Two Strategic Alliances Expected to be Finalized Within the Next Month…: Recall, LINN currently has two non-binding, strategic alliances in the works; 1) its acquisition alliance with Quantum Energy and 2) its drilling alliance with GSO Capital, both of which we expect will be finalized in relatively short order. While we support the notion that both of these structures will contribute to the partnership’s ability to finance acquisitions and fund its drilling program in a balance sheet friendly manner, we expect the strategic acquisition alliance to be more impactful in the near-term, possibly adding value before year-end.
…with Potential for Acquisition Alliance to be Impactful by Year-End: The initial agreement calls for Quantum to commit roughly $1 billion of capital to fund acquisitions, bringing the total potential size of the alliance to over $2.5 billion when combined with the ability to leverage the acquisition company “AcqCo” and LINN’s acquisition of a direct working interest. Not only would this help incrementally de-risk LINN’s acquisition story by providing dropdown potential, it also allows LINN to participate in both larger deals and deals that might not have fit the conventional Upstream MLP asset profile.
Permian Basin Deal Likely This Summer: As shown on the following page, LINN has 6,600 net acres remaining in Howard County in the Permian Basin that the partnership is looking to swap or sell. At this point, in our view, a cash offer is most likely. Based on recent acreage comps, we expect LINN to receive between $20k and $25k per acreage, equating to ~$132 million to ~$165 million. This would be capital LINN could use to fund an acquisition which would help boost cash flow and incrementally lower the partnership’s leverage ratio.
They have a $14 price target on Linn Energy and a $15 price target on LinnCo.
In the past month both Linn Energy (LINE) and LinnCo’s (LNCO) stock prices have been under pressure thanks to investors’ lingering worries about Linn Energy’s leverage and its ability to pay its distribution.
Those concerns are overblown, however, according to Raymond James’s Kevin Smith and Rich Eychner. In a new note today they reiterate a Strong Buy rating on LinnCo and an Outperform rating on Linn Energy, writing that there are several pending positive catalyst to offset debt worries.
They believe that the market continues to underestimate Linn Energy’s base cash flow business, along with the impact of its multi-year hedge book and its acquisition opportunities.
More from their note:
Handful of Positive Catalysts on The Horizon: Despite oil trading roughly flat over the last month, LinnCo’s stock price is down approximately 9% (before dividends), in-line with the E&P index (down 8%) and the Alerian MLP index (down 8%). However, we expect that performance will improve over the coming months as LINN has several positive catalysts on the horizon; including 1) the anticipated finalizing of both its acquisition alliance with Quantum Energy and its drilling alliance with GSO Capital, 2) the potential monetization of its remaining 6,600 net acres in the Permian, and 3) the well results from its Terryville field acreage in Louisiana.