Linn Energy to Buy Gas Wells From Devon for $2.3 Billion

Linn Energy LLC agreed to buy oil and natural gas-producing acreage across six U.S. states from Devon Energy Corp. for $2.3 billion, its largest purchase since acquiring Berry Petroleum Co. last year.

The 896,000 net acres in the Rocky Mountains, Gulf Coast and Mid-Continent region produce the equivalent of 275 million cubic feet of gas a day and have proved reserves of 1.242 trillion cubic feet, Oklahoma City-based Devon said in a statement today. Linn, which has interim financing for the acquisition, plans to fund the purchase ultimately by selling its holdings in the Granite Wash and Cleveland plays in Texas and western Oklahoma.

The Devon assets have “significant operational overlap” with Linn’s existing acreage, the Houston-based company said in a presentation posted on its website. Linn was formed to buy already producing oil and gas fields and seek to boost output. LinnCo LLC, a limited liability company that owns units in Linn, in December bought Berry Petroleum for $2.72 billion after having to raise the bid because of a drop in its stock price. Ownership in Berry was later transferred to Linn in exchange for units.

“They’re basically building a fortress around their dividend,” said Kevin Smith, a Houston-based analyst for Raymond James Financial Inc. who rates Linn at buy, LinnCo at strong buy and owns neither. “It advances their cash flow and they don’t have to spend as much money to maintain production.”

Linn gained 1.4 percent to $32.35 at the close in New York. LinnCo rose 2.6 percent to $31.29 and Devon fell 10 cents to $79.40.

Decline Rate

About 80 percent of the output from the Devon assets is gas. The decline rate, a measure of how much must be spent to maintain production, is 14 percent for the Devon assets, Linn said. The company last month swapped 26,000 acres in the oil-rich Permian Basin with Exxon Mobil Corp. for gas wells with a 4 percent decline rate.

“Linn is driving strategy and valuation based on acquiring assets that they perceive to have long life,” said Fadel Gheit, a New York-based analyst for Oppenheimer & Co. who rates Devon at buy and doesn’t own the shares. “That fits their financial structure and their strategy.”

The company plans to sell assets that produce the equivalent of 230 million cubic feet of liquids-rich gas a day over about 147,000 net acres.

Devon Sales

Linn has burned through $6.5 billion of free cash in the past four years, leading Kevin Kaiser, an analyst at Hedgeye Risk Management in Stanford, Connecticut, to rate it a sell.

“Nothing really changes,” Kaiser said today. “Linn’s distribution is not financed with free cash flow or earnings. It’s financed with equity raises and debt raises. I think Linn Energy eventually collapses under the weight of this debt burden.”

Today’s deal “may push that day of reckoning out,” Kaiser said.

Linn Energy didn’t immediately return a voicemail and e-mail seeking a response to Kaiser’s comment.

The deal ends a round of asset sales announced last year by Devon, which is seeking to transform itself from a gas producer into an oil company.

“Upon completion of this transaction we will have reduced our net debt by more than $4 billion this year,” John Richels, chief executive officer of Devon, said in the statement.

The transaction is expected to close in the third quarter, with an April 1 effective date.

Jefferies Group LLC was lead financial adviser to Devon on the transaction, with Credit Suisse Group AG also providing financial advice. Vinson & Elkins LLP gave legal advice to Devon. Scotia Waterous advised Linn.

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