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Linn Energy, LLC (NASDAQ:LINE)

Q4 2013 Earnings Conference Call

February 27, 2014 11:00 AM ET

Executives

Clay Jeansonne - VP of IR

Mark Ellis - Chairman, President and CEO

Kolja Rockov - EVP and CFO

Analysts

Kevin Smith - Raymond James & Associates

Ted Durbin - Goldman Sachs & Co.

Praneeth Satish - Wells Fargo

David Amoss - Howard Weil

Gary Stromberg - Barclays

John Ragozzino - RBC Capital Markets

Ethan Bellamy - Robert W. Baird

Operator

Good morning. Welcome to LINN Energy’s Conference Call to discuss its Fourth Quarter and Full Year 2013 Earnings. Today’s call is being recorded. At this time, I will turn the floor over to Clay Jeansonne, LINN Energy’s Vice President of Investor Relations, for some opening remarks. Please go ahead.

Clay Jeansonne

Thank you for joining our fourth quarter and full year 2013 earnings conference call. In a moment, I will introduce Mark Ellis, our Chairman, President, and Chief Executive Officer. But first, I need to provide you with disclosure regarding forward-looking statements that will be made during this call. The statements describing our beliefs, goals, plans, strategies, expectations, projections, forecasts and assumptions are 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 certain risk factors relating to our business, prospects and results, is available in the company’s filings with the SEC, including LINN’s Form 10-K for the year ended December 31, 2013, which we plan on filing later this afternoon in any of the public filings and press releases. We plan to file LINN Co’s Form 10-K on Monday March 3rd.

Supplemental financial and operational results, including the company’s statement of operations, selected balance sheet data, calculation of certain reserve metrics and guidance table are posted to LINN Energy’s website at www.linnenergy.com in the Investor Center, under Presentations.

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

Mark Ellis

Thanks, Clay and good morning. Joining us today from LINN are Kolja Rockov, Executive Vice President and Chief Financial Officer; Arden Walker, Executive Vice President and Chief Operating Officer; and David Rottino, Executive Vice President of Business Development and Chief Accounting Officer.

As many of you know on December 16th we successfully completed the merger with Berry Petroleum Company. This signifies and monumental achievement for LINN Energy as it not only marks the largest acquisition in the company’s history but more importantly validates the LINN Co. structure for potential future acquisitions of E&PC Corps. We are excited to assume operations of these best in class assets as was evidenced by their outstanding results during 2013, which I will discuss in a moment.

Berry’s mature long life assets are an excellent strategic fit for our current portfolio and the stock-for-stock transactions significantly de-lever our balance sheet. And the integration process with Berry is progressing smoothly. We will maintain Berry’s Denver office which has become our Rockies divisional office and houses the technical teams for both the Uinta and Piceance assets. Berry’s Bakersfield office has become our new California divisional office and houses both technical and operational staff. In addition we are pleased to add several field offices in California, Utah and Colorado. Overall, LINN was able to retain essentially all of Berry’s technical and operational workforce as we believe their experience and the technical expertise are imperative for a successful integration.

Now I’d like to turn to LINN’s operational results. During the fourth quarter 2013, LINN reported average daily production of approximately 889 million cubic feet equivalent per day. Fourth quarter production includes a 15 day contribution from Berry, which added approximately 44 million cubic feet equivalent per day during the fourth quarter. Excluding the Berry assets, LINN’s base business achieved average daily production of approximately 845 million cubic feet equivalent per day during the quarter, which was within our guidance ranges despite disruption from severe winter weather that affected most of the industry.

Berry performed above its guidance levels during the fourth quarter. Production averaged approximately 45,000 barrels of oil equivalent per day, which is above previously estimated fourth quarter guidance of approximately 44,000 barrels of oil equivalent per day and represent a 9% increase from the third quarter of 2013.

Now despite our focus in 2013 on the Berry transaction we remained active in the acquisition market. In September, we announced an approximately $500 million acquisition of properties located in the East Goldsmith field in Permian Central Basin platform. These strategic assets add to our core Permian position and increase our oil inventory with a significant operating position. The East Goldsmith assets have proved reserves of approximately 30 million barrels of oil equivalent and we have identified approximately 300 future low risk infield drilling locations, which represent four to five years of Clearfork inventory. We estimate additional upside potential of approximately 24 million barrels oil equivalent of reserves when the future Clearfork water flood and could it see even further upside from future CAQ opportunities.

Turning to our position in the Permian Basin, we have retained RBC Richardson Barr to assist with evaluating multiple strategic alternatives to maximize the value of our Midland Basin portion of the Permian Basin. Currently we produce approximately 26,000 barrels of oil equivalent per day from the Permian on which approximately 17,000 barrels of oil equivalent per day is associated with the Midland Basin.

