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Is LINN Energy Not the Acquisition Specialist We Thought It Was?

It seems as though LINN Energy (NASDAQ: LINE  ) makes some sort of deal to acquire new oil and gas properties on a monthly basis. The company does so much wheeling and dealing that many consider it a bit of an acquisition specialist. But Vanguard Natural Resources (NASDAQ: VNR  ) just did a deal in a region where LINN had made purchases, and the numbers between the two energy companies are quite startling. Let's take a look at what Vanguard did to make LINN Energy look like its not the acquisition superstar we once thought.

Source: Linn Energy Media Relations

Staking two MLPs up against one another
LINN and Vanguard are both exploration and production companies that are structured as master limited partnerships. To make this unique corporate structure work in the E&P space, they both need to be exceptional at three things: acquiring mature oil and gas properties on the cheap that will have long production lives; squeezing every last molecule of oil and gas out of these assets in a cost-effective manner; and ensuring stable cash flow by aggressively hedging the price of the oil and gas they produce.

LINN and Vanguard have proven that they can be extremely efficient operators and put very effective hedging strategies in place to ensure predictable cash flow. We as investors are able to measure these two items. LINN has shown repeatedly that it is an extremely efficient operator. In 2013 alone it was able to bring down drilling and completion costs by more than 11% in both the Granite Wash and the Permian Basin, two of the company's largest production regions. Vanguard, on the other hand, does very little actual drilling, which keeps its operational costs even lower. In 2012, Vanguard's capital expenditures to adjusted EBITDA was only 22% compared to the MLP average of 66%. 

The major differences between these two companies are their size and their appetite for acquisitions. Since 2010, LINN has spent $11.3 billion on new assets and even spun off its operational arm LinnCo (NASDAQ: LNCO  ) to allow for larger acquisitions like the recent merger with Berry Petroleum. Vanguard, on the other hand, is much more conservative with its acquisitions. Over that same time frame, Vanguard has only spent $2.6 billion on acquisitions. 

One element that is extremely difficult to compare between MLPs is how effective management is at negotiating a price for acquisitions, because normally they are in different regions or they are for different amounts of acreage or the amount of developed and producing wells don't match up well. Fortunately, we now have a way to do a pretty close apples to apples comparison.

Last week, Vanguard announced it was purchasing 14,000 net acres in the Pinedale natural gas field from Anadarko Petroleum (NYSE: APC  ) . These assets have reserves of 847 billion cubic feet equivalent of natural gas net to Vanguard and produce about 113 million cubic feet equivalent per day; about 80% of it is dry natural gas. LINN made a similar purchase in 2012, acquiring a working interest in several wells in the Pinedale field from BP (NYSE: BP  ) that amounted to about 730 billion cubic feet equivalent net to LINN and 80 million cubic feet equivalent per day of prodiuction.

Both deals had relatively similar levels of existing production, production mix, and were very close in terms of location. The difference is that Vanguard paid $581 million for its recent acquisition, while Linn Energy paid $1 billion.

There are some differences in these two purchases worth noting. A large portion of the assets Vanguard purchased are unproven reserves, and it will only have a 10% nonoperating interest in these wells. LINN, however, has a 55% operator stake in its Pinedale acreage. When you tally these things up, though, it is awfully hard to justify a difference in price of over $400 million.

What a Fool believes
The sticker prices for the LINN and Vanguard purchases in the Pinedale mean one of two things: Either LINN Energy didn't get as good of a deal on its Pinedale acreage as previously thought, or Vanguard got an absolute steal this time around.

If you look over the LINN deal, the price it paid doesn't seem completely unreasonable for what it got. It received wells that have one-year decline rates of only 15%, a great number for a tight gas formation. The price averages out to $1.36 per thousand cubic feet of proven reserves, but at the time LINN estimated that it could boost proven reserves by 64% to 1.2 trillion cubic feet equivalent, which would mean the company would pay $0.83 per thousand cubic feet of extractable resources. Just to give comparison, the top driller in the region, Ultra Petroleum (NYSE: UPL  ) , has lease operating expenses of $0.37 per thousand cubic feet of reserves. Vanguard, on the other hand, was able to pick up its recent acreage at a cost of $0.63 per thousand cubic feet of reserves.

