Updated from 12:16 a.m. ET with closing share prices and additional information throughout
NEW YORK (
continues to cut acquisitions as the upstream oil and gas master limited partnership tries to overcome scrutiny surrounding its accounting practices and increase its industry-leading dividend.
Houston-based Linn Energy said Thursday it will buy oil and natural gas properties in the Permian Basin for $525 million, in a move to increase the company's exposure to the region and expand its low-risk drilling assets.
Thursday's deal will add 300 proved low-risk infill drilling opportunities to Linn Energy, and will be financed with proceeds from a committed $500 million senior secured term loan with certain participants in its lender group and borrowings under its revolving credit facility, the company said.
Linn did not disclose which lenders will be financing the transaction in its press release. In August, the company said it had added to its credit facilities by $1 billion to $4 billion, increasing its total lenders to forty-one.
"We expect this transaction will be immediately accretive to cash available for distribution," Mark E. Ellis, Linn Energy's CEO, said in a statement.
The acquisition contains oil and gas assets with an estimated first 12 months net production of about 4,800 barrels-of-oil-equivalent-a-day and overall proved reserves of about 30 million barrels of oil equivalent. Overall, the assets are tilted 70% toward oil and have a reserve to production ratio of roughly 17 years, the company said.
Wells Fargo analyst Praneeth Satish estimated in a Thursday research note a deal could add about 10 cents to 15 cents to Linn Energy's distributable cash flow (DCF) per unit, given the 100% term-loan financing. If Linn Energy were to contribute 50% equity to the deal and assume lower crude oil prices, it could wipe out the earnings benefit of the acquisition, according to the analyst.
"On the whole, we view the transaction as a modest positive butmaintain our Market Perform ratings," Satish wrote.
Linn Energy's acquisition comes just a day after the company
that it is making progress on an acquisition of
. Linn Energy said it has received comments on an amended registration statement filed with the
Securities and Exchange Commission
for the acquisition and is now working to resubmit a S-4 to the regulator.
The disclosure indicates Linn Energy could soon remove big questions hanging over the firm's finances. Linn Energy's shares were battered in July when the company said the SEC was conducting an informal review of its accounting practices and documents related to its proposed merger with Berry Petroleum.
Linn Energy said on Wednesday it, LinnCo and Berry Petroleum have agreed to set the record dates of their stockholder meetings to Sept. 30, in a move that indicates they are making progress on what has been a very messy merger process.
Shares in Linn Energy initially rose on the company's announced acquisition of Permian Basin assets, however, they closed down 3 cents, or less than 1%, at $27.87 on Thursday.
Linn Energy's accounting practices and the non-GAAP metrics that drive its dividend have come under scrutiny in recent months from
and independent research firm
Hedgeye Risk Management
and Hedgeye argue Linn's use non-GAAP accounting figures overstates the cash flow it can pay out to shareholders and under-reports the expenses tied to its hedging practices and capital expenditure.
If Linn Energy and Berry complete their merger, it would likely refute many of the concerns raised by
and Hedgeye. The prospect the SEC approves Linn Energy's accounting disclosures could undermine analysis that the firm has not been upfront with its investors. A merger could also help Linn Energy increase its dividend payout to $3.05 a share, on an annualized basis.
There is still little clarity on what non-GAAP metrics Linn Energy will disclose in its amended S-4, or whether those disclosures would change impressions of the firm's financial condition. Linn Energy declined to elaborate on its comments.
Investors should resist the temptation to draw conclusions from Linn Energy's Wednesday press release and any change to the SEC's informal review John Ragozzino, a
RBC Capital Markets
analyst, said in a Wednesday client note.
"Our conversations with management included a warning against assuming anything with respect to the informal inquiry from today's announced S-4 update," the analyst wrote. Ragozzino also said a negative outcome of the SEC's inquiry remains "material" and he expects clarity on the effectiveness of Linn Energy's S-4 by mid-October, at the earliest.
Satish, the Wells Fargo analyst, said that Linn's disclosure on Wednesday indicated the company's Berry acquisition was "back on track" and "close to finalization." Nonetheless, Wells Fargo retained a "neutral" rating given uncertainty over whether the SEC will mandate accounting changes at Linn Energy.
Linn Energy will likely file an amended S4 proxy for the Berry merger within a few days, which could detail any changes that partnership may need to make in its presentation of certain non-GAAP financial metrics," Wells Fargo wrote.
In August, the company reported better-than-expected second-quarter earnings of $1.47 a share, driven by rising energy production and revenue vs. the same period a year earlier. Still, Linn Energy was unable to meet its own projections of what it calls distributable cash flows, or the earnings the company makes available to shareholders.
For the third consecutive quarter, Linn Energy paid out more DCF to shareholders than the company was able to earn.
Linn reported DCF of 65 cents a share, missing the company's previous guidance of 72 cents. In total, the company paid out more than $18 million in dividends beyond the amount of DCF it earned. Linn Energy funds DCF shortfalls using its existing credit facilities.
"LINN has experienced a challenging start to the year as lower-than-expected returns from our capital program coupled with historically low NGL prices have weighed on year-to-date results," Linn Energy CEO Ellis said of those results.
Jim Cramer, founder of
and contributor to
Real Money Pro
, currently owns Linn Energy shares in his Action Alerts PLUS charitable trust, along with co-portfolio manager Stephanie Link. Cramer has supported Linn Energy and invited CEO Ellis on his
On July 2, Link said in a
Real Money Pro
that the charitable trust would sell 1,400 Linn Energy shares at $29 apiece given the SEC's informal review.
Action Alerts PLUS continues to own 1,000 Linn Energy shares after its stake sale, roughly 1.2% of the overall portfolio.
Written by Antoine Gara in New York