We estimate LINN has approximately 55,000 net acres perspective for horizontal Wolfcamp drilling, which consist of approximately 630 gross operated potential locations with a 95% working interest and 87% of which are held by production.

Additionally we believe the company has another approximately 455 gross potential locations consisting of approximately 50% working interest after unitization. These prospective horizontal locations primarily include Wolfcamp A and B benches. And any further delineation of additional benches could provide further upside to our estimated drilling locations. We believe our position in the Midland Basin represents a tremendous amount of potential value and we are diligently evaluating a number of strategic options in order to fully maximize its value. These potential strategic options include, first, trading some or all of LINN's Midland Basin position for long-life mature producing properties. Second, purchasing an asset and subsequently selling some for all of our Midland Basin position in a 1031 or like-kind-exchange. And finally, developing some or all of our position through an active horizontal program.

Now, all of these options are targeted to increase cash available for distribution and will also have the potential to lower the company’s overall decline rate and capital intensity. We have outlined our thoughts more specifically in the earnings press release and I encourage everyone to read it carefully. Turning to our 2013 reserve report, LINN demonstrated its ability to grow organically by adding 527 billion cubic feet equivalent of proved reserves, primarily through our drilling programs in the Mid-Continent, Green River, Hugoton and Williston Basin. For 2013, the Company spent approximately $1.2 billion and generated a cost-to-add of approximately $2.21 per Mcfe. LINN recorded a 100 Bcf equivalent of negative performance revision. This revision included the removal of approximately 300 billion cubic feet equivalent comprised of mostly proved undeveloped reserves associated with the Granite Wash, partially offset by an increase of approximately 200 billion cubic feet equivalent comprised of mostly proved developed reserves associated with the Company's Hugoton and Green River assets.

For 2013 LINN’s reserve replacement ratio was a 123% at a finding and development cost of $3.15 per Mcfe; excluding acquisitions. Including acquisitions the reserve replacement ratio was 660% at a reserve replacement cost of $3.31 per Mcfe. For more information please refer to page 12 in our supplemental financial and operational results which was posted to our website this morning. For 2014, our capital budget will be approximately $1.6 billion with a focus on oil and liquids rich development projects. Pro-forma, this represents an approximately 11% reduction between LINN and Berry’s combined 2013 capital budgets of approximately $1.8 billion. This optimization of LINN and Berry’s capital budgets will significantly increase the quality of our distribution stability as it focuses on replacing higher declined natural gas production with high margin oil projects.

In 2014, we expect our capital program to generate more predictable results with higher rates of return and the reduction in capital will provide long-term benefits by lowering the company’s overall decline rate. All these factors are targeted to increase our distribution stability. Overall, we anticipate spending approximately $1.55 billion on oil and natural gas projects. Drilling, we are participating in about 950 wells during 2014 with the regional breakout as follows; 25% to the Permian Basin to drill or participate in approximately 160 wells including approximately 10 horizontal Wolfcamp wells; 17% to California to drill or participate in approximately 280 wells; 14% to the Jonah Field to participate in approximately 85 wells; 13% to the Uinta to participate in approximately 115 wells; 11% to the Granite Wash to drill approximately 60 horizontal wells; 7% to the Bakken, 4% to Salt Creek; and 3% to the Hugoton.

Beginning with the Permian, LINN came into the year operating a total of seven rigs drilling vertical Wolfberry wells. In 2014 this number will be reduced significantly as we expect to operate an average of only three vertical Wolfberry rigs. Due to encouraging industry results around our acreage, potentially high rates of return and a thorough internal analysis, we plan to add a horizontal rig during the second quarter to drill approximately 10 wells targeting the horizontal Wolfcamp B Zone.

More specifically, we are currently in the process of moving one of our horizontal rigs to the Permian from the Granite Wash, where we have considerable horizontal drilling expertise. We expect completion to begin in March on our first non-operated horizontal Wolfcamp well with Diamondback Energy. In addition to our Wolfberry and Wolfcamp programs, we expect to continue operating two vertical rigs targeting the Clearfork formation in the recently acquired East Goldsmith field to drill approximately 80 wells during the year.

In California, we anticipate spending approximately 255 million in 2014 primarily in the North and South Midway-Sunset assets. The South Midway-Sunset assets, some of which have been with Berry for over a 100 years, produce heavy crude by injecting steam into the existing reservoir. These assets typically have a shallow base decline rate of approximately 5% to 8% per year. Based on the low capital requirements South Midway-Sunset is expected to continue generating significant free cash flow.

