LINN Energy (LINE +0.00%) and LinnCo (NASDAQ: LNCO) are currently evaluating a number of strategic alternatives for its 55,000 acres in the Midland Basin. The company previously had been open to a number of options ranging from an outright sale of the acres to finding a joint venture partner, as well as even holding on to the asset and developing it internally. However, the company looks like it's showing its hand as management admitted on its first-quarter conference call that it's hoping to make a trade.
Reviewing the strategic review
As the following slide notes, LINN Energy is looking to maximize the value of its position in the Midland Basin by considering all of its options.
Source: LINN Energy Investor Presentation (Link opens a PDF)
As that slide noted, the company broke up its 55,000 net acres into eight separate areas to market to exploration-focused drillers. This really gave LINN a lot of options to consider, as it could sell or trade each acreage package separately. Further, the company could decide to hold on to one or more areas and develop them, or even secure a joint-venture partner to help fund the cost of drilling.
However, LINN Energy's goal this year has been to increase the cash it has available for distribution, while also lowering the company's capital intensity and overall decline rate. Because of that, the likelihood of LINN developing its position internally, other than drilling the 10 horizontal wells already part of its 2014 capital budget, doesn't really fit the company's stated goals. That was pretty much reiterated on the company's first-quarter conference call, where LINN's management team clearly favored one option above all others.
Let's make a deal
On the call CEO Mark Ellis noted that the company's clear preference is to trade its acreage in the Midland Basin for low-decline assets elsewhere. In fact, he ranked that option above a cash sale, which is still a possibility, as the company does have a number of interested parties wanting to pay cash for the assets. Still, it is interesting that the trade is the top priority because a cash sale could be used to fund a "like-kind-exchange," where LINN could use the cash from the sale to fund the purchase of another asset. The fact that LINN favors a trade might suggest that it doesn't see any compelling asset packages on the market right now, or soon to arrive to the market, that it wants to purchase. Given that it would have 180 days to complete the exchange, it's interesting that the company would rather not go that route.
Photo credit: LINN Energy
Ellis also noted that the company might not drill all 10 horizontal wells in the Midland Basin as part of the company's 2014 capital plan. He suggested that the consummation of a trade could allow the company to adjust its drilling program and focus its capital elsewhere. Clearly, LINN Energy would rather not drill high-declining horizontal shale wells if at all possible.
This is a slightly different path from the one LINN had been pursuing, which was to supplement its growth-by-acquisition strategy with organic growth capital. Because of this, LINN is likely to look to pursue similar strategic alternatives with some of its acreage in the Anadarko Basin of Oklahoma, which has been receiving most of its organic growth capital before LinnCo acquired Berry Petroleum.
Emerging plays, like the Stack and Scoop, are drawing industry attention. But, instead of joining peers like Eagle Rock Energy Partners (NASDAQ: EROC) to drill these plays on its acreage, LINN Energy appears poised to follow up its Midland Basin trades with similar acreage trades in Oklahoma. It's a move that could really pay off over time, as LINN Energy would reduce the exploration risk that affected it early last year by acquiring mature assets, which come with much less risk. It's a move that Eagle Rock Energy Partners might want to consider given the troubles it has had during the past few years.
Investor takeaway
It's looking more likely that LINN Energy will end up trading away its acreage in the Midland Basin for assets that better fit the company's MLP model. The company is clearly moving away from drilling high-declining horizontal wells, and instead looking to stick to the low-decline mature-producing wells that will make it easier for the company to maintain its distribution. If the company can find a good trading partner or two, then it could really put its past problems in the rearview mirror, and get back to growing its distribution.
