Why did LINN Energy acquire oil and gas assets from Devon Energy?

Why did LINN Energy acquire oil and gas assets from Devon Energy? (Part 1 of 4)

Overview: LINN Energy acquired assets from Devon for $2.3 billion

LINN Energy acquired assets from Devon

On June 30, 2014, Devon Energy (DVN) and LINN Energy (LINE) reached an agreement by which LINE agreed to acquire oil and gas properties from DVN. The properties include DVN’s oil and gas assets in the Rockies, onshore Gulf Coast, and Mid-Continent regions of the U.S. The financial value of the transaction was $2.3 billion, or $1.8 billion after-tax.

Combined Asset MapEnlarge Graph

Financial terms

The transaction is expected to close in 3Q14. In connection with the acquisition, LINN has secured $2.3 billion of committed interim financing from Scotiabank, Barclays, RBC Capital Markets, and Wells Fargo.

DVN’s management comments on the sale

The sale is a part of a business restructuring process that DVN has been undergoing for the past couple of years. John Richels, the president and chief executive officer of Devon Energy, commented on the transaction that, “With the sale of our remaining non-core assets, the portfolio transformation that we announced late last year is now complete. In a short period of time we transformed our portfolio through three significant steps—the accretive Eagle Ford entry, the innovative creation of EnLink Midstream, and the sale of our non-core properties. The sale of Canadian and U.S. non-core properties over the past few months has generated in excess of $5 billion of proceeds at an accretive multiple of nearly seven times 2013 EBITDA.”

Devon will now concentrate on growing its core operating assets, especially the crude oil business. Jon Richels also commented in the press release that, “Devon is now concentrated in some of the most attractive North America resource plays, with liquids expected to approach 60% of our production by year-end and multi-year oil production growth projected to be in excess of 20%. In addition to creating a platform that supports competitive and high-margin growth, we remain committed to maintaining strong investment-grade credit ratings. Upon completion of this transaction we will have reduced our net debt by more than $4 billion this year.”

LINE’s management comments on the acquisition

The acquisition will be a key part of LINN Energy’s business strategy as it seeks to grow internally as well as through the inorganic route to increase distribution pay-out to the unit holders. Mark E. Ellis, chairman, president, and chief executive officer, said in the press release of the acquisition announcement, “Early in 2014, we outlined four keys to success at LINN: realize value for the Midland Basin position; continue to make accretive acquisitions; reduce capital intensity while increasing efficiency; and improve credit metrics. We believe today’s announcement is a positive development in achieving these objectives. As we enter into the second half of the year, we remain committed to these important goals.”

Why LINE is structured like an MLP

LINE has some features that income-growth oriented investors may find attractive. From the tax point of view, LINE is like a master limited partnership (or MLP) that operates in the energy upstream sector. It’s a limited liability company treated as a partnership for federal and state income tax purposes. The company doesn’t directly pay federal and state income tax, with the exception of Texas. Taxes are deferred and are recognized only when the carrying amounts of existing assets and liabilities exceeds the tax basis and tax carry-forwards.

Also, like MLPs, LINE pays distribution to its unit holders, instead of dividend paid by the C-Corps. MLPs typically pay out a significant of their income as distribution. LINE’s distribution policy states that it distributes cash on hand plus borrowings less any reserves like future capital expenditures, including drilling, acquisitions, and anticipated future credit needs.

The acquisition of oil and gas properties of Devon Energy Corporation (DVN) by LINN Energy LLC (LINE) is expected to be positive for both the companies as it strengthens the long-term business strategies of the companies. LINE is a component of the iShares Select Dividend ETF (CVY). DVN is component of the Energy Select Sector SPDR (XLE) and the Vanguard Energy ETF (VDE). To learn about the growth prospects of LINE’s acquired assets and the effects of DVN’s asset restructuring, please continue reading the next sections in this series.

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