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Executives

Mark Ellis – Chairman, President & CEO

Clay Jeansonne, VP – IR

Arden Walker – EVP & COO

Analysts

John Ragozzino -- RBC Capital Markets

Kevin Smith – Raymond James

Ethan Bellamy – Baird

Boris Pialloux -- National Securities

Bernard Colson -- Global Hunter

Jason Gilbert -- Goldman Sachs

Adam Leight -- RBC Capital Market

Michael Peterson -- MLV & Company

Eric Anderson -- Hearthford Financial

Kenneth Miller -- KC Capital Management

Linn Energy, LLC (LINE) Q2 2012 Earnings Call July 26, 2012 11:00 AM ET

Operator

Good morning. Welcome to LINN Energy Second Quarter 2012 Earnings Conference Call. Todays call is being recorded.

At this time I would turn the call over to Clay Jeansonne, LINN Energys Vice President of Investor Relations for some opening remarks. Please go ahead.

Clay Jeansonne

Thank you for joining our second quarter 2012 earnings conference call. In a moment, Ill introduce Mark Ellis, our Chairman, President, and Chief Executive Officer. But I first 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 companys 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 companys filings with the SEC, including our Form 10-Q for quarter ended June 30th, 2012, which will be filed today, and any other public filings and press releases.

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

Supplemental financials and operational information, including the companys statement of operations, selected balance sheet data and guidance table has been posted to LINN Energy website at www.linnenergy.com in the Investor Center on the presentation.

Following managements prepared remarks, well take your questions.

Ill now turn the call over to Mark.

Mark Ellis

Thanks, Clay, and good morning. Joining us today in Houston are Kolja Rockov, LINNs Executive Vice President and Chief Financial Officer, and Arden Walker, LINNs Executive Vice President and Chief Operating Officer.

I will – that a year ago our core strategy requiring material long life assets. Year-to-date we have announced the acquisitions in joint venture agreements totaling approximately $2.8 billion, nearly exceeding total acquisitions for 2010 and 2011 combined.

Assets from these acquisitions are expected to add production of approximately 300 million cubic feet equivalent per day and increase total reserve by 1.7 Tcfe and bringing total reserves to 5.1 Tcfe on a pro forma basis.

This remarkable acquisition success combined with our organic growth program enables us to deliver outstanding operational performance and important record collection rates. At the end of the second quarter, we had increased the average daily production 76% year-over-year to 630 million cubic feet equivalent per day. We expect to exit the year with production exceeding 800 million cubic feet per day which has nearly doubled the exit rate of 2011.

Our acquisition success operational performance and hedges well enable us to increase the distribution 5% last quarter for the third year in a row. We are almost entirely below than expected NGL prices, our distribution covered ratios during the quarter was 0.97 times, however with a full year impact on 2012 acquisitions a shift away from (inaudible) drilling to oil and strong hedge positions we expect the distribution coverage ratio to wrap a good return to stronger levels, even absent a full recovery of NGL prices.

We also filed a registration statement with the SEC for a proposed IPO of common shares of Linn Co, a newly formed subsidiary of LINN. Since we are currently in registration with the SEC, we will not be able to comment further until we have an effective registration statement for Linn Co.

As we mentioned earlier, LINN announced a total of approximately $2.8 billion in acquisitions and joint venture agreements during the first half of the year. These transactions are expected to be immediately accretive to distributable cash flow per unit, and the company has already raised approximately a 100% of expected oil production from these assets through 2016 and natural gas production through 2017.

Two of our transactions, totaling $2.2 billion, have been with BP. During the first quarter, we closed a $1.2-billion acquisition of properties from BP in the Kansas Hugoton field. And in June, we signed a definitive purchase agreement with BP to acquire properties in the Jonah Field, located in the Green River Basin of southwest Wyoming, for a contract price of just over $1 billion.

Jonah is expected to produce approximately 145 million cubic feet equivalent per day and will provide LINN with a significant operated position in the Green River Basin. While current proved reserves in this asset total approximately 730 Bcfe, LINN has identified total resource potential of approximately 1.2 Tcfe, providing significant upside potential in the future. And we expect to close the acquisition on or before July 31, 2012.

Also, during the second quarter, we closed a $400-million joint venture agreement to partner with Anadarko in the CO2 enhanced oil recovery development of the Wyoming, Salt Creek field. This asset is expected to provide a low base defined range and deliver 10 years of state production growth. Activity is on track and so far we have funded 54 million of our capital commitment. Integration with core competencies of LINN, be itself, by clearly integrating acquired assets and introducing new employees to our culture. Our integration programs are on track and going smoothly.

We assumed operations of (inaudible) and I am proud to say that we have successfully retained more than 95% of the employees associated with Cleveland, East Texas and acquisitions. I would like to welcome more than 150 new employees to the LINN team.

Our excellent performance cross all our operating areas. We continue to deliver strong results Granite Wash where we have produced from several different intervals. Each interval has a unique production profile of oil, natural gas and natural gas liquids. This (inaudible) adopter drilling program to focus on the projects that provide LINN with the highest returns. For example, we were previously focused drilling liquids rich opportunity in Granite Wash. As NGL prices began dropping dramatically in the second quarter, we were able to quickly shift our focus to the Oxy reserve, which is more than 70% oil.

All eight of our operating Granite Wash rigs are now drilling (inaudible) wells. This is expected to materially improve our cash flow from organic growth in the second half of 2012 and beyond.

