LINN Energy (Nasdaq: LINE ) has announced the acquisition of oil properties worth $434 million, signaling its entry into the highly productive Bakken shale oil play.
Anticipating the Bakken acquisition from Concho Resources (NYSE: CXO ) -- worth $196 million -- to be completed by the end of March 2011, the company expects to add roughly 1,350 barrels of oil equivalent per day (BOE/D) and proven reserves of approximately 8 MMBOE to its current net production.
Every oil production company seems to be acquiring oil sands in the Williston Basin of North Dakota. In addition, LINN is also acquiring properties in the Permian Basin, located in West Texas and New Mexico, for $238 million. The company says it will offer 16 million units to raise $596 million to fund these acquisitions.
The business strategy suits long-term investors. LINN made sure that its acquisitions are proven oil reserves. This keeps unnecessary risk-taking to a minimum. The chances of hitting dry wells are therefore low. The company hedges itself against fluctuating oil prices by using derivative contracts like swaps, options, and collars that are in place till 2015. This ensures lower volatility for the company's cash flow. I believe that was a smart move, keeping in mind today's rising oil prices and tomorrow's strong uncertainty.
In the long run
Overall, I think this might be a good stock to invest in over a long period of time. These acquisitions will increase net production by approximately 3,000 BOE/D. This is a huge gain, especially if high oil prices will continue for some time. Although the current return on equity is in the red (-4.36%) because of long-term debt, I see it clearing over time. Some stocks demand investors' patience.
Management seems to know where it's heading. To quote Warren Buffett: "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact." I believe LINN has such management.