Linn Energy Is Set To Grow

Jun.23.14 | About: Linn Energy, (LINEQ)

Summary

The asset swap deal with ExxonMobil will be hugely beneficial for the partnership, as capital expenditure will be minimal due to the mature nature of assets.

The yield and the production capacity of the partnership will increase due to the addition of the mature assets.

Distributable cash flows of the partnership will be enhanced as the production capability increases.

Linn Energy (LINE) is up about 10% since we last talked about the company's future prospects at the start of the last month - our optimism about the partnership was based on Line Energy's willingness to enhance its balance sheet and focus on mature oil assets. The partnership has taken a significant step by swapping assets with ExxonMobil (NYSE:XOM) - the decision has received varied sentiments from the analysts and the unitholders; however, we believe the deal will be good for the partnership. The market has reacted positively to the news, and the stock has gained considerably since the announcement of the swap deal. Moreover, this article focuses on the possible benefits of the swap to the partnership and highlights the improved future growth prospects.

Asset Swap: A Correct Step?

Linn Energy has a strong asset base, including many of the highest-yielding areas of the U.S. Moreover, the partnership's asset base has a reserves life index of approximately 16 years, with total proved reserves of 7,034 MBcfe, which ensures long-term growth sustainability. However, in our previous article, we discussed that in order to attain long-term growth in cash flows, the partnership will be looking forward to offload its Permian Basin assets in the near term. Recently, Linn Energy has signed an asset swap agreement with ExxonMobil to trade its 25,000 net undeveloped acres of Midland basin acreage for about 500,000 net acres of ExxonMobil's Hugoton field acreage.

Before discussing the prospective benefits of the deal, we will review what each company is getting from the asset swap. According to the agreement, Linn Energy will receive the Hugoton field holding, which currently produces approximately 85 MMcfe/d and also have proved reserves of about 700 Bcfe, with 78% PDP. The proved developed producing nature and readily available production stream will start benefiting the company in a very short time without major capital spending, thus increasing the margins for the current year. The Hugoton field asset also holds a very low decline rate of about 6% with a reserve life of about 22 years. This will ensure long-term cash flow streams with less asset depreciation over the asset life. Moreover, the deal gives about 400 new potential well sites which will double the partnership's drilling inventory in the region. In addition, Linn Energy could benefit from its Jayhawk gas plant in the Hugoton field, which has available processing capacity of about 450 MMcfe/d. The figures look quite impressive for Linn Energy and will surely add the desired operational value to the throughput in the coming quarters.

Prospective Benefits of the Deal

Linn Energy anticipates the asset exchange deal as strongly beneficial due to strong acreage quality of the Hugoton Field holdings. Moreover, most of the Linn's exchanged asset acreage is undeveloped, which will require a huge capital expenditure to convert it into a useful asset. Further, the newly acquired assets from ExxonMobil are mature in nature and require a small amount of capital spending. This saves Linn Energy a lot of capital, which could be used in other areas of the business. The partnership also estimated that deal will increase the distributable cash flows by about $30-$40 million annually. Moreover, the exchange format will enable the partnership to avoid paying taxes on the asset exchange.

The continuously increasing prices of natural gas also support the exchange which includes natural gas heavy asset acreage (with reserves of 70% natural gas and 30% NGLs) for Linn's assets that were mostly oil heavy (with 70%-80% crude oil) in the Permian basin. However, the partnership estimates long-term profitability from the newly-acquired assets due to extreme cold weather in the U.S., creating an upward demand shift for the natural gas. Besides, over the past month, Linn Energy has increased its current quarterly estimates from $0.39 per common unit to $41 per common unit, while current year estimates have risen from $1.62 per common unit to $ 1.67 per common unit.

What's Next with Linn Energy

Despite the significant asset swap deal with ExxonMobil, Linn Energy still holds approximately 30,000 net acres in the Midland basin, capable of producing about 15 Mboe/d. However, the partnership is also looking forward to reshuffle another asset in the Mid-Continent region. Linn Energy has notified that the Granite Wash area is one of the highest declining regions compared to its other assets in the portfolio. The partnership operated 5 rigs in the Mid-Continent region compared to 8 rigs in the last year. Moreover, Chesapeake Energy (NYSE:CHK) is actively pursuing drilling activities in the same region, making it a prospective client for the next asset exchange deal in the future, and we might see another asset swap or the sale of assets in the region by the partnership.

Conclusion

We maintain that Linn Energy is on track to enhance its balance sheet and the assets mix, which should allow the partnership to grow its revenues as well as cash flows. Growing cash flows will allow the partnership to increase cash distributions to unitholders and acquire more assets. Furthermore, the positive impact of the deals will continue to push the unit price up.

Disclaimer: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.