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Acreage swap may, or may not, be ideal for Linn Energy

  • Opinions are mixed on Linn Energy's (LINE +0.4%; LNCO +0.4%) acreage swap with a unit of Exxon Mobil (XOM -0.5%) that adds production of ~85M cfe/day for Linn.
  • Raymond James analysts call it "quantitatively, an ideal swap," since Linn is essentially trading production that is declining at ~35%/year for gas properties that are declining at 6%, resulting in much more stable cash flow; also, the deal allows Linn to lever its already large Hugoton position to help deliver more operating synergies.
  • Citigroup’s Faisel Khan is not so sure Linn got the better of the deal: Linn estimates net accretion to distributable cash flows of $0.09-$0.12 per unit on an annualized basis, but Linn is giving up upside from the Midland basin assets resulting from additional capital spending later this year.
Comments (19)
  • hhmcdon
    , contributor
    Comments (65) | Send Message
     
    Raymond James is "Spot ON". I think it is obvious to the informed observer that this deal was beneficial to both Linn and XOM, after all that's what makes deals work. XOM has the ready capital to exploit the Permian assets, Linn does not. Linn stabilized it's DCF coverage ratio which they badly needed to accomplished; additionally increasing their Hugoton footprint will add economies of scale. I call it: WIN-WIN. I am long LINE and very pleased.
    22 May, 04:23 PM Reply Like
  • spondrei
    , contributor
    Comments (76) | Send Message
     
    hhmcdon, couldn't have said it any better! You are "spot on" about $XOM's available cash vs $LINE/LNCO. The deal is definitely win-win. Neither LINE nor XOM would make a deal that wasn't beneficial to both. LONG LNCO, love the dividend, and also am very pleased.
    23 May, 09:36 PM Reply Like
  • Chancer
    , contributor
    Comments (2520) | Send Message
     
    Just consider who is stronger and who is weaker. I would never believe that Linn put one over on Exxon. Linn has a track record of negotiating from desperation. By now the entire industry knows that.
    22 May, 04:55 PM Reply Like
  • Energysystems
    , contributor
    Comments (944) | Send Message
     
    On the flipside, $XOM bought XTO for $41B. Certainly, $XOM didn't do a solid job negotiating that deal.
    22 May, 04:59 PM Reply Like
  • cem1976
    , contributor
    Comments (75) | Send Message
     
    I don't think anyone thinks Linn "pulled one over" on XOM & being bigger/stronger does not guarantee always getting the better end of a deal. I agree w/ RJF that it is a good move on each part. XOM obviously has the resources to maximize this acquisition more than anyone and for Linn, imo, it was a no brainer. My only surprise was that there wasn't a bigger pop in Line/Lnco shares today.
    22 May, 07:03 PM Reply Like
  • User 63931
    , contributor
    Comments (58) | Send Message
     
    Who said "LINN put one over on Exxon"?
    23 May, 12:17 AM Reply Like
  • cfindlay
    , contributor
    Comments (32) | Send Message
     
    Guess Citi wants to hold the price down long enough to move important clients in for the stable 10 yield.. pretty interesting action today.. definitely some horizontal buy/sell lines that held down the volatility after the initial kerfuffle.. I was expecting a better pop, but it looks like the standoff between sellers and buyers was pretty even and organized... maybe portending a break up? Without some kind of bad news, its hard to see down at this point once the sellers dry up...
    22 May, 04:55 PM Reply Like
  • Marek
    , contributor
    Comments (612) | Send Message
     
    A breakup?
    22 May, 06:25 PM Reply Like
  • davidwisdom39@yahoo.com
    , contributor
    Comments (51) | Send Message
     
    Yes, I too am long LINE. This deal is a good one, a very business-savvy arrangement for LINE.
    22 May, 05:04 PM Reply Like
  • Marek
    , contributor
    Comments (612) | Send Message
     
    "Opinions vary," as the saying goes.

