Linn pays $1B to acquire gas properties from BP

Houston oil and gas explorer Linn Energy LLC took advantage of low natural gas prices and an eager seller, agreeing to acquire properties in the Jonah Field in southwest Wyoming's Green River Basin from the U.K.'s BP plc for $1.025 billion.

The price works out to about $1.40 per thousand cubic feet equivalent of natural gas versus the upstream master limited partnership average of $2.40 so far this year, Robert W. Baird & Co. analyst Ethan Bellamy wrote in a research note.

The deal represents Linn's second transaction with BP -- which is selling tens of billions of dollars worth of assets to pay for the Gulf of Mexico oil spill two years ago -- and the latest in a string of acquisitions that have amounted to $3 billion so far this year.

Linn bought properties in East Texas in May for $168 million, Hugoton properties in Kansas in March from BP for $1.17 billion and 23% of a carbon dioxide-enhanced oil recovery development in the Salt Creek field of Wyoming's Powder River Basin from Anadarko Petroleum Corp. this past April for $400 million.

Analysts have called Linn's acquisition strategy contrarian, with Linn using hedges and its low cost of capital to buy properties cheaply, anticipating a payoff when natural gas prices rise.

The Jonah deal must clear preferential rights on almost all of the properties that will expire the first week of July with a closing to follow by July 31.

Linn plans to pay for the deal with borrowings under its revolving credit facility, which it is looking to boost to $3 billion from $2 billion.

"This acquisition provides Linn with a significant operated position in the Green River Basin of Wyoming and the opportunity to add employees to our staff who have hands-on experience with operations in the Jonah Field," Linn CEO Mark Ellis said in a statement. "The long-life, low-decline characteristics of the Jonah Field make this asset an excellent fit for us."

BP CEO Bob Dudley said in a separate statement that the sale will allow the company to realize the value of what he called "mature" assets and reinvest in higher-growth opportunities in BP's North America gas business and elsewhere. "We are actively managing our portfolio of assets and businesses worldwide, focusing our investment on future growth in BP's areas of strength," he said.

BP said its upstream production operations in Moxa and Wamsutter, Wyo., aren't affected by the sale.

The agreement brings the value of BP's divestments since the start of 2010 to $24 billion. BP expects this total to increase to $38 billion by the end of 2013.

Ellis said the properties are expected to provide 145 million cubic feet equivalent per day of liquids-rich natural gas production, have significant future drilling inventory and be immediately accretive to distributable cash flow per unit. He said Linn hedged 100% of the expected net oil and natural gas production through 2017, including a combination of swaps and puts to hedge the production volumes to preserve significant upside if commodity prices rise.

The properties are expected to produce Ebitda of $160 million in the first year. They contain proved reserves of 730 billion cubic feet equivalent of natural gas, 56% of which is proved developed producing and 73% natural gas, 23% natural gas liquids and 4% oil. They have resource potential of 1.2 trillion cubic feet equivalent. There are 750 producing wells and 12,500 net acres.

Linn expects to spend $40 million to $50 million to maintain the properties in the first year but said there's potential for production optimization and cost savings.

In a separate move, Linn said that it plans to register LinnCo, one of its units, for an initial public offering. The purpose of the company will be to own shares of Linn. LinnCo will use the offering proceeds to acquire Linn units in an equal number of shares sold of LinnCo stock. Linn will then use the proceeds for the sale of its units to LinnCo to fund its acquisition strategy and repay debt. The new company will be listed on the Nasdaq under the symbol LNCO. Barclays Bank plc is the underwriter.

The move is seen as a way for tax-exempt institutions that can't buy into master limited partnerships to be able to have exposure to Linn shares.

Brad Hutchinson from Barclays advised Linn along with BMO Capital Markets' Miles Redfield, Stewart Frankel and Pete Boukouzis and RBC Richardson Barr's Scott Richardson. Linn senior counsel Holly Anderson handled the legal aspects of the purchase.

Jonathan Schwarzberg contributed to this report.