After yesterday’s close, Linn Energy (LINE) agreed to swapped acreage with a unit of ExxonMobil (XOM) that adds production of about 85 million equivalent cubic feet per day for Linn.
European Pressphoto Agency Raymond James analysts Kevin Smith and Kenton Tindall explain why they like the deal:
Qualitatively, this is an ideal swap… LINN has made a concerted effort to reduce its overall production declines and capital spending. Essentially the company is swapping production that is declining at roughly 35% per year for gas properties that are declining at 6%, resulting in much more stable cash flow. Additionally, this transaction allows LINN to lever its already large position in Hugoton in order to deliver more operating synergies
…plus this transaction reduces LINN's leverage in the process: Another added benefit is the transaction helps reduce LINN's debt metrics. Essentially, LINN was able to increase its cash flow without issuing any debt or equity, so on a net debt / EBITDA basis, LINN is less levered pro forma the transaction close.
Citigroup’s Faisel Khan is not so sure Linn got the better of the deal:
Linn estimates net accretion to distributable cash flows of $30-$40 mil or $0.09-$0.12 per unit on an annualized basis as a result of the aforementioned asset swap. The accretion estimate appears slightly low as the partnership is giving up upside from the Midland basin assets resulting from additional capital spending later this year. In addition, accretion estimates do not include potential upside from higher utilization at the partnership's Jayhawk gas processing plant located in the Hugoton field.
Shares of Linn Energy have gained 0.6% to $28.45 at 3:12 p.m. today, while LinnCo (LNCO) has risen 0.4% to $27.59. ExxonMobil has fallen 0.5% to $101.52.
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