Probably the best summary of these acquisitions is that Vanguard got the better deal, but LINN's wasn't a bad buy if it can truly get the amount of gas it estimates. If that fails to happen, though, then it is likely the company paid a bit more than it should have for these assets, especially at a time when natural gas prices were extremely depressed. 

Overall, these deals don't really change the investment thesis for either LINN or Vanguard. MLPs have to buy mature assets to grow, and not every deal they make will be amazing. Still, the idea that LINN paid a $0.73 premium on proved reserves in comparison to Vanguard does make us reconsider the company's stellar acquisition reputation.

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Read/Post Comments (7) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On January 09, 2014, at 4:17 PM, kneisley10 wrote:

    I disagree. You're saying that VNR just paid $581 million for 10% interest, but Linn paid less than twice that for 5.5 times more interest, yet VNR got the better deal? I just don't see it...

  • Report this Comment On January 09, 2014, at 4:22 PM, SkepikI wrote:

    Fast and Loose in the Oil/Gas Field. Not a new story...not a new ending I expect....

  • Report this Comment On January 09, 2014, at 11:02 PM, Lesismore46 wrote:

    You may be missing the point, unless you look at who was selling the properties. BP is a shrewd negotiator, recognized the value of the properties that it was selling to Linn, and got top dollar. Instead Anadarko is an underperformer, new to tough negotiations, and needed cash quick, and Vanguard seized the opportunity.

    A court ruling recently stating that Anadarko Petroleum may have to pay up to $14.2 billion in damages related to the Tronox spinoff. So the sellers are the biggest difference in the acquisitions.

  • Report this Comment On January 10, 2014, at 1:39 AM, zorro6204 wrote:

    Jeez Tyler, this is pretty much the same article you wrote the other day, getting paid by the word?

    Anyway, what point is there comparing the amount of acquisitions each company has made? VNR is not comparable to LINE, indeed, LINE is nearly as large as every other upstream MLP combined. Of course it's made more acquisitions! What would you expect? If you go back and compare their acquisitions on relative company size, I'm not sure LINE has been the aggressor, VNR has made a couple of very large acquisitions on its own scale.

    Then you pull back a bit from the last article, and call these properties "relatively similar". Maybe:

    LINE -

    Purchase price $1.025B

    Production 145 MMcfe/d (not 80, where did that come from?)

    Proved reserves 730 Bcfe, 73% dry gas

    Potential reserves 1.2 Tcfe

    Position - controlling, 55%

    VNR -

    Purchase price $581M

    Production 113.4 MMcfe/d

    Proved reserves 847 Bcfe , 80% dry gas

    Potential reserves not stated

    Position - minority, 10%

    VNR paid 57.6% of LINE's cost and got 78.2% of the production, but it was nearly 10% gassier, and therefore less valuable. Moreover, we don't know the untapped potential of VNR's property.

  • Report this Comment On January 10, 2014, at 9:48 AM, mintwood wrote:

    note that Linn is an LLC, not an MLP.

  • Report this Comment On January 10, 2014, at 1:20 PM, zorro6204 wrote:

    An LLC is a state law entity, there is no such thing in the IRC. An entity organized as an LLC has a choice of how it chooses to be taxed, and LINE chose (obviously) to be a federal income tax law partnership. Therefore LINE is an "MLP" for tax purposes and in the common jargon. The legal form is really meaningless.

  • Report this Comment On January 10, 2014, at 1:25 PM, zorro6204 wrote:

    Oh, and by the way, the income tax term for these things is "PTP", publicly traded partnership. MLP is just a term used in business, so there is no real technical definition of what it is. Generally speaking, an MLP is a PTP involved in the energy business. So, again, LINE is an MLP.

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Tyler Crowe

Energy and materials columnist for

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