1 Company I’d Love to See LinnCo LLC Buy

With its first deal now in the books, here’s a company I’d love to see LinnCo buy next.

Jun 30, 2014 at 10:15AM

It took it nearly a year and $600 million more than planned, but LinnCo (NASDAQ:LNCO) completed its first acquisition late last year. The deal validated LinnCo as a viable acquisition currency for LINN Energy (NASDAQ:LINE) and suggests that more transactions will follow. While I don't know if LinnCo is ready for its next deal just yet, I'd love to see it eventually buy Occidental Petroleum's (NYSE:OXY) soon to be spun off California Resources Corp.

California dreaming
One key asset LINN Energy picked up in LinnCo's first deal was an oil-rich position in California. As the following slide points out, this now-consolidated position consists of 2,100 wells throughout Southern California.

Linn Energy California

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

The company's assets in California largely consist of mature, low-declining oil wells. Eighty-five percent of these wells produce oil through thermal enhanced or steam processes, which deliver stable production with a very low rate of decline, and thus steady cash flow. Base production like this provides a foundation for LINN Energy's distribution and therefore LinnCo's dividend.

The company has made it known that one of its priorities is to add more low-decline properties to its portfolio. This will reduce the amount of money LINN must spend to maintain production, which will free up more cash flow to be distributed to investors. Adding more California oil assets would certainly support that goal.

While it's a big dream, Occidental Petroleum's California Resources Corp.'s asset base would fit well within LINN Energy's portfolio. This next slide provides a few details on what California Resources will look like as a pure play on oil and gas in the state.

California Resources Corporation

Source: Occidental Resources Investor Presentation (link opens a PDF).

Occidental Petroleum's spinoff is being positioned as a growth-oriented company that will be funded by self-sufficient cash flow. The company could choose to spend all $2.6 billion of its operating cash flow to grow production. However, the current plan sees it spending $2.1 billion this year as part of a plan that would yield 6%-9% production growth, with oil production growing at a 15% compound annual rate through 2016, as the following slide notes.

Occiental Production

Source: Occidental Petroleum.

That's strong production growth that will fuel equally strong growth in cash flow. The newly independent company intends to reinvest nearly all of that cash flow into further production growth, though it could just as easily be doled out to investors via dividends. That's exactly would what happen if LinnCo bought California Resources.

Pipe dream?
This would be a large acquisition for LinnCo. According to Occidental Petroleum, the PV-10 value of California Resources' reserves is $14 billion. More than likely it would cost a premium to that value to acquire the company. For perspective, as of the end of last year LINN Energy's PV-10 value was $11.9 billion, while its current enterprise value is about $19 billion. So this would be a transformational undertaking by the company.

That being said, LinnCo has the capability to lead such an acquisition, and California Resources fits the profile of the type of company LINN would be interested in buying. In fact, LinnCo would be the only way a deal like this could happen as it would require a substantial amount of equity to complete, which is where shares of LinnCo would come in handy. 

Investor takeaway
Occidental Petroleum's California spinoff looks to be an exceptional oil-focused growth company. It's an entity that I would love to see LINN Energy use LinnCo to acquire one day. While that's obviously a big dream, it's not impossible and it certainly would fit the profile of the type of needle-moving deal LINN Energy would love to use LinnCo to complete.

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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.

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