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E&P MLP giant LINN’s signs letter of intent with Quantum Energy Partners

LINN Energy (ticker: LINE) announced the signing of a non-binding letter of intent with private capital investor Quantum Energy Partners, the founding investor in LINN, to fund selected future oil and natural gas acquisitions and development on those acquired assets.

Quantum has agreed to initially commit up to $1 billion of equity capital to fund acquisitions and development of oil and natural gas assets, according to the press release. The $1 billion of capital, plus the ability to leverage the acquisition company (AcqCo) and LINN’s acquisition of a direct working interest brings the total potential size of the alliance to more than $2.5 billion.

LINN will manage the assets and hold a direct working interest ranging from 15% to 50%. LINN will be reimbursed for general and administrative costs associated with managing the assets. Additionally, LINN has the ability to earn a promoted working interest and will have a right of first refusal to acquire the properties.

The company said in a January conference call that it was looking for a deal that would help it pay for acquisitions, after announcing a deal with a unit of the Blackstone Group LP, which would provide up to $500 million for the company’s drilling in exchange for an 45% stake in the profits.

Management mentioned potential acquisitions a handful of times in the call, not ruling out the purchase of another C-corporation like its $4.9 billion acquisition of Berry Petroleum in December 2013. “Part of our strategic vision in a challenging commodity price environment is to position ourselves to be a buyer in a very opportune point in the commodity cycle,” said Mark Ellis, Chairman, President and Chief Executive Officer of LINN Energy.

“Quantum is uniquely qualified for this new acquisition alliance,” said Ellis in a company release. “Quantum brings considerable size and scale to source and fund acquisitions, along with the flexibility and responsiveness to be very effective partners.”

There is no immediate financial impact from the deal, but it is expected to benefit the MLP greatly moving forward. “This transaction helps incrementally de-risk LINN’s acquisition story by providing dropdown potential,” said a note from Raymond James. The deal will also allow LINN to participate in larger deals, deals that might not fit the conventional upstream MLP asset profile and provides assertive cash flow to the company. “We view it as a strong positive that a leading private equity company is willing to make a multiyear commitment to LINN,” the note said.

LINN Energy is the largest E&P MLP listed in EnerCom’s MLP Weekly with a market cap of $3.7 billion for the week ended March 20, 2015. The company’s yield of 11.1% is slightly below the median of 13% in the Weekly, but its capital intensity of just 130% is much lower than the median of 170%, meaning more of its capital is available for reinvesting. The company’s return on invest capital (ROIC) and return on assets (ROA) are both well above average at 21.4% and 19.3%, respectively. The group median for ROIC and ROA are just 15.5% and 14.4%, respectively.

The Board of Directors of AcqCo will be comprised of five directors, with Quantum and its representatives retaining three seats and LINN having two seats. The partnership will be focused on conventional and unconventional resource development opportunities across the United States.

Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication.


Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.