I think the other big thing that many are missing is that LINN’s management team is really smart. CEO Mark Ellis has more than 30 years of oil and gas experience and was formerly the president of the Lower 48 for ConocoPhillips (NYSE:COP). Given that LINN is solely focused on U.S. onshore production, that background is important. Ellis and the team that he’s surrounded himself with know the onshore oil and gas business as good as anyone.
That’s really helped the company know what to acquire to build the business; it’s the main lever that the company can use and it’s the model that the company has been built on. The basic premise is to acquire known reserves in the ground for less than it would cost to produce them. The margin after expenses is then passed on to investors. In just the latest example, LINN’s complex deal with LinnCo LLC (NASDAQ:LNCO) for Berry Petroleum is expected to add more than $0.40 per unit of accretion to its distributable cash flow this year. In that deal, the company is picking up fairly low decline oily assets that have upside from future drilling. For whatever reason those negative on the company miss the fact that the company has developed a very repeatable process to find the next Berry Petroleum Company (NYSE:BRY) to deliver even more value to investors.
For an oil and gas MLP, the right deal can really affect the company’s distributable cash flow. BreitBurn Energy Partners L.P. (NASDAQ:BBEP) for example has a very simple formula: $500 million in asset purchases that meets its criteria equals $0.21 in accretion to distributable cash flow. For LINN, its formula is that it expects $0.03 per unit of accretion for every $100 million in assets it can acquire, which is also the rate it looks for when it invests to grow production organically. Again, a distribution that’s not fully covered today could easily be covered by either acquired or organic growth.
The bottom line is that Linn Energy LLC (NASDAQ:LINE) has many, many levers to pull in order to prudently grow both its production and distribution over the long term. Furthermore, there is a massive opportunity to do just that, thanks to the shale gas and oil boom. As a longtime LINN investor, I’m not at all worried that the company is finally coming clean, nor that my distribution checks will get any smaller. Quite the opposite: I see immense opportunity for the company, and those holding for the long term will likely be well rewarded.
The article LINN Energy Comes Clean? originally appeared on Fool.com and is written by Matt DiLallo.
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