2010-09-08-2010-09-07

Raymond James Equity Research analysts Darren Horowitz and Kevin Smith value the deal at $106,727 per flowing barrel and $11.74 per proved barrel equivalent.

Houston-based E&P company Linn Energy LLC (Nasdaq: LINE) plans to acquire oil and natural gas properties in the Wolfberry trend of the Permian Basin in three transactions for a combined price of $352.2 million.

Pro forma, Linn's Permian Basin production is approximately 10,000 barrels of oil equivalent per day. Proved reserves are more than 74 million barrels of oil equivalent, with a high liquids content of approximately 76%, and are 41% proved developed.

"These acquisitions are an excellent addition to our existing Permian assets in the Wolfberry trend and a significant addition to our inventory of high-return oil projects," says Linn president and chief executive Mark E. Ellis.

Ellis continued, "Since our first Permian acquisition in August 2009, we have built this region into the company's second largest operating area. An important component of our organic growth will be derived from approximately 400 proved oil-focused Wolfberry drilling opportunities, which we expect will provide Linn with a five-year drilling inventory. Additionally, we expect these acquisitions to be immediately accretive to cash flow per unit upon closing."

Significant characteristics of the three acquisitions are:

Net production of approximately 3,300 barrels of oil equivalent per day (73% oil);

Proved reserves of approximately 30 million barrels of oil equivalent (72% oil);

More than 230 Wolfberry drilling locations representing proved undeveloped reserves of 23 million barrels of oil equivalent; and

Reserve life of approximately 25 years.

The deals are expected to close by late November, and will be financed with proceeds from borrowings under the company's revolving credit facility.

Raymond James Equity Research analysts Darren Horowitz and Kevin Smith value the deal at $106,727 per flowing barrel and $11.74 per proved barrel equivalent (or $1.96 per thousand cubic feet equivalent).

They report, "After layering in Nymex strip prices plus our operating cost assumptions…we derive that Linn paid roughly 6.7x EBITDA (versus 9x multiple LINE is currently trading for), adding roughly $0.06/unit in discretionary cash flow using a long-term financing cost of 9.5% (assumes 60/40 equity/debt mix)."

Since the transaction will be funded through bank debt, Horowitz and Smith report this increases the accretive level to approximately $0.17 per unit.

"The one glaring aspect of this transaction is the relatively high PUD component (77% of reserves) which could result in higher-than-forecasted maintenance capital expense," they add.