The North Midway-Sunset operations consist of Diatomite and New Steam Floods, both of which have exhibited impressive growth over the past two years. We expect to spend approximately $190 million in this area in 2014 to grow production approximately 35% year-over-year. After the growth phase is complete North Midway-Sunset is expected to have a very low base decline and also generate free cash flow. In Uinta we plan to operate three rigs for a majority of the year to drill approximately 115 wells. We continue to reduce drilling times and are encouraged by the operating results thus far. We also continued to develop marketing options by shipping crude oil to markets outside of Utah via rail cars.

In the Jonah Field LINN continues to operate two rigs using pad drilling techniques. 2014 we expect to spend approximately $220 million which includes both our operated and non-operated programs. In the Granite Wash where we plan to allocate approximately 11% of our budget, we expect to reduce our rig count in the region from an average of 8 in 2013 to 4 by midyear 2014.

LINN intends to drill approximately 60 horizontals wells during the year, which will focus primarily on the Hogshooter oil projects in the Mayfield area of Oklahoma and other liquids rich developments in the region. In 2014 we expect to grow organic production approximately 3% to 4% after normalizing for impacts of ethane rejection. The midpoint of guidance indicates average production of approximately 1,085 million cubic feet equivalent per day for the first quarter of 2014 and an average of 1,105 million cubic feet equivalent for the full year.

And when investors look at our production on a year-over-year basis, keep in mind that we are replacing higher decline gas production with higher margin oil production, which we believe will provide distribution stability and overtime, this slower pace of capital spin should [have] low LINN rates.

Before I hand it over to Kolja to talk about our financial results, I would like to take a moment to thank our employees. Last year we’re certainly in [indiscernible] for the company as we faced a number of challenges. We successfully completed the merger with Berry Petroleum while experiencing significant market volatility.

We also overcame operational headwinds at the beginning of 2013 to finish the year strong. Through all these obstacles, our employees continue to focus on their goals and represent the company exceptionally well. And for that I am grateful to them.

I would now like to turn the call over to Kolja for his financial updates.

Kolja Rockov

Thanks Mark. I would like to address the following topics in my discussion today. Fourth quarter 2013 financial results, an update to LinnCo’s tax projections, an update on Berry's bonds, the recent increase in NGL prices and our current hedge portfolio. During the quarter LINNs total revenues were approximately 585 million. We reported a net loss of approximately 785 million or $3.15 per unit for the fourth quarter of 2013, which includes non-cash impairment charges of 790 million, a $3.16 per unit and non-cash changes in fair value commodity derivatives of approximately 44 million or $18 per unit including the reduction of crude option premium value over time.

For the fourth quarter LINN achieved excess of net cash provided by operating activities after distributions and discretionary adjustments of 32 million. For the full year 2013 LINN generated a short fall of net cash of approximately 5 million which equates to approximately 1% of our distribution pay to our unit holders.

During 2013 LinnCo paid a dividend of $2.88 which we estimate will be 100% return of capital for tax reporting purposes. For 2014 we estimate almost all of LinnCo’s expected dividend to instead de-classify as a qualified dividend. Currently we estimate that due to the significant shield provided by LINN to LinnCo, LinnCo’s cash tax liability is estimated to be zero for 2014 and zero through 2018 assuming current estimates for taxable income and capital spending.

The closing of the Berry merger triggered a change in control under the indentures governing Berry’s senior notes totaling approximately 1.1 billion. As a result LINN offered to purchase all of Berry’s outstanding senior notes a 101% of product. This offer expired on February 14 and approximately 1.2 million of bonds were tendered Berry will remain an unrestricted wholly owned subsidiary of LINN. We expect our normal course of operations will not be hindered by the restricted payment and other covenants in the indentures governing the senior notes.

We plan to file separate financials for the Berry subsidiary no later than April 30. A significant advantage of the Berry merger was that the transaction was structured as a stock for stock transaction which considerably de-levered our balance sheet. Upon closing the merger LINN received ratings upgrades by both Moody’s and Standard and Poor’s. LINN funds rated B1 and B+ by Moody’s and S&P respectively. Our long-term goal is to continue reducing leverage through accretive transactions.

I would also like to take a moment to discuss the recent increase we have seen in NGL prices. The current composite price of NGLs at Mont Belvieu increased approximately 11% [Technical Difficulty] the end of the third quarter 2013. This is primarily due to colder than normal weather and increased exports.

In particular, propylene has been strong in part due to continued demand from liquid propane gas or LPG exports and residential heating. Propane prices have increased approximately 21% and 18% at Mont Belvieu and Conway respectively during the same time. Our NGL production remains un-hedged and the continuation of this trend is expected to be very positive to our future financial results.

Turning to our hedge portfolio, we have hedged approximately 100% of our expected natural gas production for the years through 2017. We are hedged 100% on oil and the 2014 and approximately 50% to 60% during 2015 and ’16. As always we will continue to watch the market and look to advantageously hedge the remaining portion of our expected oil volume.

