A busy two days for LINN Energy (LINE, LNCO). Below are some details and comments around the recent headlines.
On the 9/11/13 press release:
Quoted in full: “[LINN, LinnCo, and Berry] announced today that LINN Energy and LinnCo recently received comments related to the Amended Registration Statement on Form S-4 filed on August 9, 2013 in connection with the proposed merger transaction, and are working diligently to file an Amended Form S-4. Furthermore, LINN Energy, LinnCo and Berry Petroleum have agreed to set the record dates for their respective unitholder, shareholder and stockholder meetings as of September 30, 2013.”
- We consider yesterday’s reaction to this press release (LINE +13%, LNCO +12%) an over-reaction. The market took a press release with little information to be quite positive.
- The fact that LINN “received comments” from the SEC is not surprising or informative. We also know nothing as to the extent or content of those comments.
- The fact that LINN will file another amended S-4 is not necessarily a good thing. Many believed that the 8/9/13 S-4/A was the last one.
- Setting the record date to 9/30/13 only means that this is the last day to be “on record” as a shareholder of BRY, LINE, or LNCO to participate in a vote. Even if LINN files the amended S-4 in the next few days, the SEC could take 3 – 4 weeks to make it effective, with a vote taking place 3 – 4 weeks later. We believe it will be difficult to get a vote done before the October 31st “End Date.” However, we do believe that both LINN and BRY are strongly committed to getting a deal done, and will extend the “End Date,” if the merger cannot be completed by October 31st. In our view, it is a matter of where the share prices are when it's time to do the deal, not whether or not BRY is still interested. As far as we know, BRY is still interested.
- The real risk to a LINN position (long or short) in the near-term is the outcome of the ongoing SEC informal inquiry. We have no insight or opinion on what the SEC will or will not do. We call this "open the envelope" risk. The outcome of the SEC inquiry will drive the share prices of LINE/LNCO, which will drive the viability of the merger. If we assume that BRY needs $47/share to get a “yes” vote from shareholders, LNCO needs to get to $37.60 (+17%) for the 1.25x exchange ratio to hold. LINN could also improve the deal terms considerably (up to a ~1.95x ratio) before erasing all DCF accretion. On a FCF/share basis, the deal is dilutive even at 1.25x.
- As we explained in our note on 7/18/13, “Tying Two Rocks Together - The LINN/BRY Merger,” we don’t believe that the BRY merger is a long-term positive for LINN, though getting the deal done would likely drive the share price higher in the near-term as investors would regain confidence in this growth strategy. We believe that the outcome of the merger - which relies upon the outcome of the SEC inquiry - is uncertain and difficult to handicap.
On the 9/12/13 asset acquisition:
Deal is positive for LINN. LINN announced a $525MM acquisition in the Permian Basin this morning. It is expected to close in 4Q13. It will be financed with a committed term loan (LIBOR + 2.5%). We estimate that this deal will be ~$0.13/unit (4.3%) accretive to DCF in year one, however our estimates rely upon pretty loose guidance/information from the Company.
We estimate that LINN acquired the asset for 6 – 7x NTM open EBITDA. LINN bulls will likely be glad to see the Company getting back to its bread-and-butter, acquisitions. The press release curiously leaves out some important information, such as current production, % PUDs, and future capital needs. The deal will close in 4Q13, so we will get one more quarter of LINN’s organic numbers. No information provided wrt hedging the new volumes. And we note that LINN no longer uses the term “distributable cash flow,” but “cash available for distribution.” Interesting, but no telling what that means…
- Production is expected to be 4,800 boe/d over the NTM, 63% oil, and from the Clearfork formation. The Clearfork is a shallow interval in the Permian and is generally targeted with conventional, vertical wells, though some operators are testing its Hz potential, like FANG. In our view, it is odd to give NTM production guidance but not current production guidance. LINN paid $109k/boe/d on NTM production, but the actual acquisition multiple could be higher if LINN plans on investing capital to grow into that number.
- Proved reserves = 30 MMboe (~70% oil). Importantly, a PD/PUD split was not disclosed. If we assume 35% of acquired reserves are PUDs and a future development cost (FDC) of $20/boe, that gives us $210MM of undiscounted, FDC. The acquisition multiples in the case would be $27/PD boe and $24.50/proved boe (including undiscounted FDC).
- 6,250 net acres. 124 producing wells (50 acres/well). Additional drilling opportunities = 300 proved “low-risk, infill drilling locations.”
- It’s difficult to know what LINN really paid here, as the press release leaves out important details such as current production, % of PUDs, and the amount of capital that LINN is to invest over the NTM to hit the 4,800 boe/d guidance. We estimate that the asset will generate ~$89MM of open EBITDA over the NTM using LINN’s guidance and our own assumptions, putting the headline number at 5.9x EBITDA. But if LINN is to spend any capital to generate that EBITDA (it likely is), the multiple could be closer to 6.5x – 7.0x. Regardless, LINN trades at ~10.0x open EBITDA, and this is an accretive deal.