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Linn Energy, LLC Message Board

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  • rrb1981 rrb1981 Mar 7, 2010 4:46 PM Flag

    Granite Wash Wells

    The exit of Linn from day to day operations won't likely be a problem. I think he was necessary to float the idea to investors as he was viewed as a E&P guy, not just a finance guy, which is what Rockov is/was.

    I'll confess that I don't honestly understand some of their decisions. I know they sold the legacy Appalachian assets because they did not want the risk of developing the Marcellus assets and that bringing on the Marcellus, with much higher pressures, would in essence prevent their shallow conventional Appalachia wells from getting into the gathering systems. I know that the high decline rates of 90% scare some, but my statement has been that if the well is getting anywhere near full payback within 1 yr, who cares if the decline rates are high the first couple of years. You drill the well, get full payback, take the proceeds, drill another well, repeat over and over en masse. This is a different approach that most E&P MLPs that want to buy properties that are 70% or more PDP and just sit back and do the infill drilling to keep production flat.

    This was the point I was making previously about the Granite Wash. They mentioned on the conference call, that long tem, the Granite Wash wells would add $.015 per unit in accretion. This was after full payback and it had declined (I think they alluded to 3 or 4 years in). My point was this, if the Granite Wash well costs 5 million and adds $.015/unit in DCF, then one could in essence, replicate the company by drilling 168 wells (for a total of $840 million). Compare that to the current enterprise value. Granted, that $840 million doesn't take into account the acreage. If those wells are on 160 acre spacing, that comes out to 27,000 acres. If they pay $10,000/acre, that would be another $270 million. So, for a little over $1.1 billion, a company could buy 27,000 acres, drill 168 Granite Wash wells and have a portfolio that is producing a similar amount of cash flow that Linn is currently generating. While I like the idea of E&P MLPs picking up old properties that can be reworked and have very low decline rates, I think the idea of drilling and controlling your own destiny is also important.

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