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LINN Energy Makes a Return

By Matthew DiLallo - Apr 4, 2013 at 12:00PM

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After a string of acquisitions over the past few years, LINN Energy is now flipping an asset it bought just two years ago.

After spending billions to build up its oil and gas reserves, LINN Energy (LINEQ) and its partners are now on the selling end of a transaction. LINN, along with Panther Energy and Red Willow Mid-Continent, announced the sale of properties in the Anadarko Basin to Midstates Petroleum (NYSE: MPO) for $620 million in cash. LINN originally acquired its 40% stake in the properties for $220 million back in 2011.

The producing properties encompass 140,000 net acres and proved reserves of 34.4 million barrels of oil equivalent that are 45% oil and 21% natural gas liquids. It adds 8,000 barrels of oil equivalent production per day to Midstate's production base. Further, it adds over 700 low-risk, repeatable horizontal drilling opportunities. It's a good deal for Midstates because it's accretive to cash flow, reserves, and production.  

When LINN acquired its share in the properties almost two years ago CEO Mark Ellis noted: "The acquisition of these properties enhances LINN's overall position in the Texas Panhandle area, and marks our entry into the liquids-rich window of the horizontal Cleveland play in the Anadarko Basin." He further noted: "Partnering with Panther will align us with an experienced and efficient operator that has been active and successful in this area for several years. This acquisition provides high rate-of-return projects and we expect it to be immediately accretive to our unitholders." However, the opportunity to cash out now appears to be the more attractive option.

The company did note when it originally acquired its stake that what was attractive about the asset was its high rate of returns and quick payback. After less than two years of ownership, the asset is certainly living up to that quick payback. However, given how active LINN has been at purchasing assets, I'm surprised that it didn't bid for control of the asset.

Instead, LINN is cashing in and will likely deploy the cash elsewhere. LINN, and affiliate LinnCo (NASDAQ: LNCO) are in the midst of acquiring Berry Petroleum (NYSE: BRY) so the company does have a lot on its plate as its works toward closing that massive deal. What this does demonstrate is that LINN really is a disciplined acquirer of assets, and won't make a deal just to grow. Instead, it focuses on those transactions that can move the needle and add to its distributable cash flow.

As a LINN Energy or LinnCo investor, a transaction like this should give you confidence that LINN is operating the company with returns in mind. This is not a company seeking growth at all costs; it's focused on steadily growing its distribution to unitholders. I continue to believe in the LINN story and think it's one worth believing in for a long, long time.

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