In closing we are extremely excited about 2014. Our operations continue to deliver sound results and Berry provides us with an excellent set of low decline assets which contain an attractive inventory for future development projects. We’re fortunate to have a tremendous position in the Midland Basin and are currently focused on evaluating multiple strategies in order to maximize its full value.

We expect the acquisition market to be very robust in 2014 as E&Ps continue to shade sizeable mature asset packagings in order to narrow their operational focus. Finally we feel the closing of the Berry transaction provides solidity to the LINN Co. structure and demonstrates the company’s ability to acquire additional E&PC corps in the future.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And your first question comes from the line of Kevin Smith of Raymond James.

Kevin Smith - Raymond James & Associates

Congratulations on closing the Berry acquisition once again, but Mark thank you for your comments on the Berry integration. But given that you are really on a two months post-closing how good a feel do you believe you have on operating cost for the combined assets and implementation of any cost synergies associated with that?

Mark Ellis

Kevin, I would say on the operating cost we have a pretty good trend from them. Obviously the cost has changed a little bit from a steam generation standpoint given the increased gas prices out there, I’m sorry the second half also. So from an operating cost standpoint I think the trends are pretty predictable however. And the second part of your question again, repeat that.

Kevin Smith - Raymond James & Associates

Just implementations of any cost synergies G&A or however that may fall out?

Mark Ellis

Well, I think it’s hard to see that in the fourth quarter, obviously none in the fourth quarter you’re seeing the actual cost of the transaction in the fourth quarter. We scale back to Denver office obviously from a corporate office to more of a divisional office for us so you’ll see that flow through that. Other optimization from a G&A standpoint this thing wasn’t really driven from a synergy standpoint from a G&A point, it was more from portfolio standpoint from a capital allocation. And so I don’t anticipate to see a whole lot adjustments from a G&A standpoint going forward.

Kevin Smith - Raymond James & Associates

Okay. So in the Permian Basin given potential for the monetization horizontal Wolfcamp wells, is that impacting your midpoint or are staying away from certain areas to drill later or how are you thinking about that?

Mark Ellis

Well, we pulled back, they are running less rigs in the Wolfberry program in general, we’ve obviously high graded what we think our horizontal opportunity set is. We’ve mentioned on the call and that we will put a rig in place here in the second quarter and start developing those projects and looking to drill those projects. But really we’re just trying to maintain some activity in that play and be prepared for if we're successful and we hope to be very successful in our strategic alternative process on those assets. We’re able to hand over to the acquiring party or a trade partner an active program that’s already in place.

Kevin Smith - Raymond James & Associates

Okay. And then…

Mark Ellis

[Indiscernible] is there anything else we’re doing on the vertical wells, I don’t think we’re doing any?

Unidentified Company Representative

No I guess Kevin, the only thing I would add is we have -- we do have plans for three Wolfberry rigs running in the -- for 2014 and that activity is predominantly on the former Berry assets, the Gardendale area had very good returns and we shifted most of the activity from a Wolfberry perspective is in that area because that’s our highest return area.

Kevin Smith - Raymond James & Associates

Got it, and then lastly…

Mark Ellis

Well Kevin I was just going to [indiscernible] note that in the fourth quarter there were $47 million of deal related cost in the G&A. So I think when you look at the guidance document for [indiscernible] you see the real run rate in G&A coming in line with the appropriate levels.

Kevin Smith - Raymond James & Associates

Okay, that works. Just given the capital spending and kind of slow in pace and obviously with the new Berry assets, are you expecting your annual decline rate to go down as we exit the quarters as where we entered the year?

Mark Ellis

Yes, it’s a great question Kevin, yes, we would. I mean we look at buying as you look through the year, our exiting [indiscernible] rate in ’14 will be reduced from what it is now we’re exiting ’13 and that’s part of the reason for that. We’re able to -- Berry, the accretion from Berry is allowing us to essentially pull $200 million to $250 million out of our capital program and still fully cover our distribution. And by doing that we have less dependence on the capital program, we’ve reduced the overall decline and those are all great -- we think great long term decisions.

Operator

Your next question comes from the line of Ted Durbin of Goldman Sachs.

Ted Durbin - Goldman Sachs & Co.

Thank you. I guess just coming back to Berry and you said it was -- you thought it was a clear transaction [indiscernible] guidance at least; we've got prepaid coverage and a flat distribution this year. So just walk us through how you’re thinking about the accretion over time as the assets come through.

