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Breaking Out Linn Energy's NewCo

Mar. 06, 2018 12:05 PM ETRoan Resources, Inc. (ROAN)7 Comments


  • Linn Energy intends to separate into three standalone companies, with "NewCo" holding its remaining legacy assets.
  • NewCo will produce mostly natural gas and NGLs, and only 2% of its total production will be oil at this point.
  • NewCo has a relatively low 11% base decline rate, but production is currently declining in the upper single digits as Linn is not committing much capital to it currently.
  • Development of the NW STACK assets may increase NewCo's oil production significantly.
  • NewCo is expected to generate over $130 million EBITDAX at $2.75 natural gas.

Linn Energy (LNGG) has been selling off its assets at a rapid rate, which has made it a bit challenging to get an exact handle on what its "NewCo" would look like in the end. Linn's NewCo will be the company that holds its remaining legacy assets, while LNGG is expected to be a holding company for the 50% stake in Roan Resources and Blue Mountain Midstream also gets spun off as a separate company.

Linn has provided more information with its Q4 2017 earnings report that gives a better picture of NewCo's assets, its production mix and levels, and expected costs.

NewCo Assets

Linn's NewCo assets are listed in the slide below. The assets are located in six areas and had 305 MMcfe per day in production during Q4 2017. The reserves are mostly natural gas and NGLs, with a tiny percentage of oil, while the base decline rate is estimated at 11%.

The Hugoton has a decline rate of approximately 6%, and Michigan/Illinois has a decline rate of approximately 4%, so one can calculate that the growth asset base decline rate is approximately 18%.

Source: Linn Energy - Q4 2017 Supplemental Presentation

Linn also still owns some Permian and Drunkards Wash assets, but assumes they will be sold soon. As a result, those assets are not included in NewCo.

NewCo Guidance

Linn also provided Q1 2018 guidance along with full year FY 2018 guidance that allows us to calculate the NewCo information for Q2 2018 to Q4 2018. Linn's guidance notes assume that all its asset sales (including the remaining Permian assets and the Drunkards Wash assets it is still marketing) close in Q1 2018, so the implied guidance for the last three quarters of the year should give a good picture of the costs and production for NewCo.

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This article was written by

Elephant Analytics profile picture
Aaron Chow, aka Elephant Analytics has 15+ years of analytical experience and is a top rated analyst on TipRanks. Aaron previously co-founded a mobile gaming company (Absolute Games) that was acquired by PENN Entertainment. He used his analytical and modeling skills to design the in-game economic models for two mobile apps with over 30 million in combined installs. He is the author of the investing group Distressed Value Investing, which focuses on both value opportunities and distressed plays, with a significant focus on the energy sector. Learn more>>

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in LNGG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (7)

08 Mar. 2018
I agree. How can management bankrupt a company ant tell the stockholders and creditors to go to hell and then start a new company with the same assets. The management team and board members should be in jail. Why a bankruptcy judge would allow the same people to stay in charge or start a new company is beyond me.
06 Mar. 2018
This company LIED all along until their bankruptcy, wanted us to convert line shares to LNCO and with so many lying stories! Don't trust them at all. Now, so much cash is being generated by selling their (our) assets, will my brokage-hold "escrow shares" have any value? I am not a disgruntled old company shareholder, who is just venting. It's the way LINN lied all along and published celebration pictures (smiling executives) after emerging from bankruptcy.
Converting to LNCO eliminated CoDi (taxes) so that would have been a good thing and what photo can you provide?
Buyer beware, management will screw you over.
06 Mar. 2018
Absolutely!! This Management is the Grand Corporate Scumbag Management who fleeced LINE/LNCO assets and created the so-called new entity, Linn Energy – LNGG. Shame, Shame!!
rlp2451 profile picture
Selling @ ~$39, is Linn worth more or less than the sum of it's parts?
Elephant Analytics profile picture
I'd say a bit more. I estimated around $43+ when I took a look at the three components.
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