3 Bold Predictions of What LINN Energy Will Do in 2014

Photo credit: LINN Energy

I think many LINN Energy (NASDAQ: LINE  ) and LinnCo (NASDAQ: LNCO  ) investors would rather forget 2013. The company battled everything from critics to the weather in a year that saw it at the center of attention for all the wrong reasons.

That said, the company will emerge out of 2013 much stronger. LINN's deal for Berry Petroleum (UNKNOWN: BRY.DL  ) is now well on its way to crossing the finish line. Apparently, so are the worries surrounding its accounting and hedging practices. That leaves the company free to focus on growing its business in 2014 instead of defending it. In looking ahead to next year, I'm going to make three bold predictions of things that I expect LINN to accomplish before the end of 2014.

Realizing value
LINN Energy is sitting on a lot of potential value in its acreage in the Permian Basin. Not only that, but it has acreage that's prospective for the Mississippian Lime, as well as other formations in the Mid-Continent. I expect LINN to be pretty active in unlocking the value of its unconventional opportunities in 2014

Horizontal drilling into the Wolfcamp and Spraberry intervals of the Permian Basin could unlock a lot of value for LINN investors. However, if LINN were to internally develop these capabilities, it would take a lot of cash. That's something LINN really doesn't have, because it sends most of its profits back to investors. That's why I think we'll see LINN do something unique to unlock the value of its acreage in the Permian Basin.

I see one of two scenarios. First, it could enter into a joint venture with either another local operator, or even a foreign oil company. That would give LINN cash to pursue more deals, as well as develop its other assets. The other scenario is that LINN could trade some of its acreage for low decline oil and gas properties. My prediction is that LINN does a little bit of both, as it trades some of the upside of its Permian assets for a mixture of cash and low-decline conventional oil and gas assets as it partners with another driller to unlock the oil in these formations.

Continued consolidation
Now that LINN has proven that LinnCo works as an acquisition tool, we can expect the company to use LinnCo again to merge with another C-Corp. While there are a variety oil and gas companies on the public market that it could buy, I see LINN's next LinnCo lead deal taking a different route.

I think that LinnCo would be a good exit vehicle for a privately held oil and gas company. Whether the ownership is looking to retire, or a private equity firm wants to cash in on some value, LinnCo could be just the tool to make that happen. That's why I'm going to go out on a limb and predict that LINN's next billion-dollar deal will be with a private seller, and that it will use LinnCo shares to fund at least part of the purchase.

Expanding its presence
LINN has a pretty diversified asset base. However, there are some areas where it could go to expand its presence. My bold prediction is that we'll see the company make a big move into the Gulf Coast, which is filled with mature conventional oil and gas assets.

A number of companies could be willing to part with Gulf Coast assets. For example, Swift Energy (NYSE: SFY  ) recently put its 86,000 acre position in three producing fields in Louisiana up for sale. The assets have proven reserves of 20.4 million barrel oil equivalent, of which 62% is oil and natural gas liquids. Further, Swift sees resource potential of up to 180 million barrels of oil equivalent. It's fields like this, though not necessarily this asset package, that would be a good fit for LINN.

The reason that Swift is looking to divest that package is that it needs the funds for its Eagle Ford drilling program. There are a lot of companies that hold conventional oil and gas properties that are looking to divest them in order to pay for growth elsewhere. That puts LINN in a prime spot to move into new basins that these owners no longer want.

Investor takeaway
LINN might not do any of the exact moves that I am predicting, but one thing is sure: LINN will be an active acquirer next year. Whether that's the old standard of buying asset packages that compliment its current position, or venturing to new areas, LINN does deals to grow. We can expect nothing less than more of the same from the company in the year ahead.

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  • Report this Comment On December 16, 2013, at 7:59 PM, AsaPerley wrote:

    Interesting post. Seems likely that Linn will be aggressively acquiring as you suggest, but whom? Private entities are good guess, as you mention. I also think so. Whole E&P companies, not just projects. Keep up good work.

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