Photo credit: LINN Energy
Though it has its doubters, LINN Energy (LINE +0.00%) has proved one thing; it's still an acquisition machine. However, just proving that it's one step closer to closing its transformational acquisition with affiliate LinnCo (NASDAQ: LNCO) to acquire Berry Petroleum (NYSE: BRY) simply wasn't enough. Instead, LINN opened up its wallet and came back with $525 million in oily assets from the Permian Basin. Let's take a closer look at its latest buy.
Details on the deal
LINN is buying 124 producing wells on more than 6,250 net acres in the Permian Basin. Those wells produce about 4,800 barrels of oil equivalent per day, with about 63% of that production being oil. LINN is picking up proved reserves of 30 million barrels of oil, which should produce for the next 17 years and are 70% oil. However, this deal is more than just the present production.
There are two major future drivers to this deal which will fuel future cash flows. First, there are about 300 future low-risk drilling locations. In addition to that, LINN believes there is a lot of potential in using an enhanced oil recovery technique using waterfloods. In fact, it sees the reserve potential increasing by 24 million barrels of oil equivalent thanks to future waterflood projects. So, while LINN notes that this deal is expected to immediately be accretive to cash available for distribution, this deal was also made with an eye toward the future.
Cash or credit?
LINN is taking out a $500 million senior secured term loan to pay for the deal. While LINN is putting a portion of the deal on its revolving credit facility, the fact that it's going to its banks to take out a term loan tells me something. Those banks don't see the same issues with LINN's cash flow or hedging practices that short-sellers do. I'd view that as a nice show of confidence from LINN's banking partners.
Popularity of the Permian
LINN is paying up to add to its position in the Permian. It's a very popular play these days, which is another reason why the Berry Petroleum transaction is so important. This legacy play is the oil field that keeps on giving, which is why LINN is not the only upstream MLP that has had its eyes on the Permian.
Vanguard Natural Resources (NASDAQ: VNR), for example, spent $275 million earlier this year to pick up 7,000 net acres in the play from Range Resources (RRC 0.75%). Those assets were a bit less oily at 59% oil and NGLs. That deal also came with some upside as Vanguard saw about four years of development opportunities. Meanwhile, Range was able to get a very fair price for a non-core asset. The cash it received was reinvested to drill its higher growth acreage in areas like the Marcellus. Vanguard is building up its position in the Permian for the same reason as LINN. These are oilier assets, with low decline rates, making them perfect fits for an MLP.
That is why LINN really has bulked up in the Permian over the past few years. Once it combines with Berry it will have over 67,000 net acres in the play with more than 1,000 proved future drilling locations. That's a lot of low-risk, oil-rich growth that should continue to support its distribution for years to come.
Final Foolish thoughts
The bottom line here is that LINN is back in the acquisition market as it would appear that it's starting to put its rough start to the year in the rearview mirror. What that means for investors is that the distribution we've come to love isn't going to stop anytime soon. In fact, with more deals like this, LINN should be able to keep raising the payout as it continues to put its cash flows on even more solid ground.
