Will Linn Energy Benefit From The Deal With Devon?

| About: Linn Energy, (LINEQ)


Devon's assets will prove to be a good addition to the asset base of the partnership and will enhance the natural gas assets portfolio.

The mature nature of the assets will result in savings in terms of lower CapEx over the next few years.

Devon's assets added about $350 million to EBITDA during the last year -- this should have a positive impact on Linn's earnings immediately.

Linn Energy (LINE) and its sister concern LinnCo's (LNCO) stocks have been on the rise since the start of May; the stocks have gained substantially over the last month. However, the news about the acquisition of assets from Devon Energy (NYSE:DVN) has had a negative impact on the stock price, and the upward momentum of the stocks has been halted. We have mentioned in our previous articles that the partnership is shuffling its asset base in order to enhance its cash flows, and the deal with ExxonMobil (NYSE:XOM) was the first transaction in the new direction.

The deal with Devon is expected to be closed by the third quarter of this year and also includes the sale of Linn's Granite Wash assets. This article focuses on the short-term as well as long-term impact of the asset exchange deal along with future growth prospects of the partnership due to Devon's assets.

How will the Deal Impact Linn's Asset Base?

Linn Energy recently announced the acquisition of $2.3 billion worth of natural gas heavy assets from Oklahoma-based energy producer, Devon Energy. The deal includes the acquisition of five U.S. operating areas of Devon Energy, which are currently yielding approximately 275 MMcfe/d, of which approximately 80% is natural gas. Moreover, the assets have a low decline rate of about 14% per year with total proved reserves estimated at around 1.3-1.5 Tcfe with a resource potential of 3 Tcfe (approximately 75% Proved Developed Producing [PDP] reserves).

Source: Linn Energy: Devon Energy Assets Acquisition Supplemental, June 2014

The acquired asset acreage consists of about 896,000 net acres in five regions: Rockies, Mid-continent, East Texas, South Texas, North Louisiana and South Texas. Linn Energy identified around 4,500 total wells in the acquired acreage with over 1,000 future drilling locations and over 600 recompletion opportunities. More importantly, most of these assets are in the same area with Linn's existing assets which will substantially reduce the operating costs of the partnership by providing logistics synergies with existing holdings.

Linn Energy has been in the process of lining up several of its assets for sale, which requires huge capital expenditures to turn them mature. The partnership has also identified its Granite Wash and Cleveland plays assets in the Texas Panhandle and western Oklahoma to be available for sale due to their immature nature and high capital expenditure requirements. Linn Energy is currently operating four rigs in the region which are yielding around 230 MMcfe/d of liquids natural gas production. Further, Linn Energy has successfully delineated 17 horizontal intervals in these held-for-sale acreages and developed substantial infrastructure, including mainstream and water handling facilities, which will be a part of the sale too. Linn Energy's acquisition of Devon assets is intended to be financed ultimately through the sale of its Granite Wash assets and other non-producing acreage under its assets umbrella.

Moreover, for now, the partnership has secured the deal with the interim financing options arranged by leading financial institutions such as Scotiabank, Barclays (BCS), RBC Capital Markets, and Wells Fargo (WFC). Similar to the Permian asset exchange with ExxonMobil, Linn Energy also hopes to make the Granite Wash transaction processed with 1031 like-kind exchange and intends to save taxes incurred in the transaction.

Prospective Benefits of the Deal

There has been a lot of debate about who benefited more from the deal - we will discuss some of the prospective benefits for Linn Energy, which are going to be vital in the long-run. Linn Energy has been buying assets in areas largely surrounded by its existing holdings, thus giving a significant advantage to the partnership, as it reduces several associated costs with the development and production. These acquisitions will improve Linn Energy's distributable cash flows with the minimal operating costs in the future.

The assets included in the Linn-Devon asset transaction currently yield around 275 million cubic feet of gas equivalent a day. After the completion of this asset transaction, this 275 Mcfe/d production will substantially increase Linn Energy's operating capabilities which are currently estimated at around 1,100 MMcfe/d for the current year. Moreover, a low production decline rate of around 14% will enable the partnership to increase the output by developing 1,000 future drilling locations and 600 recompletion opportunities at the newly acquired Devon assets. This will substantially increase the operating revenues of the partnership.

Furthermore, along with the production improvements and growth in the long-run, Linn Energy will also be able to reduce its operating costs. As mentioned earlier, the close proximity of the new acreage with Linn's existing holdings will reduce the development and production costs of the partnership. Moreover, during the last year, Devon generated around $350 million in EBITDA from approximately 3,880 active wells in the region, which will now be added to Linn Energy's portfolio. This combination of decreasing costs and increasing production output will significantly benefit Linn Energy in the long-run.


As we have mentioned in our previous articles, the focus on mature assets will allow the partnership to have lower CapEx going forward and a stable revenue stream, which should result in consistent cash distributions to the unitholders. The deal will prove to be a solid addition to the assets base of the company, and we believe the partnership is on track regarding its asset reshuffle plan. We maintain that Linn Energy will prove to be a good investment over the next 2-3 years.

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.

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