And the companys first three Hogshooter wells in the Texas Panhandle had initial production rate averaging approximately 2500 barrels of oil per day per well. Combined we have produced a total of 285,000 barrels of oil in the first 90 days online. Based on the investment results and extensive geologic and reservoir mapping, we anticipate drilling an additional 20 horizontal wells in the Texas Panhandle by year end.

Various industry participants have tested (inaudible) oil in a row, including the Hogshooter in western Oklahoma over the past several years. LINN have expanded the acreage in Oklahoma and has begun mapping the Hogshooter potential in the western portion of its acreage in this space. By year end, LINN plans will began testing the Hogshooter interval in the Mayfield area of western Oklahoma.

On cost front, operational efficiencies are resulting in a lower capital cost and least operating expenses. In the Granite Wash, we have reduced spreads, the first production cycle time. In the Granite Wash Permian basin we have implemented water managing systems that will enable the company to lower water handling cost.

These operating expenses on per unit basis declined 29% year-over-year due to these cost financial efforts, the efficient of lower cost properties and increased volumes.

We are off to great start in 2012, thanks to our dedicating employees who will continue build momentum for success and future growth. I look forward to what we can accomplish in the remainder of the year.

I will now turn the call over to Clay.

Clay Jeansonne

Thanks, Mark. I would like to address the following topic in my discussions today. The recent NGL prices and their impact on second quarter results, guidance for the remainder of the year and 2013 outlook, strong hedge positioned and an exciting acquisition market.

Id like to (inaudible) performance base this year. It is been record year and we believe this momentum will continue. As youre probably aware the industry is currently experiencing majority low prices for natural gas. Prices in the average NGL barrel decreased 38% during the second quarter. This rapid decrease will be – to expect EBITDA by approximately 27 million for the quarter which represents a reduction of approximately 0.18 times in our distribution coverage ratio.

Adjusted EBITDA for the second quarter of 2012 was 319 million. On a per unit basis, our distributable cash flow was $0.07 for the second quarter. Due to the impact of the – NGL prices we reported a distribution coverage ratio of 0.97 times.

Turning to guidance for the full year 2012 we continue to see weaknesses in NGL pricing during the second half of the year and have adjusted guiding accordingly. At the mid point of our range we expect to generate adjusted EBITDA approximately 1.4 billion, distributable cash flow was estimated to be approximately 618 million. We project coverage to be approximately 1.1.times for the second half of the year. Looking forward into 2013 within our shift to oil weighted drilling and the full financial impact from acquisitions – amount per day we project coverage to be in a range of 1.2 times even after the former coverage of NGL pricing.

Adhering to our strategy and in fact Ill expect to grow our natural gas volumes associated with the 2.8 billion in acquisitions and its been aggressively building our long rated positions on legacy production. We have now hedged 100% of our expected natural gas production for six years till 2017. In the expected – we now have 100% attractive prices for five years till 2016. We believe our industry leading hedging strategy in providing the uplift. Excellent distributions to go in lease and commodity price downturn and weve also extracted our assets in cost and capital. In the current environment our hedge work positions LINN to be a buyer when other companies are sellers. This trend is clearly evident in our 2.8 billion of announced acquisitions and joint venture so far this year.

While, natural gas prices have been depressed for quite some time, the effects of lower oil and NGL prices are still in the early phases of impacting the industry. If this environment persist, we expect to see acquisition activity continue at a record pace. Our goal is to be positioned to take advantage of this trend.

So were attended some steps in achieving that goal, had been continuing to aggressively hedge spread here into the future, expanding our credit facility from 2 billion to 3 billion, and filling the S-1 for the IPO of LinnCo.

Another interesting trend during 2012 has been a clear increase in the quality of acquisition opportunity and an increase in the size of acquisition opportunity. With our clear sight and clear advantage, we may view an excellent position to be buyer in this downturn cycle.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from John Ragozzino of RBC Capital Markets. Please go ahead.

John Ragozzino -- RBC Capital Markets

Good morning, gentlemen.

Mark Ellis

Good morning, John.

Clay Jeansonne

Good morning, John.

John Ragozzino -- RBC Capital Markets

Obviously, the topic Kolja is NGL prices, Kolja, if you recall a discussion last quarter on the call, we talked about the fact we took down NGL price realization guidance, now taken it down again to like 34% of crude, I believe and distribution is probably its, obviously, being squeeze a little bit into this year. Can you talk a little bit about what your thoughts are on pricing for next year as it relates to distribution growth and coverage in 13?

Mark Ellis

Yes. Obviously the prices are down, about you know, 30% for Mont Belvieu. But really we have a bigger issue here, its been just prices being down which is a fact that they are down over 50% of their Conway, which is about 70% of our volumes go that way. We taken it down but you can see that we have a pretty big recovery in distribution coverage even absent any kind of recovery in NGL prices.

And the real main reason I guess to that John is if you recall, we spent quite a bit of money in the Granite Wash area on infrastructure, which we think, we cant say too much about it at this point in time. But we feel very confident that that mix of where were marketing our volumes is going to change dramatically going forward.

So were very confident in the numbers we put out and like is said, you can still see the coverage coming up quite dramatically even absent any kind of increase in prices. So if prices were to come up obviously that presents us with significant amount of additional upside and the as were going to get into I am sure in this call is our shift of our organic program is moving a lot more towards oil which is going to generate a lot more revenues which makes up a huge amount of that short fall going forward.

