LINN Exits Permian with $281M Deal, Completes Strategic Funding Initiatives

Linn Energy and LinnCo has closed on three of its four “near term catalysts,” adding cash to its coffers to fund acquisitions, boost revenue and lower the partnership’s leverage, analysts said.

Linn sold its remaining 6,400 acres of its assets in the Wolfcamp acreage of the Midland portion of the Permian Basin for what is estimated to be $28,000 per acre, which was more lucrative than analysts at Raymond James & Co. had predicted, between $20,000 and $25,000 per acre based on recent comparisons. LINN didn’t release the name of the buyer, and the deal is expected to close during the third quarter

The partnerships also finalized two alliances, “AcquistionCo” with Quantum Energy Partners and “DrillCo” with GSO Capital Partners LP, the credit platform of The Blackstone Group.

LINN said in a statement that GSO and its affiliates have agreed to commit up to $500 million with five-year availability to fund drilling locations provided by LINN. GSO will fund 100 percent of the costs associated with the new wells, and an 85 percent working interest until it achieves a 15 percent internal rate of return on the wells’ annual statements. LINN is expected to receive a 15 percent carried working interest during the period. Once the deal reaches the stipulated rate of return, GSO’s interest will be reduced to 5 percent and LINN’s will increase to 95 percent.

LINN CEO Mark Ellis said in a statement the deal with GSO will create a new source of capital that “allow us to develop assets without increasing capital intensity, enhance our long-term ability to live within cash flow and provide cashless dropdowns of stable production over time.”

Quantum Energy Partners agreed to front up to $1 billion in equity capital to fund acquisitions and develop oil and gas assets. LINN will be able to participate in all acquisitions with direct working interests between 15 percent and 50 percent. “AcqCo” assets will be managed by LINN in exchange for reimbursement of general and administrative expenses. Once certain investor targets are met, LINN will have the ability to earn a promoted interest in AcqCo; upon sale of any assets within the AcqCo group, LINN will have first offer rights.

Despite oil prices weighing on the markets today, RayJa views the Permian sale and the strategic alliance finalizations are incremental positives for LINN.

“As far as the Permian deal goes, this is capital LINN can now use to fund acquisitions, which will subsequently help boost cash flow and incrementally lower the partnership's leverage. And as far as the strategic alliances go, the finalization of both alliances alleviates any market concerns that the alliances wouldn't ultimately be moving forward,” RayJa said in a Monday note to investors. “We continue to support the notion that both of these structures will contribute to the partnership's ability to finance acquisitions and fund its drilling program in a balance-sheet-friendly manner, and we believe that AcquisitionCo could possibly add value before year-end.

A June survey of mostly buy-side investors conducted by Robert W. Baird & Co. found the Permian to be the preferred play over the Eagle Ford, with the Permian’s Delaware Basin taking the top spot from the Midland Basin for the first time in the Baird survey.

Jefferies LLC advised LINN on the two strategic arrangements.


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