Three keys to Linn Energy's success
While the dividend is a good reason to invest in Linn, there's more to the story that just a quarterly paycheck. The company's business model is simple: It acquires, develops and maximizes the cash flow from mature oil and natural gas assets. Its success is built upon three pillars: acquiring, hedging and drilling.
Linn is a master at buying producing assets from sellers that need the cash to fund expensive drilling programs. Among the company's four acquisitions over the past year is $175 million worth of predominantly natural gas assets it plucked from none other than Southwestern Energy. The deal added 430 producing wells in East Texas with low decline rates of less than 10% along with a reserve life of 15 years. The company has also identified multiple upside recompletion and infill-drilling opportunities.
Once Linn closes on its deals the company then hedges 100% of the production for the next few years. In fact, Linn's natural gas production is 100% hedged through 2017 while its oil production is fully hedged until 2016. Not only does this lock in the floor of the company's cash flow, but also allows for some upside. Linn's peers on average have hedged less than half of 2013 production and only 20% of 2014 production. That leaves cash flows much more vulnerable to commodity prices which will lead to continued volatile stock prices.
While a majority of the company's growth over the years has come from acquisitions, its drilling program has the potential to really boost production. Linn has a large inventory of low-risk and liquids-rich development opportunities that it can drill each year. Chief among these opportunities is the Hogshooter formation of the Granite Wash. Linn is focusing its drilling program on the formation because it has a much higher concentration of oil. That concentration is generating 71% more in revenue per thousand cubic feet equivalent than the average Granite Wash well, giving Linn some very nice upside as it keeps drilling.