John Ragozzino -- RBC Capital Markets

All right. Thanks. Arden, can you give us an update on the progress of the assessment what youve done for the Hogshooter on the majority of the Granite Wash division?

Arden Walker

Sure, John. We over the course of the quarter we got comfortable with the results we saw from our first three wells which averaged about 25 per barrels a day each and we gathered a significant amount of geologic mapping over our core area that weve been focused in the Frye Ranch area. We have now shifted essentially all of our development to the Hogshooter. We have eight ridge running and drilling Hogshooter wells. So were needless to say very excited about the results weve seen so far, as well as potentially we think that this Hogshooters own a gift to exactly right now. So were shifting that program in that direction and expect to see continued probably 20 more completions before the year ended the Hogshooter.

John Ragozzino -- RBC Capital Markets

Kind of update this 50 identified locations, I know you drill out there last time?

Mark Ellis

We havent updated that number. I think thats going to be a pretty good number for the Frye Ranch area that were focusing right now. I did mention that before year end were going to be shifting over to began testing into the Mayfield area of Western Oklahoma and there could be some additional inventory that comes out of that testing exercise – have some success over there. Were excited about it, there have been some oils drilled in Oklahoma area just not in our general area, so were going to be over there. I do some drilling before year end.

John Ragozzino -- RBC Capital Markets

Okay. There is a couple quick on – couple more quick ones. Recall last quarter, you know, we discussed the expected EURs on the Hogshotter wells and you talked about three to four in MMBoe day – MMBOE. Mark mention a 90 day of 285 and MBOE, could you update that forecast a bit?

Mark Ellis

Yeah, the 285 is a 90 day first 90 day production cumulative for those three wells and we still see them in the 350 range, probably for (inaudible) like that 300 to 400,000 EUR range that I gave last quarter. We still them – kind of looking that way. We modeled the volume at 1700 barrel day IPs, could in that been a little stronger than that based on the first three wells we drilled. But at this point weve got a lot of variances in the net fitness that were saying so. Well see what that works out to be overtime. We think thats a pretty good model to use going forward and I wish all the clients are I think are over 85% range so we will put performing right on our type curve that we had predicted for last quarter right now.

John Ragozzino -- RBC Capital Markets

Okay. Fair enough and then last one you guys have done a good kind of work with BP this year. As Mark mentioned, can you talk a little bit about how these transactions came about, I mean just given the math of liability being faced over there, is there any meaningful potential for additional transaction this year with BP?

Mark Ellis

Yeah, John this is Mark. On the last question we should hope so that there are other opportunities. We like doing business with those guys. They are you know market assets they do, they kind of take a select approach, there is a little more than handful of folks that they got due to these assets given the size of the assets and their billion dollar plus deals you know there is a limited number of folks that they can market those to. Weve been successful on two occasions and we like to drop our relationship with and to be able to acquire assets in the future probably. Things with a level bottom is a very high quality assets where they fit our business model because they are very stable, very low declines and the other thing that you know they are going to be very well taken care of. What weve seen so far in both the assets, weve been on the ground and – us well although we havent closed that deal, but these are very high quality assets and we are looking forward to bringing those on board, so I think they are going to serve us very well.

John Ragozzino -- RBC Capital Markets

Thanks very much guys. Well talk to you next quarter.

Mark Ellis

You bet.

Operator

Our next question comes from Kevin Smith of Raymond James. Please go ahead.

Kevin Smith – Ramond James

Hi, good morning gentlemen.

Mark Ellis

Good morning, Kevin.

Kevin Smith – Ramond James

About your acquisitions is there any meaningful change to your CapEx budget for the year and are you planning to put any capital work in I guess either the Cloud properties over six months?

Mark Ellis

No Kevin, the things we brought right now, really mostly PDP performing assets, they do have capital opportunities and in the future we had I would say minimal capital added to our capital budget for those two. I cant remember off the top of my head. Im looking at David. But certainly the $30 million range may be – and now that youve got all weve added this year. We dont look to be really active near term in dividend. Probably something as we go into the budget cycle for next year, well look at some opportunities.

And I think about mid year next year is kind of what we forecasted in Jonah, starting to look at some opportunities there. So were giving our operating team a chance to actually get on, bring those assets onboard, get a better understanding. That would be cool. We try and think we can accelerate any development activity. But I think both have some very good development opportunities.

Kevin Smith – Ramond James

Okay. Fair enough. And then, I guess this kind segues in with all the PDP production youve acquired. Kind of surprised to see maintenance caps continue to pick up as a percentage of EBITDA. And I think thats forecasted to do the same in third and fourth quarter. How should we think about that going forward?

Mark Ellis

Im not so sure I understand that. You were surprised to see what? I have missed something in the call.

Kevin Smith – Ramond James

Yeah. Sorry. Maintenance CapEx continues to kind of tick up as a percentage of...

Mark Ellis

Right. So I think Kevin what youre seeing is its still tracking the growth that weve had in the Granite Wash. So we were – obviously, its coming up in and then we go into 13 and starts to kind of level up I suppose, because of the mix change that youre talking about. But its kind of hard to take one point in time and just say, heres the percentage. I mean there is a lat effect, I think, in all the growth thats coming on. But...

Clay Jeansonne

Yeah. Im sorry. I understand that. Look Kevin, see this year, were still generating about 25% organic growth this year. So thats still a pretty significant organic growth component.

Kevin Smith – Ramond James

Fair enough. And then just one question on the NGLs. Level of ethane rejection youre seeing in the Panhandle in Oklahoma?

