How the Linn Energy-ExxonMobil Deal Will Deliver a Huge Payout

Recently ExxonMobil and Linn Energy agreed on a land swap deal that is massively favorably to both companies and likely to make investors in both companies a lot of money over the long term. This article outlines this deal and why it makes both companies a buy.

Jun 18, 2014 at 9:59AM

In my last article on Linn Energy, I explained why I believe that Linn Co (NASDAQ:LNCO) and its MLP counterpart Linn Energy (NASDAQ:LINE) are excellent long-term, high-yield income investments. One of my main arguments supporting this stance was that Linn Energy was looking to trade its Midland Basin assets (which would have been a steep cost to drill) for assets that are already producing. This would increase production while lowering costs, greatly increase distributable cash flow (DCF), and secure Linn Energy's generous 10+% yield. On May 21 Linn Energy indeed announced such a deal with oil giant ExxonMobil (NYSE:XOM) and after careful study of specifics of the arrangement, I believe that the long-term investment thesis for all three is substantially stronger. 

Why this deal is so great for both companies
In exchange for 25,000 net acres of its Midland Basin properties from Linn Energy, which are producing 2,000 barrels/day, ExxonMobil is giving up 500,000 net acres of its Hugoton field in Kansas (gas reserves of 700 billion cubic feet of gas, currently producing 85 million cubic feet/day, MMcf/d, of natural gas).

For Linn Energy the deal is advantageous for several reasons:

  • Total company reserves up 9.4%
  • Total gas production up 18%
  • Decline rate of 6%
  • $30 million-$40 million in additional DCF/year
  • Distribution coverage ratio increases to 1.01-1.27

In addition to securing the current distribution and likely setting it up for strong growth ahead, the deal netted Linn Energy the East Goldsmith field (24 million barrels of reserves), an enhanced oil recovery (EOR) project that uses CO2 injection to increase well pressure and results in super low decline, high-margin oil production.

Linn Energy also receives the Jayhawk gas plant, a 450 MMcf/d processing facility located in the heart of the Hugoton basin and already processing Linn Energy's gas from the field. Jayhawk is 44% utilized and with its new production Linn Energy should be able to achieve much higher utilization rates, synergistic cost savings, and higher margins on this gas production. 

What is most exciting for Linn Energy investors is that it retains 30,000 net acres of the Midland Basin, producing 15,000 barrels/day.

Why are these Midland assets so valuable? Because they sit over the Wolfcamp and Spraberry shale formations, which Pioneer Natural Resources believes to be the largest recoverable oil deposits on earth, with an estimated 75 billion barrels of remaining oil in the ground, an estimate that is up 50% since 2013.

This is the real reason that ExxonMobil was willing to trade land at a 20:1 ratio. The Hugoton gas formation, though low decline, is 80% natural gas and 20% natural gas liquids. 

Due to America's recent shale gas explosion and current lack of export capabilities, natural gas prices fluctuate much more than oil prices as the below graphs shows (BNO is Brent Oil, considered world standard price). 

Henry Hub Natural Gas Spot Price Chart

Henry Hub Natural Gas Spot Price data by YCharts

Thus we see the benefit of this deal to both companies. Linn Energy, whose recent Berry Petroleum acquisition ran into massive cost overruns that left the company strapped for cash (and holding valuable but expensive-to-drill land), traded less than half of its assets to ExxonMobil, a company with a bank vault-safe balance sheet and plenty of cash necessary to exploit the new, oil-rich land. This greatly increases both ExxonMobil's reserves and future production potential. In the meantime Linn Energy gains a substantial increase in low-cost, low-decline gas production that will generate large and steady cash flows to not only secure its generous yield, but grow it in the future. 

Meanwhile, ExxonMobil shareholders should be excited at the prospect of management's stellar execution for its long-term plan to lower costs while increasing production. With this deal, plus Exxon's downspacing efforts in its 570,000 net acres of Bakken Shale and the company's declining exploration and production capital spending, ExxonMobil is setting itself up for continued double-digit dividend growth through 2016. 

With a track record of 31-years of consecutive dividend growth (7.54% CAGR dividend growth since 1970) and one of America's three remaining AAA credit ratings (better than the U.S. government...), long-term dividend growth investors should look at a potential for double-digit dividend growth through 2016 as further reason to buy ExxonMobil shares.

Foolish takeaway
The specifics of this deal are not only massively beneficial to both Linn Energy and ExxonMobil but illustrate why these are two of the premier names in the energy sector. Linn Energy's generous yield is now safe and set to grow, and the company has preserved its access to the world's largest oil reserve. Meanwhile ExxonMobil gains access to high-quality oil reserves that will allow it to grow production at sufficiently low cost to continue its superb dividend growth record.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Adam Galas has no position in any stocks mentioned. 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

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, 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