LINN Energy (NASDAQOTH:LINEQ) has had an interesting year, to say the least. It's likely a year that many investors in the oil and natural gas producer would like to forget. That said, it was an important year because it showed the company can stand up to criticism and come out strong.
The turbulent year isn't over just yet; the last thing on LINN's agenda is to close its complex deal with affiliate LinnCo (UNKNOWN:LNCO.DL) for Berry Petroleum (UNKNOWN:UNKNOWN). The SEC gave it the green light to move ahead, and LINN boosted its offer to reflect Berry's improved performance, so the deal looks like a lock to close by early next year. Now the question that's likely on the minds of investors is what's next for LINN Energy.
On the company's last quarterly conference call, management hinted at three things on its agenda other than closing and integrating Berry Petroleum. Investors should familiarize themselves with what management sees ahead so we know what's next for the company.
Decide what to do with the Permian
One of the first things LINN needs to do is decide how it wants to handle its massive Permian Basin position, which will double once it closes the deal for Berry Petroleum. The company has the potential to tap some emerging formations like the Wolfcamp and Spraberry through the use of horizontal drilling. It sees the impressive results that other Permian Basin drillers like Pioneer Natural Resources (NYSE:PXD) are putting up and it's encouraged that the acreage it holds could yield similar results. The only thing left to determine is the best way to develop the acreage. On LINN's third-quarter conference call, CEO Mark Ellis noted that the company had three options: develop, joint venture, or trade.
Developing the play comes with the highest cost but also could yield the greatest reward. It's probably not the best option here given that LINN's business is built around stability. That's why it's much more likely we'll see LINN follow path similar to Pioneer Natural Resources and joint venture some of its acreage. Pioneer sought foreign capital, which is certainly a possibility for LINN. Overall, it's a nice problem to have as it suggests that there is future upside to LINN Energy just waiting to be unlocked.
Shift its capital focus
Once LINN decides how to develop its Permian Basin assets the company can decide how to earmark its 2014 capital budget. We'll likely see a shift that will see LINN invest more capital into the newly acquired, oil-rich Berry Petroleum assets.
Ellis noted that LINN would be "high grading the capital program." He added, "When we look at what Berry is going to bring to the table, we think there is a great opportunity for us to shift our capital, to improve overall returns, and performance going forward always focused on the bottom-line cash flow generation." It would appear that LINN's focus will be much more on oil in the year ahead now that it will soon have a plethora of oil-rich assets to develop.
Continue the hunt
While LINN has several intriguing opportunities to grow organically, acquisitions will still be what drives its growth in the future. In the near term we should expect to see the company pursue asset packages similar to its recent bolt-on acquisition in the Permian Basin. That said, LINN has now demonstrated that LinnCo is a viable acquisition vehicle that it can use to acquire C-corps in deals similar to the one for Berry Petroleum.
Ellis noted this on the conference call when he said that LINN has "proven that the LinnCo model works, it has been received well by industry, obviously doing 100% stock-per-stock transaction with Berry as a testament to that. And looking forward ... there is always additional C-corps on our list that we've continued to monitor and look for the opportunity to do."
He went on to say that there are a significant number of oil and gas properties coming to the market right now. He sees the opportunity for LINN to be involved in acquiring both asset packages and C-corps. However, another C-corp isn't likely until LINN has time to integrate its Berry acquisition, which isn't like to be until well after the new year. Bottom line here, though, is that LINN Energy is likely just warning up in making deals.
While LINN Energy's growth was slowed this year, its previous issues appear to be in the rearview mirror. That means that the company and its investors now are focused on what's next. Given its opportunity set, LINN Energy has a strong future and its distribution should continue to grow over the long term.