Mark Ellis

Yeah. Kevin we have elected to reject ethane in any material way at this point, other than a couple of small (inaudible) that weve done some rejection in. But for the month of August weve actually done the half already and had to make a reflection on our plants and weve elected not to reject ethane, so its funny as it seems, its really not the economics arent really pushing us to reject ethane at this point of time. The heavier ends of the stream intend to cause you to go ahead and process to the extent you cant but you do is some efficiencies on the heavier ends when you start rejecting ethane.

Kevin Smith – Ramond James

Okay. Thank you very much.

Mark Ellis

Thank you.

Operator

Our next question comes from Ethan Bellamy from Baird. Please go ahead.

Ethan Bellamy – Baird

Hi guys. A few questions. How many of the 17,000 barrels a day anti – wells do you have in inventory?

Clay Jeansonne

We have identified about 50 locations at this point, Ethan. And thats kind of the model we are using for all three – at this point and we are going to drill 20 or so of those between now and the end of the year and obviously as we get more and more of those under our belt we will be able to hung in on that, that model is a little bit closer and we are surprised by higher rates we will be able to bump those up a bit, thats kind of what we see right now.

Ethan Bellamy – Baird

Do you think that you know is there upside to that 50 number?

Clay Jeansonne

I think there is. I mean, I considered before in the Mayfield area we have some pretty high hopes that we are going to find some – potential over there those really arent factored into the inventory at this point of time, so at this point of time I think its very likely we will see some numbers go up if we are successful over there on the Mayfield side.

Ethan Bellamy – Baird

Okay. And you have some I think gas processing contracts with Enbridge that are rolling off at year end, how much better can you do on NGL pricing just on the contractual basis?

Clay Jeansonne

Yes. Ethan, really good question. And I dont know if you caught that in my first answer thats the part that Ive got to be a little careful about talking it out. But like I said, with the infrastructure that we have in place, we have a lot of flexibility and lot of options. And we think that we can mitigate whatever NGL prices weakness we have in the quarter going forward pretty significantly and thats kind of where I have to leave it. And so we get down to some of those negotiations.

Mark Ellis

Yeah, just to add, just a little bit, obviously weve been primarily price behind Conway. We recognized the value been price behind. The transactions weve done thus far this year both of BPG price that will pricing for the most part at least on the lighter products and as Kolja mentioned, we think our infrastructure we put in place will allow us to capture the option LD of changing that pricing next so.

Ethan Bellamy – Baird

Landscape to be clear is fairly competitive than the Granite Wash area, you do have other options, right?

Clay Jeansonne

The beauty of the – the beauty of spending the money we spent and putting the pipeline in place and creating the interconnects is providing us the optionality that we need to have there. And yes, youre right, we will be able to use that to help mitigate the exposure to a Conway like Kolja mentioned.

Ethan Bellamy – Baird

Got it. Keeping on the infrastructure theme, do you plan, still plant to keep the Jhoc plant and have you had any reverse enquires from industry players that might be looking to pick that up from you?

Clay Jeansonne

Yeah, I think our phones started ringing the day after we announced that transaction. There is a lot of mid stream interest for that asset, that asset is pretty critical to the success or that feel. We like the asset. Its a very efficient plant in the area, probably one of the most efficient plants in that area and you know we are still in the evaluation phase on that, we think its pretty critical to our base operations and well continue to look for ways to make sure we are maximizing the value of that asset. So, Ill just leave it there for now. Its still early.

Ethan Bellamy – Baird

Okay. And last question with respect to the hedging strategy you guys are clearly the – one of the not the most aggressive hedger in the industry. Why no short run direct NGL hedges, Im going to know that its a pretty terrible market but atleast in the short term it might provide some downtime protection, just curious about that?

Clay Jeansonne

Yeah, I mean, I guess its a Monday morning quarter backache you can kind of say that. And I am not accusing you, well I am just saying that if you look back and say okay. You know when we looked at hedging at its back related by 30 40%, how – you want to be but having said that you would have endured that kind of lowered pricing for six months and so you saw the lower pricing that we are seeing today, so probably nets up to about the same. It just didnt look that compelling honestly and even looking back its still questionable as to whether its compelling. So and until there is a longer dated, less backdated NGO hedge market and we look at it, trusting you will look at it everyday, because we had the ability to hedge NGL for 100% and then they would be consistent with everything else we do at LYNN, we would be all over that. But the economics has just never looked compelling at the times we have looked at it, so well keep looking but I dont regret it really at this point.

Ethan Bellamy – Baird

No, Im not going to hold you to this (inaudible) though. All right, good luck guys, thank you.

Clay Jeansonne

Thank you.

Operator

Our next question comes from Boris Pialloux of National Securities. Please go ahead.

Boris Pialloux -- National Securities

Good morning and thanks for taking my question. Actually I have two quick questions. One, you mentioned that in your supplemental that you have an $18 million recovery on a bankruptcy claim, so I would like to know more about it and if there would be an impact in Q3 and second is you also mentioned that your expenses went way down because of a water management system and I can see that with your operating expenses, so is that something that could be actually used form the Granite Wash to the Permian Basin and all your other basins?

Clay Jeansonne

Okay. Let me take the first one. The recovery we had was from the loss that we had on hedging from Lehman when they went bankrupt back in 08, 09 timeframe and we are really pleased with the levels of recoveries we had with that claim.