Mark Ellis

Yes, good question. As I mentioned just on Kevin’s question, let’s say the accretion from Berry really has allowed us to pull back on the capital program. So we were spending an additional 200 million to 250 million, you’d see higher excess cash generated, but we pull that back because we think it’s a prudent thing to do right now, we pulled $250 million of capital out, we reposition the capital throughout the organization and so that piece of it which you’re not really seeing from a standpoint of accretion in terms of additional excess cash.

As far as the other value that was paid for Berry at end of the day, had a lot to do with Wolfcamp potential in the Permian and you’re not seen the full value of that. You obviously have that and our strategic alternatives project where we’re trying to monetize our Midland Basin position and that’s forthcoming. When that is complete, I think you’ll see the value associated with those. Assets being moved into mature assets and that’s when you’ll see additional cash generation.

Ted Durbin - Goldman Sachs & Co.

Got it. And then just coming back to the decline rate, maybe I missed it. What do you pick the overall decline rate if you came out of '13 and what do you see at the end of ’14?

Mark Ellis

Coming out of '13, we're in and around, it's kind of say, we’re in and around in mid-20 levels and we’re moving closer to -- moving into the low-20s towards 20% by the end of the year result of the pull back in capital and seeing the full impact at Berry asset. And anything we do in the Midland Basin, which is another higher decline area, if we can trade those assets for lower decline assets, we have further improvement to that decline rate.

Ted Durbin - Goldman Sachs & Co.

Got it okay and then, if lastly, if I can just ask about hedges, maybe I guess I thought you will have more hedges on the oil side into ’15 and ’16 here, I guess philosophically are still wanting to be sort of four or five years hedge on those commodities and then maybe you can talk about how you’re going to manage [indiscernible] California as well?

Kolja Rockov

Sure, Ted, this is Kolja. On the gas side, I think almost everyone knows we’re very fully hedged to 100% through 2017 on the overhead fully for 2014, beyond that we’re kind of 50% to 60% in ’15 and ’16. Now we're going to be opportunistic obviously in terms of when we hedge in the back rated curve notwithstanding. One of the things you have to think about is the Permian position with 17,000 barrels a day allocated to the Midland basin, which is a pretty substantial piece of volume that we would look to hedge, if we were to keep that asset. So as we kind of move through that strategic alternatives process, that’s going to dictate a lot in terms of what we do with 2015.

Ted Durbin - Goldman Sachs & Co.

Got it and then just how you’re going to manage basis in California?

Kolja Rockov

Yes, what we’ve done in California is we’ve done a lot of analysis obviously on Midway-Sunset and it seems to be a little bit more correlated to Brent than it is to WTI. Of course in the last 3 months or so it’s been trading a lot tighter to TI, which I think proves our original thesis which is, it’s not really correlated that much to either, it kind of bounces around. And so what we did was we basically in the hedge structure without getting too far into the weeds, we hedged at 60% basically like Brent and 40% like TI. And I think that’s about where we would look to do it going forward.

Operator

Your next question comes from the Praneeth Satish of Wells Fargo.

Praneeth Satish - Wells Fargo

Thanks, good morning. Just wondering if you could update us on the decline rate of the Midland properties that you’re looking to potentially monetize?

Mark Ellis

Well the Midland properties that we’re going to monetize, basically there is two types of assets that you got the, Wolfcamp -- I mean, Wolfberry, Vertical Wells. Most of those have been developed over the past. We started that program in 2010, so I would say the average decline is probably on the order of 35%, something like that. The wells that we've drilled just in most recently would have been even steeper higher decline than that. So if you were to do an average, you probably [net to five higher] 35% of range but I think it’s probably right there in that range.

Praneeth Satish - Wells Fargo

And can you [remind us again, how] much of NGL production is priced off of Conway versus Bellevue?

Mark Ellis

Right now it’s about 70% of Mont Bellevue and about 30% Conway.

Praneeth Satish - Wells Fargo

Just last question. I was wondering if you could talk about at all the spread that’s developed here in Linn. I mean LinnCo used to trade at premium, amount of discount just wondering if you had any thoughts about that?

Mark Ellis

I will check it, offer words of wisdom there. I mean we’re scratching our heads just like almost everyone when we talk to. We've become kind of used to it trading ahead of premium, but I guess I would say that we just closed a very large transaction. We put out 93 million new LinnCo units and possibly there is still some movement from old homes to new homes for those units. And that's probably the only thing I could really point to that’s concrete.

Operator

Your next question comes from the line David Amoss of Howard Weil.

David Amoss - Howard Weil

I am looking at your new presentation you put out in the Permian map and you subdivided that acreage into now eight different areas. Can you kind of walk through the differences between those eight areas and why or how you split it up that way?

