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LINN Energy Reshuffles its Portfolio with Devon Energy Deal

Photo credit: Devon Energy. 

LINN Energy (NASDAQ: LINE  ) and LinnCo (NASDAQ: LNCO  ) announced today that LINN Energy has finalized a deal to acquire Devon Energy's (NYSE: DVN  ) noncore U.S. natural-gas assets. The $2.3 billion deal will be funded by the future sale of LINN Energy's position in the liquids-rich Granite Wash.

Drilling down into the deal
LINN Energy and LinnCo are acquiring assets in five operating regions. As the map in the following investor slide shows, most of these assets overlap with LINN Energy operating areas.

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

LINN Energy is acquiring more than 3,800 producing oil and gas wells from Devon Energy. Those wells today produce 275 MMcfe/d, of which about 80% is natural gas. The company also sees the potential for 1,000 future drilling locations on the acquired acreage. The current decline rate of these assets is about 14%. While that rate is a little on the high side, it's not nearly as high as the assets LINN Energy plans to sell to pay for the Devon Energy assets.

Wave goodbye to the Granite Wash
LINN Energy and LinnCo also announced plans to monetize the Granite Wash and Cleveland plays in the Texas Panhandle and Western Oklahoma. This really isn't a surprise as LINN and LinnCo had already hinted that their position in the Mid-Continent would likely be traded next. However, instead of an outright trade with another operator, LINN Energy is first buying assets, in this case from Devon Energy, and will use the proceeds from a future sale as part of a "like-kind exchange" to pay for the Devon Energy deal.

Photo credit: LINN Energy.

This position produces 230 MMcfe/d of liquids-rich natural gas, which LINN Energy has grown from 65 MMcfe/d by horizontally drilling 17 different intervals since 2010. LINN Energy had used this position as the growth driver of its portfolio, but it has found the decline rate of these assets were a struggle to overcome. The company constantly needed to invest capital into the play just to maintain the production rate, which has been cutting into the its distributable cash flow. It's a problem that investors in upsteam MLPs like LINN Energy are increasingly becoming aware of as the culprit in constrained distribution growth.

This is why we have seen LINN Energy make a strategic shift away from higher-decline horizontal properties. In fact, one of the strategic rationales behind the LinnCo-led acquisition of Berry Petroleum's oil-rich assets last year was to free up LINN Energy from relying on the Granite Wash to supply growth. The deal allowed the company to shift its capital spending away from the Granite Wash and into the newly acquired assets' lower-decline oil properties. That acquisition, along with the others LINN Energy has completed over the past few months, enables the company to cash in on the value it created from its position in the Granite Wash as it no long needs its high-decline headaches.

Investor takeaway
LINN Energy continues to take steps in the right direction to lower its decline rate and strengthen its distribution. Through its deal with Devon Energy, the company is acquiring lower-declining natural-gas properties to replace fairly high-decline liquids-rich assets in the Granite Wash. This move makes a lot of sense for the company as it repositions its portfolio to so that it can finally start to grow its distribution again.

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Read/Post Comments (4) | Recommend This Article (8)

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  • Report this Comment On June 30, 2014, at 5:37 PM, MonsterFluff wrote:

    great article

  • Report this Comment On June 30, 2014, at 6:02 PM, AdamGalas wrote:

    Exceptional coverage of one of the best upstream MLPs in America. Thanks Matt, you are a hero to your people, celebrated in both song and legend:)

  • Report this Comment On June 30, 2014, at 6:04 PM, zorro6204 wrote:

    Well, one presumes that's what they have in mind, a reverse deferred exchange. In that case they had to identify the properties they would be selling within 45 days. But it's weird, because a reverse exchange is twitchy even in a simple real estate deal, you have to transfer the "replacement property" (that is, the Devon assets) to a third party, who holds them pending the sale, then completes the exchange. All these properties in all those states . . . whew! Apparently they had to close with Devon now, because it's a heck of a lot easier the other way around. Assuming that's what they have in mind, who knows? Maybe there's not a lot of tax gain in the Granite Wash properties.

    It's fascinating that they said these were the properties to be sold, and not Wolfcamp II, so that's still to comp, presumably. And we can still hope for an oily bolt-on to kick current cash flow, because this deal is more like Wolfcamp I.

  • Report this Comment On June 30, 2014, at 8:11 PM, bunngolf wrote:

    Thanks for the info. The market seems to like the like-kind swap in the making.

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Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

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