of the program really wasn’t performing quite well; we moved away from it. We’re not condemning the remaining portion of the Hogshooter over in Texas Panhandle.

We’re essentially taking a little bit of a time-out and allowing our science to catch up and look at it a little bit more before we go back into that area. So I wouldn’t condemn the remaining inventory there. It’s not that we’re totally gone. But I think it’s better for us now to move over into Oklahoma, do the work that we’re doing to build that inventory set and then we’ll look to go back to Texas at the right time.

Jeff Robertson – Barclays

Okay. Thank you.

Mark Ellis

You bet.

Operator

Thank you. Our next question comes from the line of Eric Anderson from Hartford Financial. Your question, please.

Eric Anderson – Hartford Financial

Thanks. I wonder if I could just follow up little bit, Mark, on your opening remarks where you noted the oily nature of the Granite Wash in both Texas and Oklahoma, and specifically, I believe there’s five or six layers that are on top of the Hogshooter. And I’m just wondering if there’s any activity that’s going on either in Texas or in Oklahoma on some of the more shallower oily layers and your thoughts on a potential exploitation of those zones at some point.

Mark Ellis

Yes, there are for sure in Oklahoma, but I’d hate to comment much on that at this point in time.

Arden Walker

Yeah. And on the Texas side, I’d just mention that we have developed the Lansing formation, which is another zone just above the Hogshooter. We’ve got several wells producing there. We’re actually watching those right now to understand them a bit better. Those were drilled by Plains before we did that transaction last year. So we’ve been in a mode of kind of watching those. We’re encouraged by what we’re seeing actually there.

The Cleveland formation which we’ve talked about up in the Panhandle, doesn’t exist too much in the Granite Wash area that we’re developing, but the Tonkawa is a zone that does kind of come into part of the Panhandle as well as over in Oklahoma, and there is a fair amount of activity in the industry on that right now and we’ll keep an eye on it. We actually have one Tonkawa well in our plans for this year over in Oklahoma. So we’re definitely looking at those other intervals and we’ll see what comes from them both by industry as well as our own development work.

Eric Anderson – Hartford Financial

So would it be fair to say that a couple of years from now you could actually have different programs for the more shallower layers above the current Hogshooter?

Arden Walker

Absolutely.

Mark Ellis

Yeah, I would think so. I think you could see us develop some inventory on some of the shallower zones. We just – it’s a little early to talk about them too much right now. And anyway, we’ll just leave it at that.

Eric Anderson – Hartford Financial

Okay. Appreciate it. Thank you for taking my question.

Mark Ellis

You bet. Thank you.

Operator

Thank you. We have time for one final question. Our final question comes from the line of Abhi Sinha from Bank of America. Your question, please.

Abhi Sinha – Bank of America

Just something real quick I just wanted to get some color, if you could provide, on the takeaway capacity in the Permian available to LINN. And how do you see that changing going forward?

Mark Ellis

Well, I can’t quote specific numbers in terms of total takeaway capacity, but I can tell you the wells that we’ve drilled are producing into a higher line pressure than what we’d anticipated, and the whole systems are kind of backing up. It’s hard to predict exactly what the total takeaway capacity is. I don’t know those overall global numbers. But we do know that where infrastructures are being expanded and where plants are being expanded, it should give us some benefits with some lower pressures in the area and we should get back to normal operating conditions, and we anticipate that – to start seeing that happen in the second half of the year.

Abhi Sinha – Bank of America

Okay. Thank you. That’s all I have.

Mark Ellis

You bet. Thanks.

Operator

Thank you. I’d now like to turn the program back to Mark Ellis for closing remarks.

Mark Ellis

Okay. Well, thanks. Thanks, everyone, for your time this morning. And that concludes our call.

Operator

Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.

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