The amount that weve recovered this quarter is clearly not all of what we will recover. There will not be a recovery of any additional amount in the third quarter but there will be some more in the future and I cant tell you exactly when thats going to be, but there clearly will be more coming our way, and then it comes to the water.

Mark Ellis

Yes, the water management question, I think Ive got most of the question you were asking there, basically we took a strategy on the water management system. We put in on the Granite Wash similar to the infrastructure on the gas side that we talked about quite a bit in the past. We put in a series of pits and gathering systems for water to move water in and out of each location.

We are actually just now starting to implement something similar in the Permian Basin and what thats generating for us is more efficient use of the water, water savings and also cost reduction in both the capital side as we use the water to frac our wells as well as on the expense side when we flow it back and have the disposal on the road. So I think its generating a lot of additional value for us. And weve taken that similar kind of approach in the Permian Basin that walk where it played down.

Boris Pialloux -- National Securities

And would that impact your guidance for operating expenses for like Q3 or 2012 or 2013 if you expand that to your order fills?

Kevin Smith

And I think its already in the guidance that weve provided at this point. I mean there could be some additional upside down the road and so we continue to see some expenses come out of the system. But its been factored in for the most part at this point.

Boris Pialloux -- National Securities

Okay, thank you.

Operator

Our next question comes from Scott Elser of (inaudible). Please go ahead.

Unidentified Analyst

Good morning, gentlemen.

Clay Jeansonne

Good morning.

Unidentified Analyst

Can you guys address Moodys where they just put the company on a negative lot from stable I know theyre rating for you as B1 thats not four notches into the junk area and if you can address that and perhaps talk to us about meeting or seeking with Moodys about it to me it looks the company has been a lot better shape than where the rating shows?

Clay Jeansonne

Right. I completely agree with you. But let me just be fair I suppose this year weve made a significant amount of acquisitions. We have deviated a bit from our kind of 60% equity and 40% debt target. And the last acquisition was running on the credit facility until such time as we can raise additional equity. And Im sure youve noticed the filing of LINN is one of the ways to reduce leverage. So I guess both agencies had gone to a negative outlook in the interim period but clearly as we exit the year we plan on pushing in the other direction and putting those levers specific stack into a range that both they feel comfortable with and well comfortable with. So I kind of view it as temporary and then the long-term the strategy is clearly when we get that addressed is to go in and make a case of the companies with significantly stronger in our opinion than they were being rated.

But I think that argument is somewhat moved until we get the statistics back, at a price that were comfortable.

Unidentified Analyst

Did you also – just kind of follow up and then Ill hang up and let other people ask questions. My question would be that right it would be propitious time to be able to borrow money as opposed to sell equity because of the increase in the dividend as opposed to the rates that youre borrowing money. And would – can you address that and certainly...

Clay Jeansonne

Sure.

Unidentified Analyst

A another thing to speak about would be, maybe even extending maturities longer because of the lock in, you know, 30 year or 20 year money while its cheap? Thanks, guys and I appreciate your hard work.

Clay Jeansonne

Thank you. Its a good question. In the interim period obviously weve expanded our credit facility from 2 billion to 3 billion and thats about 2% money. So in the interim period as were waiting to kind of get things to where we like them, clearly were benefiting from lower rate and if we were not going to purchase anything from here and out then that might be some what tempting. But I think you have to balance your comment with what the opportunity set is going forward and were already seen $3 billion of high quality assets shake lose in the first half of the year.

NGL prices and oil prices have come down since then which is pushing even more assets on to the market. I think at attractive prices. So you really have to – you dont want to get so granular that you are looking at the difference between the cost of equity capital and the cost of debt capital two of the opportunities that which you are able to acquire and the accretion that you are able to lock in with that. The second part of your question in terms of maturity, clearly I had something to look at, but I kind of go back to your first question and say look, if we can get a material improvement in ratings and our cost of debt capital then that longer term maturity I think would look more compelling, because what youve seen us happen to us is weve gone from a point where we issued a 11.25 bond all the way down to where our last issue was fixed in the quarter. So forget about what going on with interest rate, I think the credit quality of the company is materially improved and we see that continuing so until we hit that point where we feel like its optimal then I think that option is pretty viable.

Operator

Our next question comes from Bernard Colson of Global Hunter. Please go ahead. Excuse me Bernie, your line is open, please go ahead.

Bernard Colson -- Global Hunter

Good morning.

Mark Ellis

Good morning.

Bernard Colson -- Global Hunter

Can you hear me now.

Mark Ellis

Yeah.

Bernard Colson -- Global Hunter

Okay, sorry about that. Most of my questions have all generated interest and a lot of them have been answered, but I was hoping that if you could give us an idea of you know kind of your average ethane content from your mix NGL barrels.

Mark Ellis

Sure. Our average ethane content in the granite wash which is the highest area of exposure that we have really here is about 45%.

Bernard Colson -- Global Hunter

Okay. And so Im still trying to just get a little bit more clarity about what the assumptions are. Going forward, I mean, the commentary was that absent a full recovery of NGL prices that the guidance would recover somewhat.

And I was hoping you could just provide a little bit more color on how much of that is just pure, for example, NGL prices increasing versus the location issues that you discussed with being able to price at Mont Belvieu and Conway. In other words, if we look at your ethane price, I mean, what do you – are we assuming that it goes from either 40 or 40 to 50? I mean, can it – is it...

