LINN Energy LLC (NASDAQOTH:LINEQ) is going back to the well a second time. But, this time the results of a trade with ExxonMobil Corporation (NYSE:XOM) brought back what investors wanted: oil. Let's take a closer look at the trade and what it means to LINN Energy investors.
Details on the deal
LINN Energy's latest Midland Basin deal sees the company trade away another 17,000 net acres in the Midland Basin as well as 800 net acres in New Mexico's Delaware Basin in exchange for ExxonMobil's operating interests in the Belridge oil field in California. Along with that acreage LINN Energy is handing over 4.7 MBoe/d of current production that was declining by about 35% per year for 3.4 MBoe/d of production in California that's declining by just 10% per year. Even better, the production LINN Energy is picking up is 100% oil and even though it is losing a little production in the exchange, its cash flow will actually improve. In fact, LINN Energy expects the deal to add $20-$30 million to its cash flow. That extra cash flow will go a long way to supporting the company's dividend.
On top of the oil-rich production, LINN Energy is picking up a lot of future upside as noted on the following slide.
As that slide points out there are over 300 future drilling locations that could unlock a total of 67 million barrels of oil equivalent in the future. This upside helps to offset some of the upside LINN Energy is potentially giving up in the Midland Basin.
The other important thing to note is that the Belridge field is located in close proximity to the company's other oil operations in California. This could open up some opportunities for operational efficiency that could lower LINN Energy's costs in the state to improve its margins and cash flow.
What's next for LINN Energy?
With two deals agreed upon LINN Energy has made a lot of progress in maximizing the value of the Midland Basin assets. As the following slide points out, LINN Energy has replaced a lot of rapidly declining production with very low decline production.
Even with all the progress the company has made it still has plenty of acreage in the Midland Basin left to trade as the slide above illustrates. In fact, while LINN Energy only has 13,000 acres left, those acres hold twice the proved reserves and production that LINN Energy just sent to Exxon. So, the company has a lot of potential upside left from future trades.
The other thing worth noting is that in addition to replacing high declining production, LINN Energy has also added a lot of proved oil and gas reserves. Those proved reserves are important because there is a lot more certainty that this oil and gas can be produced:
The certainty of the reserves LINN Energy is picking up is more valuable to the company because these additional reserves are seen as being credit positive by banks. So, if the company needed to take on some more debt in the future to buy assets it has the reserves to back up that credit.
LINN Energy's latest Midland Basin trade looks like a very solid deal for the company. It's picking up low decline oil assets in California in exchange for really high decline oil and gas assets in the Midland Basin. While there might be more upside in what LINN Energy is giving up, the company simply was having such a hard time maintaining the production of the wells it was drilling that it makes sense to make the switch.
Matt DiLallo owns shares of Linn Energy, LLC. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.