Linn Energy buying Devon assets for $2.3 billion

HOUSTON – Houston oil and gas producer Linn Energy is planning to snap up $2.3 billion in natural gas-rich assets in the Rockies, Louisiana, east Texas and elsewhere, the firm said Monday.

The 900,000 net acres of U.S. land trading hands in the deal with Devon Energy Corp. have about 4,500 wells, many of which are mature, already pumping natural gas and oil at a lower production decline rate than newer wells.

Shale wells typically decline rapidly within the first year of production, but they eventually settle on a lower, but more stable level of output. Buying older wells means the company doesn’t have to face the high decline rates, and can rely on the lower production levels to sustain its growth, said Daniel Guffey, an analyst with Stifel.

“That’s consistent with their strategy,” Guffey said, adding that as an upstream master limited partnership, Linn’s goal is to consistently grow over time and avoid the pitfalls of high production decline rates.

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The assets, in the Rockies, midcontinent, east Texas, north Louisiana and south Texas, produce about 275 million cubic feet of natural gas equivalent per day, about 80 percent of which is gas. The deal is expected to close in the third quarter this year.

About three-quarters of the assets’ 1.3 trillion to 1.5 trillion cubic feet of gas equivalent in proved reserves are developed. That will give Linn a steady stream of production, Guffey said.

Linn also said it has identified more than 1,000 future drilling locations. The firm is planning to pay for the Devon assets by selling off liquids-rich natural gas assets in the Texas Panhandle and western Oklahoma, where it is pumping 230 million cubic feet of natural gas equivalent a day.

Those assets, known collectively as the Granite Wash assets, have faster decline rates than the assets Linn is buying, as the Houston firm trades more stable assets, said Kevin Smith, an analyst with Raymond James.

Linn is a master limited partnership, which is a tax-advantaged corporate structure that pays much of its cash flow to investors in the form of regular distributions.

“They’re strengthening their ability to pay the underlying dividend, and de-risking that process,” Smith said.

Unlike publicly traded C-corp oil producers, Smith added, MLPs often take the long view on their assets, as they’re able to hedge their production out to three to five years. That makes low-priced natural gas more attractive for Linn than its competitors, he said.

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The deal accomplishes several of Linn’s objectives, including “reducing capital intensity while increasing efficiency,” Mark Ellis, chairman, president and CEO, said in a statement.

For Oklahoma-based Devon, the sale is a chance to jettison the last of the non-core assets it promised investors it would sell off, which included assets along the Gulf Coast and other areas. All told, it has sold off assets in the U.S. and Canada for $5 billion in proceeds.

Devon president and CEO John Richel said the company will now focus on attractive North American plays, and expects to increase its liquids production to 60 percent of its output by the end of the year.

“The portfolio transformation we announced late last year is complete,” Richel said.

Analysts with Wells Fargo wrote the sale, which was worth about $1 billion more than Wall Street investors had believed, would help further erase debt from Devon’s balance sheet. This year, the company is expected to slash $4 billion in debt, the analysts wrote.

Linn units closed up 46 cents Monday at $32.35 on the New York Stock Exchange.

Devon shares dipped 10 cents to $79.40 on the same exchange.


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