Mark Ellis

Yeah. No. I think it is – I know where youre going with it. There are so many different factors in it that can move it upwards or that its kind of isolate one or the other. But let me just be really clear, as you look through the balance of 2010, were forecasting $30 a barrel of NGL pricing, which is exactly where we were. In the quarter, we were at 29, okay, so pretty much right on that number.

And as Ethan mentioned, our contracts go out through the end of 12. So youre not going to see any mix change from Conway to Mont Belvieu in 2012. So the pickup in coverage in 2012 was clearly due to – one, the Jonah acquisition which was very accretive; and two, a beginning of shifting of our programs to oil in the Hogshooter.

So really no recovery whatsoever in NGL prices is really forecasted in there. And I mean we are careful with those words, really the “full recovery.” And then as you go into 2013, obviously, there is a whole host of factors that can alter that number. But weve been – I think weve been very conservative with the 1, 2.

And if prices recover, you could see that would be significantly better because I think most of the pricing issues, assuming that Mont Belvieu stays the same, right, it can be a dread, which is moving from one hub to the other.

Bernard Colson -- Global Hunter

Okay. And then – thats really helpful. And then, when youre speaking of ethane rejection. I mean, its seems in the Mid-Con, I mean, weve had a recovery in the last couple of weeks of ethane prices. But prior to that it seems like wholesale ethane rejection really made sense and so Im trying to tease out just how much the propane recoveries impact your decision on whether or not to process that and the economics of that?

Mark Ellis

Yeah, I mean, so let me get one point, as ethane got to as low as I believe $0.02 a gallon at Conway and last year I looked here its around $0.09, so its pretty – on a percentage wise basis its the material recovery. But its not being sold for very attractive price. But it has balance up to bottom. So, Ill check that box, I agree with that. Its being still bottom and its coming the other way, which is a nice trend.

In terms of the ethane rejection, as already mentioned earlier. Its a purely economic decision, so the point I guess he was trying to make is that the heavier even though ethane is essentially free, the heavier are carrying the economics and we havent rejected to-date, but we look at that scenario, almost daily and well make the right decision, purely based on economic. There is no other real consideration there.

Bernard Colson -- Global Hunter

Yeah, okay. All right. Thank you so much.

Mark Ellis

Thanks.

Operator

Our next question comes from Jason Gilbert of Goldman Sachs. Please go ahead.

Jason Gilbert -- Goldman Sachs

Hi, guys. Thanks for taking my question. Most of my stuff has been answered. I was wondering maybe you could – I wonder if you could elaborate on some of the thing youre going to enhance oil production beyond exporting the Hogshooter?

Clay Jeansonne

We have a two big plays we have going on the company is the Wolfberry play and the Permian Basin thats exclusively oil, its probably 75, 80% oil. So we have development program going there. We also – the shipped to the Hogshooter is probably the other single most significant thing and its going to be a big deal by the time well get to the end of the year, I mean, with volumes coming on 1700 barrels day per oil.

We do have activities in other areas, you know, Salt Creek and Bakken area is obviously those are both non-operated but those are maturity of oil volumes and in the case of the Salt Creek it is a growing asset thats – that will be coming up pretty significantly over the course of the next couple of years.

Jason Gilbert -- Goldman Sachs

Okay. Thats more of a 2013 time?

Clay Jeansonne

Well, Salt Creek, yeah, its not growing a whole lot this year, its mainly next year.

Jason Gilbert -- Goldman Sachs

Okay. And then other question, I just wanted to see if you could talk a little bit about the acquisition opportunities youre seeing out there and thus typically youve seen more assets yields or I think you mentioned from time to time Seacor base -and I was just sort of wondering what the profile of a type of deal particularly for Seacor might look like?

Clay Jeansonne

Well, I mean, all of those opportunity on the shopping list right now as you can imagine. But weve been very blessed with some great asset deal weve seen so far. There are material in size, they are high quality in terms of those assets and they fit our business model. I cant comment on Seacor, we might be looking at for that matter but if you think about out business model, what type of asset character we need, were looking for claims fairly long life in nature, fairly stable and predictable declines and have an element of low risk development growth is what would fit our self. You know there are companies out there that have those types of asset; we sure are to be interested.

Jason Gilbert -- Goldman Sachs

Would it be, would you look into new geographies where you are not already or mostly build on to where you are?

Clay Jeansonne

Well you have seen that reach out to new basins here in these last couple of transactions, prior to January we were not even integrating River Basin. So, yes we are not opposed to going to new basins. Obviously on assets its usually easier to build both on but so we remain pretty active there, I dont know there is many more bolt on – where we are. But we are willing to look at new basins provided again it has the right asset character probably at this model.

Jason Gilbert -- Goldman Sachs

Okay. And thanks. And last follow up I guess going forward, should we expect you to do you were – 60% equity and 40% debt or even maybe using more equity going forward?

Clay Jeansonne

Yeah, I think the answer to your question, yes, the number one and number two is purely dependent upon what kind of opportunities we see going forward and the magnitude of those and we would love to position our balance sheet that if things continue to get worse, we are in a position of relative strength and it would feel like we are there now anyway, but if we could enhance that to or maybe opportunities are coming our way at really attractive prices and large sizes, but the capital markets are maybe not there to support it if we had a stronger looking balance sheet I think that would be a priority.

Jason Gilbert -- Goldman Sachs

Okay. Thank you very much.

Clay Jeansonne

Yourre welcome.

Operator

Our next question comes from Adam Leight of RBC Capital Market, please go ahead.