Mark Ellis

Yes, we’ve broken it out into eight packages, a really more graphic oriented and of course by county and really what that does is just provides us full flexibility in terms of the best way to actually covet trade partners, potentially sales. It just gives us a lot of flexibility in how to move this position.

David Amoss - Howard Weil

Okay and then I guess you know a follow-on question there is, if you do this transaction, if you’re selling this asset, in multiple package, whether it is two or three, you know how complicate the things we want, the flexibility that you do a 10/31. You know how quickly would you have to go ahead and purchase the asset on the flipside? And how do you get this multiple sales in the same window with a purchase?

Kolja Rockov

David this is Kolja. We basically would have 180 days to sell an asset, I think -- we are thinking of it in terms of, we would identify an asset to buy and then because it's broken up into packages that actually increases our flexibility because we can size it appropriately to whatever it is that we were purchasing in the asset market.

Unidentified Company Representative

And each transaction will have its own unique timeframe.

Kolja Rockov

Correct. It actually makes it easier.

David Amoss - Howard Weil

Okay. One last strategic question; has your purchase criteria change at all now that you have Berry, so you’re looking at a different geography than you were pre-Berry, is California kind of your primary place to target or are you still looking across the country at different things.

Mark Ellis

Well, I would still say we look for asset character, but you’re right Berry allow us to have a foothold in the San Joaquin Valley, so now obviously we have steam flood technology, we will love to expand that position there. So that's an addition from the Berry standpoint. You enter as a new position for us. You know in Berry, in total really kind of strengthen some of our Rockies position. So yes we can look at assets in that basin but ultimately it still gets back to asset characters, what’s primary what we look for.

Operator

Your next question comes from the line of Gary Stromberg of Barclays.

Gary Stromberg - Barclays

Most of my questions were asked. Kolja, a couple of capital markets questions. First, with regard to the Berry bonds, I take it from your prepared comments that you plan to keep those outstanding, continue to file financials for Berry or is there some plan over time to consolidate and equalize those bonds with the existing Linn bonds?

Kolja Rockov

Carrie I think at this point in time we’re very comfortable with the arrangement as it is a separate sub, and really don’t have any plans to change that at this point in time. We will obviously be opportunistic, but that’s really not in our current plan.

Gary Stromberg - Barclays

And then any update with regards to registering the 2019 bonds?

Kolja Rockov

I think that’s what’s coming in the next month or so.

Gary Stromberg - Barclays

And finally it’s just on the revolver draw, 2.7 billion drawn. What’s your comfort level, on how much you like to send that revolver, any thoughts on terming that out?

Kolja Rockov

Yes, I think from a liquidity standpoint we have about $2.5 billion of availability which we think is more than adequate. And typically we've come to market, with capital markets transactions, with a transaction which I think would be our preference. And then you also have to think about capital needs could change materially as a result of something that we do strategically in the Permian. Those are some of our thoughts around that.

Operator

Your next question comes from the line of John Ragozzino of RBC Capital Markets.

John Ragozzino - RBC Capital Markets

To what extent has your team done, any additional extensive work on the other horizontal benches outside the two identified in the inventory numbers that you guys provided in the Permian.

Mark Ellis

John, our technical guys are looking at the data from the rest of the industry, I am sure as you are, and the rest of the analytical groups out there. We see a lot of production data coming in and it’s not the B or D Wolfcamp zones, you know we think that the [indiscernible] are going to be productive especially in some of our areas that are the more active areas right now. We are focusing, our initial development is going to be in the Wolfcamp B, and we will pursue that zone first as it's probably the most de-risk in our area. We will pursue that one first and then eventually we will get into other intervals. But we’re pretty much kind of a latency. We are looking at rest of the industry, and we haven’t seen anything really negative on any of those benches at this point in time. It looks like it’s working in nearly every one we’ve seeing data on.

John Ragozzino - RBC Capital Markets

Okay with respect to the B as the most de-risk, can you give us an idea of what kind of type curve assumptions or terms you’re looking in that?

Mark Ellis

Yes the type curves are on the order of about a 500,000 barrel UR well, and initial potentials are somewhere in between 500 and a 1,000 barrels a day, you know somewhere in that range.

John Ragozzino - RBC Capital Markets

Okay in the supplementary material, it was clearly stated that there was some low hanging fruit to the tune of about 455 additional gross locations upon unitization of the acreage. Are there any significant hurdles to -- you guys are basically playing nice with your neighbors and ultimately realizing those locations being booked?

Mark Ellis

Yes there is additional land work necessary; most of those leases weren’t taken at the time horizontal was even contemplated. So there is some additional language work necessary on the leases, but that should not be an issue. Then you have the issue of the offset locations, but if another operator is offsetting [indiscernible] drill horizontal, you would expect them to want to participate with us. So I think at the end of the day they will get drilled, it's more of a ton probably arrangement more than anything else.

