A Big Deal for This Big Dividend
A delightful yield of 7.4% makes Linn Energy (Nasdaq: LINE) a pretty intriguing prospect for dividend investors. Its commitment to growing production by 40% in 2012 and the huge acquisition it announced on Monday make it all the more compelling.
Linn is buying BP's (NYSE: BP) assets in the Hugoton Basin for $1.2 billion. The deal highlights a trend for both companies. Over the past two years, Linn has made $4 billion worth of acquisitions, as the company grows by leaps and bounds. BP, on the other hand, has divested more than $22 billion worth of assets as it refocuses operations and tries to raise cash to pay for damages from the Deepwater Horizon disaster of 2010 and the ensuing legal fees.
The 600,000 acres of Hugoton assets sit in Southwest Kansas and contain about 2,400 operated wells, as well as more than 800 potential drilling locations for future development. Sure, those are nice numbers, but it's the details of this deal that make it great.
Right now, the assets are producing 110 million cubic feet of natural gas equivalent per day. We're using the word equivalent there, because 37% of production is coming from natural gas liquids, more commonly known as "the only way to make money in natural gas production right now."
Though the NGL numbers look great, the assets produce primarily natural gas. To that end, Linn has hedged 100% of natural gas production through 2016. The company hedged 50% of production using swaps, and 50% using puts, so if natural gas prices rise in the next five years, Linn won't miss out entirely.
Proved reserves for the assets stand at 730 BCFE right now. With a 7% decline rate, the reserve life is estimated at 18 years.
Perhaps the most important part of this deal, in my opinion, is the midstream asset. As I've written before, midstream capacity in the U.S. can't keep up with production right now. But when this deal closes, Linn will take 100% ownership of the Jayhawk natural gas processing plant. The plant has a capacity of 450 MMCF per day.
Linn is a small company with ambitious plans for growth. As is often the case, that requires taking on debt. Linn plans to finance the acquisition through debt, issuing a private offering of $1.8 billion in senior notes on Tuesday. This is the second capital raise already this year; Linn issued a public equity offering in January for 17 million units with hopes of raising $586 million to pay down debt. While I think Linn is a good growth opportunity, debt-leery investors may want to steer clear for now -- even with the sparkling dividend.