Adam Leight -- RBC Capital Market

Good morning.

Mark Ellis

Good morning.

Adam Leight -- RBC Capital Market

So I just wanted to clarify one thing first, did you say confirm that your borrowing disk has increased to $3 billion.

Mark Ellis

Yes it is, that closed yesterday.

Adam Leight -- RBC Capital Market

Okay. Then that preempts to next question. Second of all again just to clarify would you be thinking of more equity financing after Linco in order to strengthen the balance sheet not necessarily in conjunction with additional acquisitions, but to kind of get to the better credit metrics.

Mark Ellis

Well our preference is always to time it with acquisitions add on. But, just like I said on the previous question which is kind of similar is if we saw opportunities that were attractive and sizable immediately position the balance sheet ahead of time we wouldnt be oppose to doing that.

Adam Leight -- RBC Capital Market

And are you in a rest phase you are still pulling in the acquisitions or can we expect activity either of events?

Mark Ellis

Look at the – we are clearly waiting on the SEC number one. Number two, as there back half of the year could be strong. Its hard to say. I mean, but, we want to position ourselves so that we can do that.

Clay Jeansonne

Yeah, Adam, we dont shutdown our new shop necessarily. We are always springing opportunity, we will stay active in the deal flow and looking for the right opportunities, but we have been very successful this year. We have got some things to integrate but we are blowing our way to get complete.

Adam Leight -- RBC Capital Market

Yeah, last one along this line, you had a buy and hold strategy, is there anything in your portfolio that you might think about divesting at some point in the future or is you are happy with what you have got just want to continue to accumulate?

Mark Ellis

Yeah, a great question we will get that quite often. I mean, we look at it on a regular basis. There arent many things that come to my mind now that says okay, well listen it really doesnt set our business and maybe its time to monetize but as we continue to build our inventory set, there are some things that kind of like inventory we think about, but as pure assets we kind of do a lot of that cleaning back in the summer of 08 when we exited in certain areas and we sold some things in the deep plays in Oklahoma, so were pretty clean right now we like our asset.

Adam Leight -- RBC Capital Market

Okay. And then I dont know if I missed this but did you give a well cost on – and maybe compare with you think your IRRs are on those versus kind of losses?

Mark Ellis

Yeah, I think we are currently – in those $28.5 million which is a little bit lower than our Granite Wash wells, weve kind of been up in the 8.5 to 9 million probably on the Granite Wash wells so it is a little bit less some of that as a result from the optimization work its hard work that weve been doing out there some completion the efficiencies we were building. In terms of rate of returns lets say 50% plus if we continue to get results like we did on the first three wells, but current model at 1700 barrels a day gives us kind of 50% rate of return. So very good economics as we see it today and they could be better if we get results like the first three wells. Those first three wells I actually probably close to pay out at this point of time. So you know you are three months in to producing all the wells and approaching pay out your pretty quickly. So as to me thats pretty good and well continue to develop that.

Adam Leight -- RBC Capital Market

And as I think there is – in todays economics.

Mark Ellis

Weve actually got a slide in the supplemental information that shows kind of what the difference in Granite wash well (inaudible) well but I would say probably 10 to 15 percentage points rest on the Granite wash and we will focus in very rich little areas so I mean even if low NGL process we see in this, so pretty good economics.

Adam Leight -- RBC Capital Market

Slide four, I missed at the first time, sorry. Okay. Thats great. Thanks.

Mark Ellis

Thank you, Adam.

Our next question comes from Michael Peterson of MLV & Company. Please go ahead.

Michael Peterson -- MLV & Company

Hi, good morning gentlemen.

Clay Jeansonne

Morning.

Mark Ellis

Good morning.

Michael Peterson -- MLV & Company

Regarding the 19 operated but not yet producing oils in the Granite Wash, can we expect all of those to be commercialized in the third quarter?

Mark Ellis

Yes, they will, all 19 wells will be put online, varying very stages, these are drilling, completing or waiting on completion at this point in time. So those will all be in -all be up in running sometime in Q3.

Michael Peterson -- MLV & Company

Terrific. Thank you, thats all I have.

Mark Ellis

Thanks.

Operator

Our next question comes from (inaudible) please go ahead.

Unidentified Analyst

I was just wondering if you guys could walk us through how you think about the LinnCo versus the annual units in terms of our cost of capital perspective given the tax issues surrounding the LinnCo versus MLP and where you think thats going shake out in terms of the difference between issuing that one and see versus the other side from the fact that recognizing you guys are going to access in new investor base?

Mark Ellis

While Ill love to engage you in that discussion. Were currently in registration and really cant comment on LinnCo at all but at some point in time obviously Id love to answer that question for you.

Unidentified Analyst

Great. Thank you.

Operator

Our next question comes from Eric Anderson of Hearthford Financial. Please go ahead.

Eric Anderson -- Hearthford Financial

Hi. Maybe you can answer those questions either, but with regards to LinnCo will the dividends be paid in shares?

Mark Ellis

Yes. Sorry, again Id love to answer that one too but we cannot answer any questions about LINN or – I could refer to you the filing at itself because I think the answer to your question is there.

Eric Anderson -- Hearthford Financial

Okay. And just following up a little bit on the question regarding the divestitures, just curious as to your thoughts on in terms of what you guys thought about the price that Noble energy got earlier in the week for its divestiture of 11000 acres in the Permian for something like 320 million or more than $200,000 for flowing barrel. And if that kind of evaluation it might make sense for you guys to prune a little bit of some of your staff its good.