     

    Or: "Opinions are like _-holes: everyone has one." Consider that gas is what the world wants right now. Soon it will be time to lock in even more high gas prices with some new hedging.
    22 May, 06:26 PM Reply Like
  • jerrywengler
    , contributor
    Comments (402) | Send Message
     
    I am very pleased. As a Linn holder I find the news excellent, and it's a win-win deal for both Linn and Exxon. The Hugoton is a tremendous place for Linn to extend its holdings in a stable way that uses its better capabilities. Exxon has the fire-power to be an American point-man company--this deal allows both companies to function at things they do best. These companies are walking hand in hand better than their critics are.
    22 May, 06:36 PM Reply Like
  • jrp1324
    , contributor
    Comments (67) | Send Message
     
    The most valuable Midland basin acreage went fast. I think it was a good trade for Lynn. People would have been screaming if the deal went the other way. Lynn giving up gas acreage declining at 6% with a positive carry of $30 - $40 million to buy development acreage with large capital needs leveraging up on oil.
    The gas belongs in an MLP while the Midland acreage will not for a while.
    jim
    22 May, 06:56 PM Reply Like
  • pmblass
    , contributor
    Comments (14) | Send Message
     
    Opinions are NOT mixed. Kahn is saying that since they don't have to pay capex to develop the properties traded to XOM, DCF goes up. Here is the complete quote quote from Kahn (which you apparently selectively lifted from today's Barron's article, where the author, Ben Levinsohn, makes the same mistake as you):

     

    "Linn estimates net accretion to distributable cash flows of $30-$40 mil or $0.09-$0.12 per unit on an annualized basis as a result of the aforementioned asset swap. The accretion estimate appears slightly low as the partnership is giving up upside from the Midland basin assets resulting from additional capital spending later this year. In addition, accretion estimates do not include potential upside from higher utilization at the partnership’s Jayhawk gas processing plant located in the Hugoton field." --Khan, Citigroup

     

    He's giving two reasons why the deal is accretive to DCF, which is what Linn was trying to accomplish. They traded for properties that will shore up their coverage ratio a little, and will continue to do so for a long time, which is exactly what they needed to do. Great job, Linn Energy. as for Levinsohn, Hedgeye, and the ilk -- phew! Something still smells.
    22 May, 09:34 PM Reply Like
  • pmblass
    , contributor
    Comments (14) | Send Message
     
    Kahn at Citigroup made a POSITIVE comment that the deal was accretive to Linn’s distributable cash flow. Kahn’s comment was misinterpreted by Ben Levinsohn in today’s (5/22/14) article at Barron’s. Here’s the complete quote taken from the Barron’s article:

     

    “Linn estimates net accretion to distributable cash flows of $30-$40 mil or $0.09-$0.12 per unit on an annualized basis as a result of the aforementioned asset swap. The accretion estimate appears slightly low as the partnership is giving up upside from the Midland basin assets resulting from additional capital spending later this year. In addition, accretion estimates do not include potential upside from higher utilization at the partnership’s Jayhawk gas processing plant located in the Hugoton field.” -- Kahn, Citigroup

     

    Kahn is saying that Linn’s DCF will improve because they don’t have to pay capex on the properties that they traded to XOM. This trade will shore up Linn’s DCF, and will continue to do so for a long time, because of the slow decline rate. Also, there are synergies in that Linn can make better use of its Jayhawk plant. Kahn is actually saying that Linn underestimated accretion to DCF, but Levinsohn somehow incorrectly interpreted that as a negative comment, and the writer of this SA article followed right along. Linn did a great job here -- exactly what it needed to do.
    22 May, 09:34 PM Reply Like
  • P. Dennis
    , contributor
    Comments (371) | Send Message
     
    A deal is never a deal unless all parties benefit. That's what we have here. Two knowledgeable and capable management teams found a win-win transaction.
    22 May, 10:17 PM Reply Like
  • koolsool
    , contributor
    Comments (290) | Send Message
     
    Judging by the action in the stock price on Thurs, it appears the shorts have some pretty strong leverage to manipulate the price & keep it down. I am not sure if that is good or bad, my cost basis is about $30. But $28.50 seems like a good buying price foe someone who wants to start a position right now.
    23 May, 08:13 AM Reply Like
  • tgar13
    , contributor
    Comments (193) | Send Message
     
    I will continue to benefit from shorts
    As I can accumulate more shares at lower prices
    Truth will win in the end!
    23 May, 02:35 PM Reply Like
  • Your Average Joe
    , contributor
    Comments (3) | Send Message
     
    Have only 1k shares of LNCO and welcome downward price movement as long as monthly dividend is stable. Accumulating more shares thru the DRIP. Believe will benefit for long term holders. Thanks short sellers and fear-mongers!
    23 May, 03:57 PM Reply Like
  • ziggyzig
    , contributor
    Comments (78) | Send Message
     
    From EIA'S last release:
    Stocks were 774 Bcf less than last year at this time and 943 Bcf below the 5-year average of 2,209 Bcf. Keep it simple folks.
    23 May, 09:20 PM Reply Like
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