Friday June 29, 2012
by Elliott Gue, editor The Energy Strategist
Growth Portfolio holding Linn Energy LLC (LINE) is a limited liability company (LLC), an organizational structure similar to a master limited partnership (MLP).
Linn Energy’s business model is simple: The firm acquires mature oil and gas-producing assets and hedges the majority of its production for five years into the future to lock in gains.
Linn Energy went public in 2006 and was among the first upstream partnerships to list on the major US exchanges since the 1980s. As a first mover, Linn is now the largest of the upstream partnerships and has superior access to capital, despite its B credit rating.
This low cost of capital has allowed Linn Energy to make large acquisitions in recent years, including acreage in the Bakken Shale, a region where no other upstream MLP operates.
The other major distinction is that Linn Energy hedges its production aggressively, locking in prices on the majority of its output. This strategy limits Linn Energy’s to the depressed price of natural gas in North America and fluctuations in oil prices
Always opportunistic Linn Energy in February announced an agreement to acquire conventional gas fields in Kansas’ Hugoton Basin from BP for $1.2 billion. NGLs account for about 37 percent of output from these properties, with natural gas making up the remaining 63 percent.
Although natural gas prices remain depressed in North America, Linn Energy purchased these properties at a price that makes the transaction immediately accretive to distributable cash flow.
Moreover, the limited liability company disclosed that it has hedged 100 percent of the acreage’s expected natural gas production and 68 percent of its NGL output over the next five years. This move limits the firm’s exposure to unfavorable swings in commodity prices
The firm also closed a $400 million joint venture with Anadarko Petroleum in early April and the $175 million acquisition of properties in East Texas shortly thereafter.
This is the fastest pace of acquisitions for Linn Energy in some time, and all these deals should be immediately accretive to cash flows. The company has very little commodity or economic risk, thanks to its aggressive hedge book.
We expect additional bolt-on acquisitions in the firm’s operating regions to fuel distribution growth in coming years. Yielding more than 8 percent at current prices, units of Linn Energy LLC rate a buy under 40.
Learn more about this financial newsletter at Elliott Gue's The Energy Strategist.