Mark Ellis

Well, I coming in on other peoples transaction I mean obviously that was premium price for our quality asset in the Permian Basin. What we have seen out there and weve been on the buy side out there weve seen some of the prices go up on – purchase and different times weve been active there and sometimes as we kind of stepped out the mortgage tends to get a little overheated. So, that was a pretty good value.

Eric Anderson -- Hearthford Financial

Okay. So if you would get something that high you might think about it?

Mark Ellis

Well as a (inaudible) but obviously you are going to, were going to think about any.

Eric Anderson -- Hearthford Financial

Okay, fair enough. I dont want to put – spot thanks a lot guys. Nice quarter.

Mark Ellis

You bet. Thank you.

Operator

Our next question comes from Kenneth Miller of KC Capital Management, please go ahead.

Kenneth Miller -- KC Capital Management

Yeah, good morning. Hi, possibly you know all the questions about Vinco is this KMP, KMR concept; can you say yes or no to that?

Clay Jeansonne

I havent really – cant there is really kind of (inaudible) Im sorry. I think I said were -- Id love to, but I cant.

Kenneth Miller -- KC Capital Management

No problem. The other question is theres a commentary you made on the Jonah acquisition and from what I can gather there, great concern on the part of some -- there are that NGL pricing and the effect its going to have on your variability to increase distribution.

Question is in the color you gave us regarding the second half and the impact of Jonah on cash flow. Have you incorporated all of the potentially positive improvement in pricing for Jonah in -- what was it, Bellevue, the Conway and its absolutely in the guidance youre giving us, or is there some possible additional room.

Kevin Smith

Yes, I guess theres a couple of different concepts youre raising there. Jonah is accretive; this is an acquisition opportunity period which is in the numbers. The natural gas liquids from Jonah are already sold at Mt. Bellevue. So, theres no Mt. Bellevue there, Conway difference there.

But as I said in the previous question, we have not baked in any kind of NGL price recovery through the balance of the year. So, clearly if that were to occur, that would be another upside element. And then really kind of keep your eye on our shift to oil, I think there we feel pretty good about the numbers and they could be a pretty dramatic pick-up in cash flow.

And then obviously the last point is clearly, we dont think were done for the year in terms of acquisition opportunities. So, that in it itself changes things quite a bit.

Kenneth Miller -- KC Capital Management

Just maybe one more follow-up. It seems that the acquisitions youve made from BP, you know, all the times, people say when you see huge dump of properties when, I guess as spot gas price is south of $2. Some could (inaudible) up the concept that, you know, if not a bottom, thats hopefully close to bottom.

And I am wondering in your prospective, I mean, you are buying these properties would appear to be below market prices now. Am I often this concept or did you guys sort of pack your self and back particularly for those acquisitions?

Clay Jeansonne

Well, look were not trying to call the bottom. But were trying to look at is the spread between the price that we paid and the price that we hedged. And so I would really refer you to the fact that we hedged those volumes for five years or more in the future at north of $4 per Mcfe. So to us whether the bottom today...

Kenneth Miller -- KC Capital Management

Answer my question.

Clay Jeansonne

Yeah. Well, look I mean the opportunity is for sell, wanted for sell but we think we got a great deal. I mean you are talking about our price per flowing that you havent seen in years. And the margin we locked on it, it was very aggressive. So I mean were not in the business of passing up an opportunity because we feel like two months later there might be a real bottom.

Mark Ellis

Let me add to that just a little bit. I mean weve locked in prices for five years, that looks great. Keep in mind were buying 20 year plus assets with tremendous upside potential. So beyond the five-year window we have got all kinds of optionality. So we clearly are in a bottom of the cycle and we just locked in a hell of a margin.

Kenneth Miller -- KC Capital Management

Okay. Thank you very much.

Operator

Our next comes from (inaudible). Please go ahead.

Unidentified Analyst

Hey guys, good morning. I just wondered if you could reconcile the CapEx number for the second quarter as well as maybe the guidance for year 2012. I am showing about $800 million in investment spending in the second quarter. I know 135 of that was the East Texas acquisition. But whats the remain part of that, is that CapEx or is there something to do with the acquisitions that were announced that in rias of course during quarter or something?

Clay Jeansonne

I think our CapEx firm developed an organic development was on the order of $5 million for the first half which is on track to the – spend a $1 billion for the years. So I think thats about right and your probably correct in terms of 175 million for the other acquisition you mentioned. So I think you probably got it pretty correct there.

Unidentified Analyst

I am showing 800 million for the quarter for investment spending, based on your press release?

Clay Jeansonne

Yeah. Let us reconcile that with you...

Unidentified Analyst

Okay.

Clay Jeansonne

When we can get more into the reads with you. But I guess my our point is that there is nothing thats changed I mean, our capital program is exactly the same as weve always laid it out.

Unidentified Analyst

Okay. Helpful.

Clay Jeansonne

Yeah.

Operator

I would now like to turn the call back over to Mark Ellis for closing remarks.

Mark Ellis

Okay. Well, thanks, there was a lot of good feedback, lot of good questions. We appreciate it. Still very confident about the organization and our future I think you heard that in the announcements that we look forward to. I appreciate your questions and look forward to the coming quarters. Thank you.

Operator

Ladies and gentlemen, this does conclude todays conference. You may all disconnect. And have a wonderful day.

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