John Ragozzino - RBC Capital Markets

Okay, and then Kolja, you guys threw out a lot of different alternatives when it comes to the monetization here and if it were just you and I hanging out on happy hour Friday afternoon, what does your gut tell you, you want to do like with this deal, what is the idea transaction [indiscernible]?

Kolja Rockov

Well I mean I think that there is just so many different combinations of alternatives here and we're evaluating a lot of them and obviously I can’t tell you from what we know, where we had a tremendous amount of interest. And I think that’s why we took the time to really write that paragraph in the press release and just kind of layout all the different alternatives and really close with saying that all of these are viable and different combinations of them are obviously viable. So, I think it’s just too early for me to really commit to one or the other, but it obviously has a tremendous amount of value.

And with respect to capital markets, I mean we find ourselves in somewhat a unique position because most of the time when we make an acquisition we go to the capital markets to finance it and now we have an embedded asset that’s worth a lot that basically provides us a bank for financing future acquisitions and we put a lot of effort and time into putting a lot of detail out there and I think I am not going to give you a range of value, but I mean there is a lot of public market comps out there and you can take a look at it yourself. And that should give you an idea of what the size of that bank is if you will and it’s just pretty compelling.

It’s a unique position to be in and it takes a lot of pressure off of me because our BD Group is very-very active as you know, the market is very robust and we feel like we have this built in financing option that we’ve never had before.

John Ragozzino - RBC Capital Markets

All right and I hate to be a hog, but this what you get for letting me stay in the back of the queue, because I got more time to think of questions to write down. When you guys think about the asset valuations out there, I mean there is obviously some pretty [floppy] comps out there. What does your gut tell you as far as a realistic or accurate enterprise value to per acre type of valuation metrics should be out there in the marketplace?

Mark Ellis

See I don’t think we’re going to really commit to that. Obviously we’re not going to give you a range here but like I said, you can kind of come up to the number yourself. But what I will tell you is because there is a lot of frost in the marketplace, I think the private market valuation is probably not as high as the public market valuation which is why a cash sale and 10/31 type of structure is so compelling, because I think there is a lot of private equity players out there that could potentially buy it and spin it out into a public market IPO and capture that value. So that’s one of the reasons that that sort of trade is one, but a buy and a sale is another very viable option. So you just have to kind of think about that yourself.

John Ragozzino - RBC Capital Markets

Just one big picture one and then a real quick update on the Mayfield development stuff. Assuming that the Permian modulation goes all as planned, do you have a timeframe in mind or a cap laid out in your internal discussions as far as achieving a self-funding status?

Mark Ellis

No you're talking about a timeframe for concluding the entire process?

John Ragozzino - RBC Capital Markets

No I mean if we were -- if [indiscernible] were to close the deal tomorrow, from that point you’ve not effectively reduced the capital intensity of the entire portfolio, decline rates were what much more manageable. Is there a path in your mind that gets you to a LINN that is now [self-depending] and self-funding?

Mark Ellis

Well, I mean I think that the Permian transaction in of itself, there is a pretty big allocation of capital in that area, so if we were able to trade or sell that would put a pretty big dent in that number. And then going forward, you just have to kind of plug the gap in terms of what else are we going to acquire, what sea corps are out there, what assets are out there and the market is very robust like we said and we’ve been narrowing that number for a while now and that continues to be our goal. And we’re pretty optimistic that there could be a much smaller number as we exit the year. I don’t know if I can tell you exactly when we think the lines we’re going to cross, but it’s almost impossible…

Kolja Rockov

But from the SG buy but obviously the assets you’re going to trade are going to be much less capital intensive.

John Ragozzino - RBC Capital Markets

Okay. And then I mentioned the Mayfield stuff, can you give us an update on normal [indiscernible] refinance, a little while that have been drilled?

Mark Ellis

Yes, I’ll talk about the program in aggregate rather than give last few wells update, but you can I think draw your conclusions from that. We drilled 17 wells in the Hogshooter at this point. We continue to see very good results. I think our returns are still in the mid to upper 30% range and even higher on a number of the wells, but in average they are in the mid to upper 30s. We’ll see in return our initial production rates very similar to what I had outlined in the past. So I think our range is from low to about 1,000 barrels a day equivalent, up to about 5,400 barrels a day equivalent. So we continue to see good results, fair amount pretty good repeatability in the area and we’ll continue to develop that throughout 2014.

Operator

Your next question comes from the line of Henry [indiscernible] of Alpine Associates.

Unidentified analyst

So, coming in to today, you knew what the risk was going to be like. How did you think your stock was going to react to today’s release?

