What’s the Opportunity for LINN Energy Investors?

Photo credit: LINN Energy

LINN Energy  (NASDAQOTH: LINEQ  )  has been in the news a lot this year. Because of this, it can be easy to forget the basic bull case for the company. Let's take a step back from the noise an consider the opportunity before the company. 

LINN's greatest opportunity is the acquisition landscape. LINN is a company that knows this landscape well as the company has been involved in more than 50 deals since going public in 2006. LINN has spent almost $15 billion to build what is now one of the top independent exploration and production companies in the U.S. If LINN can close its complex deal with affiliate LinnCo (UNKNOWN: LNCO.DL  ) for Berry Petroleum (UNKNOWN: BRY.DL2  ) it will have amassed more than 19,000 gross producing wells which should keep producing for more than 17 years on average. However, as busy as LINN has been in the past the company looks like its just getting started, despite the speed bumps this year. 

America's energy boom breeds opportunity
LINN and its peers like BreitBurn Energy Partners (NASDAQOTH: BBEPQ  ) have an incredible opportunity to grow. This is due in part to the American energy boom as it has created the opportunity for these companies to serve as a conduit to fuel the boom. LINN and BreitBurn's role is to buy the mature oil and gas assets that shale focused drillers want to trade for cash to fuel growth.

As an example, earlier this year BreitBurn handed just under $900 million to Whiting Petroleum (NYSE: WLL  ) for its mature Postle assets. It was a great deal for both companies. BreitBurn Energy Partners received a high margin oil rich asset that will deliver great cash flow for years to come. Meanwhile, Whiting Petroleum was able to receive a large cash payment which it used to pay down some of its debt. In addition to that the company was able to spend $260 million to add to its growth focused Bakken acreage position. Not only that but Whiting added $300 million to its capital budget this year, which was enough to completely replace the production it lost to Breitburn. This deal was a big win for both companies.

How this boom effects LINN Energy
Investors should expect deals like this to continue. LINN Energy has even said on a number of occasions that it believes that there are between $20 billion and $30 billion of assets like these coming to the marketplace over the next 18 months. A bulk of these assets will come from cash strapped drillers who need a cash infusion to pay for expensive drilling programs. LINN's financial strength puts it in position to take advantage of a growing number of these opportunities.

Each newly acquired asset brings two things into the fold: producing wells that LINN can lock in years of cash flow and an inventory of drilling locations for future organic growth. Take the company's recent acquisition of 30 million barrels of oil equivalent reserves in the East Goldsmith Field in the Permian Basin. The asset adds solid oil-focused current production that is immediately accretive to its cash available for its distribution.

However, that's just the beginning. LINN has 300 identified future drilling locations to keep it busy for the next five years. Following that it has future waterflood potential which could unlock another 24 million barrels of oil equivalent. Finally, the company can then turn to carbon dioxide floods to unlock even more oil. That's a lot of potential upside for production growth from this one asset.

LINN's ability to grow through the drill-bit as well as by employing enhanced oil recovery techniques such as water and carbon dioxide floods adds another layer of strength to the company. Over the past few years the company's organic production growth has averaged more than 20% annually. With thousands of untapped drilling locations LINN has years of low-risk, liquids rich development opportunities to fuel its future growth. Among its most promising liquids rich opportunities are the Hogshooter formation of the Granite Wash in Oklahoma and the Wolfberry, Wolfcamp and Spraberry potential in the Permian Basin.

This growth, whether organic or acquired, fuels one simple purpose, LINN's ability to grow its distribution to investors. Over the past year the company has struggled to maintain a distribution coverage ratio above one times. However, if it's able to close its deal for Berry then LINN should produce a much more secure 1.16 times distribution coverage ratio. Beyond that, LINN is always in the market looking for the next cast away to acquire, which will further support its distribution. 

Investor takeaway
The bottom line on LINN is that the company has a tremendous opportunity to be a conduit in funding America's energy boom. It will gladly take the slow growth mature wells off the hands of a cash strapped driller and turn them into income producing machines. That's an opportunity that I think many investors overlook.

How you can profit from America's energy boom

Shale oil and gas wells are fueling record oil and natural gas production that is revolutionizing the United States' energy position. LINN Energy is one of many companies benefiting from this boom. The Motley Fool has found three more we really like and we are offering you a comprehensive look at them. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

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9/28/2016 3:59 PM
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