The Best Next Move for LINN Energy

LINN Energy should make an effort to buy a privately held C-Corp with LinnCo.

Apr 21, 2014 at 1:00PM

Linn Energy Llc Linnco Llc

Photo credit: LINN Energy.

LINN Energy (NASDAQ:LINE) and LinnCo (NASDAQ:LNCO) have a long road of recovery ahead to regain the market's favor. The company's balance sheet could use some work, and it needs to do a better job at consistently growing its production and distribution. But while most investors are focusing on company's exploration of strategic alternatives for its Midland Basin acreage, that might not be the best next move for LINN Energy.

The LinnCo retirement plan
Instead, I think the company should use LinnCo to buy a privately held C-Corp as its next move. After basically overpaying to close its acquisition of Berry Petroleum, LINN needs another equity-financed acquisition that offsets some of that dilution. The best way to get that done without paying a high market premium to entice shareholders to sign off on a deal is to use LinnCo as an exit strategy for the owners of a closely held energy company.

 Linn Energy Worker

Photo credit: LINN Energy

LINN should look for an ownership group that is seeking to exit day-to-day operations but still wants to profit from what it has built over a lifetime. A LinnCo-led deal would accomplish that, while also enabling the exiting group to avoid paying major taxes on a sale -- the deal could be structured like the tax-free share exchange that worked in the Berry acquisition. The deal would provide instant liquidity to the sellers, as well as an income stream for retirement. It's really an ideal exit.

LINN could negotiate a fair price for the assets, but might not need to pay too steep a price thanks to the added benefits of a LinnCo-led transaction.The right fit would involve a a company loaded with low-decline, cash-gushing assets that would be an immediately accretive fit within the LINN Energy portfolio. Furthermore, by doing an all-equity deal, LINN could improve both its leverage ratio and its distribution coverage ratio.

Buying time
Such a deal would buy the company time so that it can truly maximize the value of its Midland Basin acreage, which analysts say could be worth over $2 billion. As the following slide shows, the company has divided its acreage into eight distinct geographical packages.

Linn Energy Midland Map

Source: LINN Energy Investor Presentation (Link opens a PDF).

Having more time would allow LINN Energy to complete its planned 10-well horizontal program in the Midland Basin this year. While those well results could disappoint, there's just as much potential for an upside surprise, which could increase the value of LINN's acreage in the Midland Basin. LINN could spend the money to do the scientific work necessary to better prove its acreage, which would increase the value of what it is looking to sell. 

Investor takeaway
While most LINN Energy investors want the company to complete a deal for its Midland Basin acres right away, that might not be the best next move for the company. A better move would be to find a really great privately held oil company to acquire in a LinnCo-led retirement plan. LinnCo could offer the sellers greater value due to its tax advantages, which could enable LINN to get a good deal. Such a deal would improve LINN's credit and cash flow metrics so that it can take its time as it works to maximize the value of the Midland Basin assets. 

The IRS is daring you to make this energy investment
LINN energy is part of a small group of energy companies taking advantage of a small IRS "loophole". It's a loophole that's helping to line investor pockets. We want you to learn this strategy, and profit from companies like LINN. To learn more, just check out our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Matt DiLallo owns shares of Linn Co, LLC and Linn Energy, LLC. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers