Why LINN Energy is interested in the acquisition from Devon
Business overview of LINN Energy
LINN Energy LLC (LINE), an independent oil and natural gas company, acquires and develops oil and natural gas properties. As of December 31, 2013, proved reserves of LINE were approximately 6,403 billion cubic feet equivalent. Approximately 34% of these were oil, 47% were natural gas, and 19% were natural gas liquids (or NGLs). The total discounted future net cash flows of the proved reserves is estimated to be ~$11.9 billion with an average proved reserve-life index of approximately 16 years. As of July 1, 2014, LINE had market capitalization of $10.8 billion and recorded an enterprise value of ~$20 billion.
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The asset portfolio acquired by LINE from DVN comprises of approximately 900,000 net acres across the Rockies, Mid-Continent, east Texas, north Louisiana, and south Texas regions. It includes approximately 4,500 total wells, with 1,000 future drilling locations being identified by LINE. LINN’s acquisition of Devon assets is intended to be financed ultimately through the sale of its Granite Wash assets and other non-producing acreage in LINN’s portfolio. Potential excess proceeds from the sale of assets, if any, will be used initially to reduce debt and for general corporate purposes.
Production and EBITDA of LINE to grow from the acquisitions
The acquired assets are currently producing ~275 million cubic feet per day, ~80% of which is natural gas. The base decline rate of the assets was ~14%. Total proved reserves are estimated to be between 1.3–1.5 trillion cubic feet equivalent. Approximately 75% of this is proved developed reserves with total resource potential of approximately three trillion cubic feet equivalent. In 2013, EBITDA from these assets totaled $350 million.
The assets complement LINE’s strategy of developing mature, long-life oil and gas asset properties with lower decline rate. The assets would require less capital investment as these are already in mature stage of production. Decline rate is defined as the relative change of production over a time period.
Decline rate = (Last year’s production – this year’s production) / Last year’s production
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 a component of the Energy Select Sector SPDR (XLE) and the Vanguard Energy ETF (VDE).