Mark Ellis

I would say we’re completely shocked, because when you look at our fourth quarter, excess cash is 18% above the distribution. We had previously a while ago, guided to it being even and then we upgraded to 5-10% above and then we came in at 18% above. We’ve cut capital, the distribution for this year, we feel like is very [few] and the opportunities that we have going forward, we’re pretty enthusiastic about our growth opportunities, I mean I think maybe excess cash is a little lower in2014, than people may have anticipated, although I think we’ve been pretty open that we’re going to cut capital and that number was going to come down, so even with excess cash lower, we feel like the distribution stability is actually higher than it’s been, so we’re quite surprised I would say.

Kolja Rockov

Look we’re the second largest shareholders at Linn Co, so I did my due diligence in terms of expectations and when I saw the release this morning I went, oh great, and so I’m shocked by the share price reaction also. I’m just wondering what expectations were out there that are not meeting, that people think that we were going find out the Wolfcamp prices were [dead] I mean can you think of anything that someone is going to hang their hat on. And let’s hope that [indiscernible] is one of them but…

Mark Ellis

I think some are kind of anxious to see what we’re going to what with the Midland basin and maybe expecting something to happen pretty quick, but we said, I mean it’s a broad process, we’re having -- Let me just this, we’re having tremendous interest in this particular package and so there’s a number of things that we’ll be reviewing over the course of the process here. So, we want to be patient with that, we want to make sure we get the most value out of those assets. So, there might have been some expectations that we have a further update on this strategic alternative but I don’t know, hard to say.

Kolja Rockov

All right, well we're going to buy some, how’s that sound?

Unidentified analyst

Would like that.

Operator

Your next question comes from the line of Ethan Bellamy of Baird’s.

Ethan Bellamy - Robert W. Baird

Guys, one question, with the C-Corps that you’ve been talking to since the before the Berry deal was announced, has Linn Co been redeemed in their minds as an acquisition currency that’s viable?

Mark Ellis

Yes Ethan, I would say the successful conclusion of Berry, that transaction being tested over the years to find of last year I think we validated the use of Linn Co as a currency to acquire C-Corps, so I think it’s been very well supported.

Operator

Your next question comes from the line of [indiscernible] of UBS.

Unidentified analyst

A lot of my questions have been asked and answered, but just a couple of quick follow ups. The first one kind of on your LOE guidance, kind of seems a little bit higher than maybe some have expected. I was wondering if you can sort of walk us through your expectations and what might shake out where it does shakeout.

Mark Ellis

I guess I would just tell you on, for LOE, the Berry assets very oily assets tend to be much-much higher from a LOE perspective. To kind of put in perspective for you, fully $300 million a year of LOE is in California alone, so you layer that in, the unit cost definitely comes up but as a percentage of the total LOE, the Berry assets definitely move the bar up significantly and because we’re spending more of our capital in California and Utah assets that are former Berry, they tend to be very oily assets, those numbers are continuing to put some pressure on the unit cost in 2014, so basically it’s the mix of the product going forward and where we're spending our capital.

Unidentified analyst

And are there efforts to try and sort of tweak with that or is that kind of what we should expect on a go forward basis?

Mark Ellis

Yes, obviously that’s one thing we’ve always focused on is cost reductions, cost optimization efforts, I think both the Berry organization and the Linn organization have a very good culture around that, so we’ll continue to do that as much as we possibly can. Another tidbit I’d throw out for you is gas prices being up right now and we’ll be seeing probably an incremental $30 million of steam cost for every dollar per mcf the gas goes up.

So we are -- we do have a little bit of exposure there in future acquisitions that allow us to be un-hedged on that portion of the production stream will work in our favor. We currently are fully hedged; gas has had a little bit of exposure on the cost apart from the steam costs out in California. So right now I think those are probably the biggest pressures we have and I think some of the things we do in Permian will take us in a direction of allowing us to go have some volumes that are un-hedged on the gas side, which will get us some protection there.

Unidentified analyst

And one final question, you are able to more than replace your production last year via the drill bit. Do you kind of have a target outline for this year as well too? You're spending over above what we would define as maintenance CapEx, should we be looking at something that’s being greater than 200%? Just wondering if you have a sort of a target that you can be able to share with us?

Mark Ellis

No, we don’t have specific targets in terms of reserve replacement ratios that we're shooting for. It's just the result of the actual program. On the growth side though, our growth capital as we mentioned on the call is forecasted to generate somewhere around 3% to 4% organic growth.

Operator

Ladies and gentlemen, we have reached the allotted time for questions. I would now return the call back to Mr. Mark Ellis for any closing comments.

Mark Ellis

Okay. Well, thanks everyone for participating on the call and that concludes our call this morning.

Operator

Thank you. That concludes today's conference, you may now disconnect.

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