Oil and natural gas income giant LINN Energy (NASDAQOTH:LINEQ) is out with its 2013 capital spending plan. With more than 10,000 prospective drilling locations across its more than half dozen core operating areas, LINN has plenty of options with which to invest its capital. Let's drill down and examine where LINN will be looking to boost its organic production growth in the year ahead.
A quick look back
Last year, LINN drilled 440 gross wells, with only four of them coming up dry. Those wells cost the company around $1 billion and boosted organic production by 15%. They also helped the company to produce a reserve replacement ratio of about 150% if you exclude price-based revisions and undeveloped reserves more than five years old. Those were great results for the company, which is expecting even more in the year ahead.
Drilling down into the 2013 capital budget
LINN plans to spend $1.1 billion on developing its oil and liquids-rich acreage. That money will allow LINN to drill or participate in about 500 wells over the next year. If everything goes according to plan, those wells should help LINN deliver another year of double-digit organic production growth.
The money will be split across its portfolio:
The Granite Wash is far and away the most important growth asset for LINN at the moment. The company is planning to spend more than a third of its capital to drill 80 wells into the play. The liquids-rich Hogshooter formation will continue to be the key target area for the company, as it generated excellent returns in 2012. Aside from that, the Permian Basin will see its share of capital in the coming year. While it is getting just 18% of the capital, LINN will use it to drill nearly 100 wells. Finally, the most interesting aspect of the drilling budget, in my opinion, is that LINN will be spending a great deal of capital to further develop its Jonah Field, which it acquired from BP (NYSE:BP) last year, while spending minimally on the Hugoton assets, which it also bought from BP last year.
Jonah is more of a gas asset, as 73% of production is natural gas. It also has a higher decline rate of 14%. Hugoton's production, on the other hand, has a lower decline at 7%, while it's just 63% natural gas. The likely reason for the focus on Jonah is that the company will be participating with Encana (NYSE:ECA) on approximately 58 wells while only drilling 18 wells that LINN will operate. That makes more sense, especially when you consider that Encana is one of the few companies that's still drilling for natural gas these days.
Harvesting future fruit
While the deal won't close until the second half of the year, LINN's purchase of Berry Petroleum (UNKNOWN:UNKNOWN) in conjunction with its affiliate LinnCo (UNKNOWN:LNCO.DL) will add even more organic production growth. Before the deal was announced, Berry was planning to spend between $500 million and $600 million of internally generated cash flow to grow its production. Half of those dollars would be spent on its California assets, with the rest of the capital split evenly between the Permian Basin and the Uinta.
The plan was to grow oil production by 10% to 15% in the year ahead, though overall production would grow just 5% to 10%. That's because the capital spent to grow its oil production would not fully offset the declines of its natural gas business and mature oil assets. It is possible that these plans will change in the year ahead, now that the company will be acquired by LINN.
My Foolish take
While LINN might be known for its model of buying mature production and squeezing every last drop out of its acquired wells, its organic growth opportunities continue to sweeten that deal. The company is spending a bulk of its capital to drill low-risk, liquids-rich wells, which should generate excellent returns for investors. While acquisitions will always be the key driver for LINN, it's these organic opportunities that will turn a solid acquisition into a fantastic deal for investors.