Source LINN Energy LLC.
LINN Energy LLC (LINEQ) made several big announcements earlier this month. These moves were made to better position the company for the future given the current uncertainty in the energy industry. While the current market is challenging, the company sees new opportunities emerging from these challenges as it could make it a great time to buy oil and gas assets.
Beginning the search for bargains
On the company's conference call to discuss its recent announcements, LINN's CEO Mark Ellis noted that, "part of our strategic vision in a challenging commodity price environment is to position ourselves to be a buyer in a very opportune point in the commodities cycle." He later went on to say that the management team believes that, "these challenging times will also provide opportunities for the Company, as we continue to evaluate both asset and C-corp acquisitions."
Throughout that call management actually sounded really excited about the opportunities that should present themselves over the next few months. In order to take advantage of these opportunities the company is pursuing the creation of a unique acquisition financing structure, which would be similar to its new DrillCo venture with GSO Capital.
Source LINN Energy LLC.
Lining up funding
CFO Kolja Rockov spent some time on the call detailing the direction the company is heading by saying,
[...The...] objective is to help us regain a useful cost of equity and debt capital, in order to take advantage of what we believe will be an excellent buyers market in 2015. However, taking into consideration the potential for capital markets to be very volatile and unpredictable, we have made great strides in an effort to tap large pools of private capital to diversify us away from reliance on traditional equity and debt capital markets.[...This...] initiative would be a partnership similar to DrillCo but focused on acquisition funding. While we are still in the early phases of forming this acquisition partnership, we are encouraged by the concept and resulting potential benefits to Linn.
Later on he provided some more details on this concept by saying,
[...] The concept is similar in the way that we want to make acquisitions jointly with a financial partner. And if we're able to achieve certain return hurdles, we would be able to buy that asset in, back into Linn at the right point of the decline cycle and hopefully at a better price, if we perform in terms of running that asset.
He then noted that this would be a long-term strategy that would allow the company to initially buy assets that are earlier in their lifecycle (such as a shale play), but those assets would be owned at the financial partner and not in the MLP. However, Rockov also noted several other benefits to such a structure by saying,
[...] it solves for other issues, which is one of the problems we've been dealing with when things were great is the acquisition sizes were getting bigger and bigger. And those are tough to chop up into manageable pieces to finance in the capital markets. And a tool like this, absent any kind of drop in commodity prices allows us to mitigate that effect and bring assets into Linn in reasonable pieces and on a more ratable basis, so we can give the investor a more predictable acquisition growth over time. And really, it reduces other things like integration risk, because if we do this properly, we're running that asset anyway. And all we're changing is the ownership deck and paying for that. So basically, it's an asset we own a piece of and operate anyway. And we're bringing smaller pieces of it in over time, which gives the investor more visibility to acquisition growth [as LINN Energy would then be in the position to say] 'here is five or six assets we own jointly with private capital, and here is how we see bringing those assets into the Company over time'.
Basically the acquisition funding vehicle would provide the company with built in acquisition growth in the form of drop-down acquisition opportunities from a financial sponsor. It's a vehicle that the company sees being a key to opening new doors as well as smoothing out growth and reducing some of its risk.
Investor takeaway
LINN Energy sees the current market turmoil as a time to go on the offensive and go shopping. It's trying to line everything up so it can take full advantage of the buying opportunities that are sure to present themselves over the next year. As Rockov put it, "obviously, what we're trying to put in place is not something to allow us to do small things."
