- The addition of Pioneer's assets will enhance the natural gas production yield of the partnership.
- Mature assets will allow the partnership to have stable revenues and production levels as these assets have low decline rate.
- The decision to sell the undeveloped assets to fund the acquisition of mature assets will result in considerable production gains for Linn Energy massive capital spending.
Linn Energy's (NASDAQ:LINE) focus is currently on optimizing its balance sheet by adding mature oil and natural gas assets. The partnership recently acquired Devon Energy's (NYSE:DVN) assets - the ink has barely dried on that agreement and Linn Energy has announced another asset purchase - this time, the seller is Pioneer Natural Resources (NYSE:PXD) - the acquisition includes Hugoton and Barnett Shale assets of Pioneer Natural Resources for $340 million. The deal includes natural gas heavy assets and is expected to be closed by the third quarter of the current year. Moreover, the new acreage will add substantial production increase in the natural gas production yield of the partnership which rose around 100% during the second quarter. This article focuses on the short-term as well as long-term impact of the deal along with future growth prospects of the partnership.
Pioneer Assets Acquisition
Linn Energy, along with its sister concern, LinnCo (NASDAQ:LNCO), recently announced the acquisition of Hugoton and Barnett Shale assets from Pioneer Natural Resources. The partnership has acquired these natural gas heavy assets in the Hugoton Basin for around $340 million. These assets have a current production yield of around 40 MMcfe/d, of which 60% is natural gas and 40% is natural gas liquids [NGLs]. The favorable pricing environment during the winter season prompted the partnership to increase its natural gas yield along with liquid petroleum variants.
The acquired assets have a decline rate of around 6% with total proved reserves of around 340 billion cubic feet equivalent [Bcfe] (approximately 95% Proved Developed Producing). Further, the deal will add approximately 235,000 net acres to the Hugoton acreage of the partnership with approximately 1,200 producing wells in the region. Linn Energy has also identified 180 future drilling locations and 150 recompletion opportunities will significantly benefit the partnership in the long-run.
The Hugoton acreage has an excellent maturity with a decline rate of approximately 6% and reserve life of around 23 years. Further, the partnership is also in practice of spinning-off expensive unconventional plays towards long-lived, less capital intensive resources to maintain its growth rate. On the other hand, Linn Energy also announced the sale of its Woodford and Meramec acreages, which is spread over around 26,000 acres in the Anadarko Basin, for $90 million. The transaction is expected to be closed in the fourth quarter of 2014.
Why Move to Mature Assets?
In order to understand the rationale behind moving towards the mature assets; we need to understand what a mature asset is. There are a number of definitions of the mature oil fields - I will quote Paul Bondor, an SPE distinguished lecturer - Paul has worked for Shell for 35 years in technical and supervisory services. According to Paul Bondor a mature oil field is:
"A mature oil field is an oil field that is considered fully developed. There may be infill opportunities but in general the field development plan has been executed. There may or may not be secondary recovery with gas or water injection. But if there are no additional wells to be drilled, you are doing a decent job of reservoir management and your production has peaked and is on decline."
The following image is also taken from the study linked above and it will further help us understand what the benefits of mature oil fields are.
The newly developed oil field can certainly result in considerable production growth as the production rates will be high - however, in order to develop the assets, a substantial capital investment is needed. Linn Energy cannot afford to make heavy capital spending at the moment due to the tight cash situation of the partnership. In the current situation, the addition to mature assets allows the partnership to increase its production levels without major capital spending as the partnership will be replacing non-productive assets with these slow decline rate assets. Although these assets are on a decline; they can still be productive for a long time and the predictable and slow decline rate will add stability to Linn's production levels as well as revenues.
A Glance at the Recent Earnings Announcement
Linn Energy announced its second quarter earnings recently. The change in partnership's strategy has really paid off during the period and the partnership managed to swap and acquire several mature assets for its undeveloped assets. During the second quarter, Linn Energy managed to increase its average daily production to 1,131 MMcfe/d, which is up around 2.4% compared to 1,104 MMcfe/d in the same period last year. The sales of oil, natural gas and NGLs went up by almost 100% -- revenues for the quarter stood at $967 million, up from $488 million last year.
Source: SEC Filings
Linn Energy also reported an increase in the operating cash flows. The partnership managed to increase its cash flows from operating activities from $227 million to $481 million during the period. Moreover, the distributions for quarter also stood at around $241 million, compared to $170 million for the same period last year.
As we have said before, the partnership is on the right track and the management is making the right decisions. The addition of mature assets will result in lower capital spending and an increase in the production levels. Furthermore, the slow declining rate will allow the partnership to better predict its production levels. The biggest advantage of mature assets is the consistent production and stability in revenues. We believe Linn Energy is positioning itself very nicely for growth over the next two-three years, and the unit holders will benefit substantially from the strategy.
Additional Disclosure: 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.