Linn Energy LLC, the company that’s increased output more than 20-fold in the six years since it began public trading, agreed to pay $1.2 billion for BP Plc’s natural-gas holdings in the Hugoton Basin in Kansas.
The transaction includes the equivalent of 110 million cubic feet of gas production and proved reserves of 730 billion cubic feet, Houston-based Linn said in a statement yesterday. About 63 percent of the output is gas and the remainder is natural-gas liquids, which can fetch higher prices.
Linn, which began trading in 2006, specializes in buying older fields and profiting from production larger companies may not find attractive, said Ethan Bellamy, an analyst with Robert W. Baird & Co in Denver. The company’s output has risen to the equivalent of 44,230 barrels of oil a day in 2010 from 2,210 in 2005, according to data compiled by Bloomberg.
The Hugoton purchase is “sort of contrarian” since gas prices have fallen, said Bellamy, who rates Linn “outperform” and doesn’t own it. “They’re in a position to do that, they can basically look out five years” and wait for prices to increase because they are hedged and Linn’s corporate structure offers access to low-cost capital, he said.
Gas prices reached a 10-year low on the New York Mercantile Exchange last month. Gas futures declined for a third consecutive day to settle at $2.466 per million British thermal units yesterday.
Limited Liability Company
BP, which expects production to be “broadly flat” this year, plans to sell assets worth $38 billion by the end of next year, the company said on Feb. 7. The asset sales come after the London-based company claimed about $40 billion in costs associated with its 2010 oil spill in the U.S. Gulf of Mexico.
Linn is a limited liability company, a structure that allows it to pass its cash flow on to holders of its units and avoid paying federal income tax.
The properties have estimated 2012 adjusted earnings before interest, taxes, depreciation and amortization of $160 million, Linn said. The transaction immediately adds to distributable cash flow per unit, according to the company.
Linn has hedging agreements for the gas production it’s acquiring through 2016. About 68 percent of the natural-gas liquids output hedged, it said.
The purchase is expected to close by March 30, Linn said. The company was advised on the transaction by RBC Richardson Barr, Barclays Capital and BMO Capital Markets.